NEED TO REGULATE & OUTLINE THE QUALIFICATION OF COMPANY LIQUIDATORS

NEED TO REGULATE & OUTLINE THE QUALIFICATION OF COMPANY LIQUIDATORS February 16, 2010 Under the Companies Act, 1956, Company Liquidators (professionals and private practitioners as Liquidators) can be appointed only in cases of Voluntary Winding-up procedures. However, under the Companies Bill, 2009 the scope of appointment of Company Liquidators in the process of winding up of the Company has been widened so as to include Winding-up by the Tribunal as well. With more involvement and responsibility being given to the Company Liquidators (known as Insolvency Practitioners or Private Trustees in UK and USA respectively), there is a greater need to ensure the quality of people who practice this profession. The Companies Bill, 2009 only lists down the professions from which Company Liquidators can be appointed but merely listing the professions from which company Liquidators should be appointed will not suffice and a set of minimum qualification should be prescribed before the professionals can be enlisted in the panel so as to ensure the quality of professionals entering the professionals entering the profession as Company Liquidators. Hence, it is essential to look at some of the important duties that the Company Liquidator has to perform under the Companies Bill, 2009 so as to align the qualifications with the responsibilities or duties that a Company Liquidator has to carry out. Accordingly, in this Session, we propose to discuss the some of the important duties of company Liquidator under the Bill so as to give a background as to what are their (Company Liquidator s) responsibilities are and accordingly attempt to outline the minimum qualifications for a person to be enlisted as a Company Liquidator. We will also refer to the laws laying down the qualifications of Insolvency Practitioners (Company Liquidator s) in some of the countries of the worlds where the system is successfully in operation. Taking the discussion further, we would also try to identify possible regulatory agencies which can be entrusted with the responsibility of regulating the Company Liquidators and would attempt to devise a framework to regulate the Company Liquidators.

QUALIFICATION OF COMPANY LIQUIDATORS Duties of Company Liquidator under the Company Bill, 2009 Following are the some of the important Duties of the Company Liquidator:- Submission of Report to the Tribunal: - Where a Winding-up order is made by the court the Company Liquidator within sixty days from the order, submit an exhaustive Company Report to the Tribunal containing details of assets and liabilities of the Company, amount of capital issued, subscribed or paid up, details of trademarks and intellectual properties, details of subsisting contracts, joint ventures and collaborations, details of holding and subsidiary companies or any other information which the Tribunal may direct or the company Liquidator. Act as Custodian of Company s property:- The Company Liquidator is to act as custodian of Company s property and should take control over all the property, effects and actionable claims to which the company is or appears to be entitled to and take such steps and measures, and may be necessary, to protect and preserve the properties of the company. Submission of Periodical reports:- the Company Liquidator has to submit periodical reports to the Tribunal at the end of each quarter. Maintenance of Company Books of Account:- The Company Liquidator has to maintain proper and regular books of accounts including accounts of receipts and payments made by him. Other Duties: Other duties of the Tribunal as laid down under Clause 265 of the Bill includes carry on the business of the company so far as may be necessary for the beneficial winding up of the company; to execute, in the name and on behalf of the company, all deeds, receipts, and other documents; to raise on the security of the assets of the company, any money required; to institute or defend any suit, prosecution, or other legal proceeding, civil or criminal, in the name and on behalf of the company; to invite and settle claim of creditors and distribute sale proceeds; and to do all such other acts and things as may be necessary for the winding up of the company and distribution of its assets.

Companies Bill, 2009: Company Liquidator The Provision Liquidator or the Company Liquidator can be appointed from a panel maintained by the Central Government consisting of the names of Chartered Accountants, Advocates, Company Secretaries, Costs and Work Accountants or firms having a combination of these professions; or a body corporate comprising of professionals mentioned above under Clause 250 of the Companies Bill. From the above provisions of the Bill, it is clear that only those Chartered Accountants, Advocates etc. (as mentioned above which are listed in the panel maintained by the Central Government can be appointed as a Company Liquidator or the Provisional Liquidator. In order to ensure that only good quality Insolvency Practitioners/Liquidators get enlisted in the panel maintained by the Central Government, it is necessary to lay down certain additional eligibility criteria even for the professionals mentioned above. The additional requirement may be in terms of experience in respective professions or may be in terms of some additional educational qualification or a combination of both and we are here to discuss and highlight What these requirements should be, so as to ensure the quality of professionals enlisted in the panel maintained by the Central Government. QUALIFICATION OF INSOLVENCY PRACTIONERS IN OTHER COUNTRIES 1. UNITED KINGDOM Authorizing/Licensing Body In UK, the Secretary of State (SoS) for the Department of Business, Enterprises and Regulatory Reforms regulates the Insolvency Practitioners. The SoS recognizes independent professional bodies for the purpose of authorizing, licensing and regulating appropriately qualified individuals to act as Insolvency Practitioners. These bodies are called Recognized Professional Bodies or RPBs. The SoS regulates the RPBs. The SoS regulates the RPBs by monitoring their compliance with legislation and agreed standards. The SoS and each RPB authorize and licence appropriately qualified individuals to act as Insolvency Practitioners. The SoS and each RPBs regulate the

