IP Mukesh Khathuria

  December 29, 2021

The Board should come up with some guidelines on remuneration of the IPs. As per me, the remuneration should not be lower than what is paid to the CEO or CFO of the corporate debtor.

(Mr. Khathuria is a Mumbai-based IP)

  • Please tell us a little about your professional background and about what led you choose to become an Insolvency Professional (IP).

I have done an MBA in finance, and subsequently I have been working with major corporate groups like Adani Group, K. Raheja, and others, over the past 23 years. When the IBC started, it started with the insolvency resolution of the big 12 companies under the RBI’s order. And reading the IBC academically, it appeared that the RP has tremendous powers, and I joined this field. However, in reality, the real power is with the CoC only, and the IP remuneration is also not at par with the work that is required of him. So, I feel that the IBC has not turned out for me the way I had envisaged when it came into force.

  • Well, if the IPs are not very happy with the working of the IBC, that is certainly going to have an impact on its success. If you have any suggestions for reform, we would like to hear them.

Under the Code, so many responsibilities are put on the IP. He has to run the corporate entity as a going concern and has the sole decision-making authority regarding the corporate debtor. He also has to report to both the IBBI and the NCLT. Looking at the tremendous responsibilities of an IP, something I see that their remuneration is not up to the mark. There is a lot of competition among the IPs, there are too many of them and the bankers are selecting them based on the lowest fee quote. IPs who do not have much assignments are quoting lower. So, there are IPs who are willing to work for say, 50,000 – 60,000 rupees. 

Therefore, the Board should come out with some guidelines on remuneration of the IPs. As per me, the remuneration should not be lower than what is paid to the CEO or CFO of the corporate debtor because an IP is responsible for running the company, and the remuneration must reflect that. There is a need to have a major reform in the remuneration aspect of the IPs. If that is not done, there is a probability of the IPs compromising with the situation, and that would ultimately hamper the success of the IBC.

One more thing – under the Code, the decision to change the IRP and appoint an RP is with the CoC. If the IRP needs to be replaced, this decision should come from the IBBI, or an independent body, and not from the CoC. The CoC comprises of the bankers, and these bankers would be the ones who the IPs would look to for assignments. So, if the decision to remove the IRP comes from the CoC, there is certainly a conflict of interest which would jeopardise the independence of the IP.

  • On Committee of Creditors’ decision-making authority

Regarding the committee of creditors (CoC), the courts say that they must be attended by people who can take the decisions then & there only. There are so many guidelines by the IBBI and decisions by the courts to that effect. But despite all of them, we have seen that bankers do not take the decisions then & there in the CoC meetings. They say their higher authorities would revert to them.

  • On that note, do you think the current discussion on having a code of conduct for the CoC will help in any way? Or do you think it interferes with the commercial wisdom of the CoC?

See, the CoC has the decision making authority, while the RP runs the entire process. Definitely, certain issues arise between the two. Since RP runs the process, he understands the requirements of the corporate debtor and the IBC. However, the CoC only understands the financial matters, but what is actually required to be done is better understood by the RP. Naturally, some differences arise between the RP’s decision and the CoC’s decision. For example, if the RP feels that some technical person needs to be appointed for certain task, he has to seek the approval of its budget from the CoC. Now, the CoC may or may not understand the need to appoint a technical person. So, the CoC is required to have a flexible approach in understanding these concerns and make their decisions accordingly. Extra care is required in case of going concern corporate debtors where quick decision making is required on a day-to-day basis.

  • This reminds me of the time when the discussion to include homebuyers as financial creditors was ongoing. One major objection was that the homebuyers do not have that commercial acumen that is required for decision making in the COC meetings. 

Considering what you said, it appears that even the seasoned bankers of the CoC are not very well-versed with the process and its requirements, and just look at the financials. Do you think that a requirement to have an authorised representative (who is an insolvency professional) is there even for the bankers, just like it is for the homebuyers? To sort of, make them understand the IBC process and the corporate debtor’s requirements well?

There is a major difference between homebuyers as financial creditors and bankers as financial creditors. The quantum of individual homebuyer’s claim is very less, and most of them are interested in getting their apartments and not in recovering their money. However, the bankers are only concerned about recovering their money. So, this difference is the reason why they perform differently in the CoC meetings. And on the question you raised on appointing an authorised representative for the CoC constituted of bankers, there is already a provision made in the IBC, but no one uses that. The bankers are unwilling to pay additional 10,000 – 15,000 to an IP to attend the CoC meetings as an authorised representative. 

