New restrictions on insolvency resolution professionals

The change seeks to eliminate a potential conflict of interest that insolvency professionals in charge of steering a company through the bankruptcy process could have if any of their colleagues advise others involved in the case.

Insolvency resolution professionals hired by lenders to rescue bankrupt companies cannot continue in that role if any of their colleagues represent any of the parties in that case, says a new rule brought out by the Insolvency and Bankruptcy Board of India (IBBI).

Once a company enters bankruptcy proceedings either on its own or by a reference made by its lenders or other creditors, shareholders would be trying their best to retain their ownership while lenders would be looking for new investors. (Pradeep gaur/Mint)

The change seeks to eliminate a potential conflict of interest that insolvency professionals in charge of steering a company through the bankruptcy process could have if any of their colleagues advise others involved in the case. It is significant because shareholders and creditors of a bankrupt firm would be trying their best to maximize their separate and often conflicting interests during the process.

Once a company enters bankruptcy proceedings either on its own or by a reference made by its lenders or other creditors, shareholders would be trying their best to retain their ownership while lenders would be looking for new investors. The resolution professional appointed as administrator of the company will have to manage the affairs impartially. An insolvency professional’s job includes verification, accepting or rejecting claims by creditors and taking possession of assets and selling them.

A director or a partner shall not continue as a resolution professional in an insolvency resolution process if the entity or any other partner or director of such an entity represents any other stakeholder in that process, IBBI said.