Insolvency Practitioners whom they authorize and license by monitoring their compliance with legislation and accepted standards. List of Recognized Professional Bodies: - 1. Institute of Chartered Accountants of England and Wales( ICAEW) 2. Institute of Chartered Accountants of Scotland (ICAS) 3. Institute of Chartered Accountants of Ireland (ICAI) 4. Association of Chartered Certified Accountant (ACCA) 5. Solicitors Regulation Authority (SRA) 6. Law Society of Scotland (LSS) 7. Insolvency practitioners Association (IPA) Qualifications for Insolvency Practitioners Quite often Insolvency Practitioners have accountancy have an accountancy background. A few active practitioners are lawyers, but it is not necessary to be qualified as either, as since 1986 there has been a direct entry route to the profession. Insolvency is a regulated profession under the Insolvency Act 1986 and anyone who wishes to practice as an Insolvency Practitioner needs to pass the three examination papers (paper on Liquidations; Administrations, Company Voluntary arrangements and Receiverships; and Personal Insolvency) set by the Joint Insolvency Examination Board (JIEB) and meet the authorizing body s insolvency experience requirements. Though no mandatory qualification in terms of any degree is prescribed but is suggested that the candidates appearing for the Joint Insolvency Examination should have a basic understanding of Accounting, Taxation and Business Laws. 2. AUSTRALIA Authorizing/Licensing Body All insolvency procedures applying to corporate entities are provided for in Chapter 5 of the corporations Act and regulations and Australian securities and Investment Commission (ASIC) is the authority which regulates the Private Insolvency Practitioners in Australia. Private sector practitioners become registered with ASIC and are then able

to be appointed as receivers, administrators and liquidators in individual cases. When they become registered with ASIC they become known as registered liquidators. There is a separate category of liquidator; called Official Liquidators who are the only liquidators permitted to conduct court windings-up. The criteria that must be met to become a registered liquidator and the role and duties of appointees to particular cases are set out in the Corporation Act. Qualifications of Private Practitioners as Liquidators Only natural persons are allowed to be registered as Liquidators in Australia. 1 Following are the requirements laid down under section 1282 of the Australian Corporations Act, 2001 that a person applying for registering himself/herself as a Liquidator has to fulfil:- Holds a degree, diploma or certificate from a prescribed university or another prescribed institution in Australia and has passed examinations in such subjects, under whatever name, as the appropriate authority of the university or other institution certifies to ASIC to represent a course of study in accountancy of not less than 3 years duration and in commercial law (including company law) of not less than 2 years duration; or has other qualifications and experience that, in the opinion of ASIC, are equivalent to the qualifications mentioned above. Has experience in winding up bodies corporate Is capable of performing the duties of a registered liquidator and is otherwise a fit and proper person to be a registered liquidator Is not a person disqualified from managing corporations Is (generally) resident in Australia and If the application is granted, will comply with our policy on the security required under S.1284. 3. UNITED STATES OF AMERICA 1 Section 1279 of the Corporations Act, 2001

Under the legal framework in United States, Trustee is responsible to look after the Bankruptcy proceedings. Once the order of Relief is made in case of liquidation proceedings under chapter 7 of the Bankruptcy Code, the United States Trustee 2 shall appoint one disinterested person that is a member of the panel of private trustees established under section 586(a)(1) of title 28 or that is serving as trustee in the case immediately before the order for relief under this chapter to serve as interim trustee in the case. The service of an interim trustee under this section terminates when a trustee elected by creditors or designated under section 702 of title 11 agrees to serve as trustee. Creditors meeting held under Section 341 of Title 11, a Trustee can be elected by the creditors and if a Trustee is not elected then the interim trustee will serve as the Trustee in the case. Qualifications of Private Trustees 3 The qualifications for membership on the panel for a Private Trustee are as follows: 1) The person who can be appointed as a trustee must be:- i. Be a member in good standing of the bar of the highest court of a state or of the District of Columbia; or ii. iii. Be a certified public accountant; or Hold a bachelor s degree from a full four-year course of study(or the equivalent)of an accredited college or university with a major in a businessrelated field of study or at least 20 semester-hours of business-related 2 The United States Trustee Programm is an agency of the United State Department of Justice that is responsible for overseeing the administration of bankruptcy cases and private trustees. The United State Attorney General generally appoints a separate United States Trustee for each of twenty-one geographical regions for a five year term. Each United States Trustee is removable from office by and works under the general supervision of the Attorney General; the above mentioned information has been taken from http://en.wikipedia.org/wiki/united_states_trustee 3 The qualification for private trustee is provided under part 58, chapter I, Title 28 of the United States Code; the information has been obtained from http://cfr.vlex.com/vid/58-qualificationmembership-trustees-19677744.

