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Penalty on IPs for violations of regulatory norms

The Insolvency and Bankruptcy Code, 2016 proposes the regulatory body Insolvency and Bankruptcy Board of India (IBBI) which acts as a watchdog over insolvency professionals and insolvency professional agencies. The Code also defines Insolvency Professionals and Insolvency Professional Agencies. Section 3(19) defines an insolvency professional enrolled with an insolvency professional agency (IPA) as its member registered with the Insolvency and Bankruptcy Board of India as an insolvency professional (IP). The Insolvency Professional Agency is defined in the very next clause as a person who is registered with the IBBI under Section 201 of the Code. Under the IBBI’s supervision, these Insolvency professional agencies will develop professional standards, codes of ethics and exercise a disciplinary role over members leading to the development of a competitive industry for insolvency professionals.

The Insolvency and Bankruptcy Board of India (IBBI) issued a Circular dated 28 July 2021 which tightened the disciplined framework for insolvency professionals. According to this circular, the IBBI has set up fines or penalties in case of violations by insolvency professionals while dealing with distressed assets in the resolution process. According to the circular, the minimum amount of the fine is Rs. 50,000 or Rs. 1 lakh. The fine amount can go up to Rs.2 lakh or even up to 25% of the fees which the professional charges or whichever is higher depending upon the violation. This move can be said to ensure that IP’s and IPAs honour and follow the Code and not abuse it.

This new rule is important for the corporate insolvency resolution process (CIRP) as the IPs play an important role in it and also under the provisions of the Code manage the corporate debtor’s affairs. Therefore, this is a good move by the IBBI. Its effectiveness, however, has to be reviewed with time.

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