  • So, that apart, in terms of the substantive work that you do as an IP, what are some of the significant challenges you face?

One issue I can think of is, the hindrance caused due to the actions/inactions of government departments. 

So, I remember in one of my assignments as a liquidator, after I sold the property to a purchaser, he was facing problems in getting this & that approvals from the government departments. They were sending their claims against the corporate debtor to the new purchaser, which should not happen. In some cases, they send their 4-5 years’ past claims to the new purchaser, instead they should have come to the liquidator to submit the claims when asked for. The purchaser should not be burdened with these past liabilities and claims. So, I think there should be guidelines issued to various government departments that if a sale happens under the IBC, they should be quick in clearing them. The new purchasers literally wait for 3-6 months, running pillar to post. This should not be allowed to happen. Because of these bureaucratic hassles, I feel that the purchasers are not seeing much value in the sales happening under the IBC.

In another case, I am waiting for the refunds from the Income Tax Department since two years. Despite sending them multiple follow-ups that I have to recover those amounts to distribute them among the stakeholders, and close the liquidation process within one year, they are not willing to listen. They are simply delaying the process.

  • In terms of the working of the IBC, in recent times, do you notice some changing trends, something that was not there initially or before COVID-19?

One significant thing I notice is that now not many financial creditors are interested in going to NCLTs to recover their dues. The bankers that I have interacted with, prefer to go for one time settlement options or something else. They are not much interested in taking the matter to the NCLT. Over a period of time this may improve. But currently this is a trend that I am observing.

Another thing that I see is that there is now a greater degree of credit discipline in the borrowing community. They now understand that there is a repayment obligation that will come soon, and if they do not pay, the bank is not going to forget about the loan. This discipline is more so since now the IBC can come even after the personal guarantors. So, that’s a good thing that is helping bring about more credit discipline.

  • Interesting changes. I see that you have handled four companies in different capacities, and in total, nine assignments. So, an open-ended question regarding that – any significant challenge that you faced or something that stayed with you from those assignments?

In one of the cases, the CoC rejected a resolution plan that was offering good money, and instead decided to go for liquidation. In liquidation, they received much lesser amount. So, I feel that it was a bad decision-making on part of the lenders. So sometimes I see that the financial creditors simply say that, I am not getting a good value, so I will go for liquidation. They do not realise that liquidation will take another one year or more, and then the assets will depreciate and the market dynamics may change.

Another thing – in one of the liquidations I handled, I prepared a detailed information memorandum and connected with as many players as I could to create a competitive market. This way I was able to sell the property at 40-50% premium above the market rates because I had generated too much buyer interest in the property.

  • You mentioned that once the CoC rejected a plan merely on the basis of the amount. Do you think that it is a frequent occurrence in the IBC regime that the plans are rejected just on the basis of the amount, and the CoC is not considering other aspects of the plan?

See, there are different reasons for rejection. And the amount is certainly a major reason. They might consider that the amount they are getting in resolution is less, and that in liquidation, they may get more as they are higher in the priority list. So, they are not considering about the other stakeholders, like the employees or the operational creditors, or the economy at large. But the CoC has to look at all the angles of the resolution plan, the treatment of the employees, operational creditors, etc., but in reality, they are not doing so, which is problematic. One recommendation in that regard that I wanted to make to the IBBI as a liquidator is regarding the computation of interest of the financial creditors. When a company is under the CIRP, the interest over the loan is calculated up to the date of the commencement of CIRP, but when it goes under liquidation, the interest is calculated up to the date of commencement of liquidation. Now, this is not the case with the operational creditors, the employees, etc., their claims, especially employees & workers claims does not have interest part.  So, when CIRP matter ends into liquidation, while financial creditors claims grows bigger with the added interest for the CIRP period, the claims of workers and most of the Operational creditors remains the same as on date of CIRP commencement date. So, the overall claim ratio tilts more in favour of financial creditors (which already is very large chunk) at the costs of other stakeholders. Thus, that is a big flaw that encourages the financial creditors to opt for liquidation. So, I would suggest that provision should be made that if the company goes under liquidation due to the CoC’s decision, the interest of the stakeholders should be calculated till the CIRP date and not till the liquidation date.

 

(This interview was conducted by Kumari Saloni and has been edited and condensed for clarity.)

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