Insolvency regulator, IBBI, proposes to stipulate mandatory audit of Insolvency Resolution Process Costs (IRPC) in resolution cases where the assets of the corporate debtor (CD) is in excess of ₹ 100 crore.

This proposal forms part of the nine new measures that the Insolvency and Bankruptcy Board of India (IBBI) has mooted in a new discussion paper that has been floated to increase the possibility of resolution, the value of the resolution plan, and enable timely resolution. 

Public comments have been sought electronically on this discussion paper latest by June 27.

IBBI has proposed that the audit of IRPC can only be conducted by a Chartered Accountant, who is also recognised as an insolvency professional (IP).

This additional measure of mandatory audit of IRPC is intended to bolster financial accountability and enhance confidence among all stakeholders involved in such CIRPs.

Currently, existing Corporate Insolvency Resolution Process (CIRP) Regulations provide what constitutes IRPC but they do not necessitate an audit of these costs. However, considering the significant bearing these costs can have on the overall resolution process, it becomes crucial to assure their veracity. 

Therefore, it is proposed to introduce an audit requirement for CIRPs involving CDs of a certain asset size within the CIRP Regulations, the IBBI discussion paper noted.

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The discussion paper noted that the resolution professional (RP) can get the audit of IRPC conducted after finalisation of the cost of IRPC for the financial year.

IRPC comprises various costs, including the remuneration of the Resolution Professional (RP), expenses incurred by the RP in running the business of the CD as a going concern, and costs specified under Regulation 31 of the CIRP.

Experts’ take

Anoop Rawat, Partner, Insolvency & Bankruptcy, Shardul Amarchand Mangaldas & Co, said “The proposal to audit the IRPC is to bring more transparency and accountability to the functioning of the Resolution Professionals. However, one should also be sensitive to the fact that while maintaining the Company as a going concern and running the CIRP, the Resolution Professionals are faced with a daunting task and during the difficult and complex resolution phase, the costs are incurred as IRPC. 

The audit principles shouldn’t lead to over-regulation over certain subjective aspects of process management that are peculiar to each process.”

Mukesh Chand, Senior Counsel, Economic Laws Practice, said “Formal introduction of the requirement of audit of IRPC is a welcome step but, side by side, stress should be on timely resolution and all the authorities need to act with equal responsibilities to achieve this objective. There is a need that all the authorities and functionalities under the Code, be it IRP/RP, CoC and NCT, should keep the interplay of cost, time, and value erosion in mind while discharging respective functions.”

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Therefore, there is a greater need for calculating and analysing value erosion on account of time and cost, which should also be placed before IBBI by RPs and Liquidator, Chand added.

Assignment of debt

The IBBI discussion paper has also introduced a timeline for providing information for assignment or transfer of debt. The original creditor and the assignee of debt would have to, within seven days, post assignment or transfer of debt inform the interim resolution professional  (IRP) or the Resolution Professional (RP) about the terms of such assignment or transfer and the identity of the assignee or transferee. 

Authorised representative

IBBI has in the discussion paper proposed changes in CIRP regulations so as to allow creditors in a class to replace an authorised representative (AR). Presently, there is no express provision for the replacement of an AR after his appointment by the Adjudicating Authority (AA).

Meanwhile, IBBI has also proposed that CIRP regulations be amended to mandate that the personnel of the corporate debtor (CD), its promoters or any other person associated with the management of the CD, hands over the assets as per the balance sheet of the CD.

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The discussion paper highlighted that the current regulations do not lay down how the control and custody of assets and records will be taken over. It has been noted that there are instances where such information is not provided in a timely or efficient manner.

The Insolvency and Bankruptcy Code (IBC) 2016 was enacted with the primary objective of time bound resolution and maximisation of value of assets.

However, two major criticisms against the resolution process under the Code are that fewer companies are being resolved with lesser value realisation and the time taken for such resolution is longer than what the law prescribes.

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