courses; or hold a master s or doctoral degree in a business-related field of study from a college or university of the type described above; or iv. Be a senior law student or candidate for a master s degree in business administration recommended by relevant law school or business school dean and working under the direct supervision of: (A) A member of law school faculty; or (B) A member of the panel of private trustees; or (C) A member if a program established by the local bar association to provide clinical experience to students; or v. Have equivalent experience as deemed acceptable by the U.S. Trustee. 2) Possess integrity and good moral character. 3) Be physically and mentally able to satisfactorily perform a trustee s duties. 4) Be courteous and accessible to all parties with reasonable inquiries or comments about a case for which such individual is serving as private trustee. 5) Be free of prejudices against any individual, entity, or group of individuals or entities which would interfere with unbiased performance of a trustee s duties. SESSION II: CODE OF ETHICS & REGULATION OF INSOLVENCY PRACTITIONERS 1. PRACTICE IN UNITED KINGDOM Regulation of the Insolvency Practitioners 1) IPs are regulated by Government monitored self regulation i.e. Insolvency Practitioners Regulation 2005 2) The Secretary of State and each RPB regulate the Insolvency Practitioners whom they authorize and give licence. 3) Insolvency Practitioner Unit of the SoS is responsible for all the functions/regulations in relation to IPs authorized by the SoS

4) IPs are required to comply with the statements of Insolvency Practice set out by RPBs and in case of default by the IPs, the concerned RPBs and in case of default by the IPs, the concerned RPBs could take disciplinary action. 5) All IPs are subject to monitoring, visit from their authorizing bodies, the SoS and the RPBs. Monitors seek to establish that IPs are adhering to legislations namely Insolvency Act, 1986 and Insolvency Regulation 1986. 6) In the Institute of Chartered Accountants of England and Wales, which is one of the biggest RPBs, the Insolvency Licensing Committee undertakes monitoring visit. 7) IPs are required to comply with Insolvency Licensing Regulations of respective RPBs 8) IPs are required to follow the Professional Standards and the Code of Ethics framed by respective RPBs Code of Ethics In addition to the above regulations, the Insolvency Practitioners are also required to adhere to Joint Insolvency Committee s code of Ethics issued by the Joint Insolvency Committee and adopted by all Recognized Professional Bodies (RPBs). This Code is intended to assist Insolvency Practitioners meet the obligations expected of them by providing professional and ethical guidance. This Code applies to all Insolvency Practitioners should take steps to ensure that the code is applied in all professional work relating to an insolvency appointment, and to any professional work that may lead to such an insolvency appointment. Failure to observe the Code may not, of itself, constitute professional misconduct, but is taken into account in assessing the conduct of an Insolvency Practitioner. 2. PRACTICE IN AUSTRALIA Australian Securities and Investment Commission ( ASIC ) is the regulatory body that governs and regulates the private Liquidators involved in the liquidation of Companies in Australia. ASIC in order to supervise the Liquidation of Companies by private Liquidators has made it mandatory for every private Liquidator to report matters and

lodge documents with ASIC on regular basis. The reporting by the private Liquidators has to be done online and Liquidators compliance section of ASIC also specifically highlights the responsibilities, duties and obligations of a private Liquidator in a Liquidation proceedings. This online portal also helps the Liquidators to obtain books, records and other data that might be required in order to fulfil his/her obligations as a Liquidator. In case of failure to fulfil the duties/obligations or failure to comply with Liquidator compliance including the failure to lodge and maintain security, as required under section 1284 of the Act and the failure to comply with the arrangement for liquidators under ASIC Policy Statement 33, the ASIC can apply before the Companies Auditors and Liquidators Disciplinary Board (CALDB) for disciplinary action to be taken against liquidator as it deems fit. Insolvency Practitioners Association of Australia ( IPAA ) is an independent, selfgoverning Association of Insolvency Specialists, the majority of who are Chartered Accountants. The IPPA has issued a Code of professional practice to be adhered and followed by the Insolvency Practitioners so as to establish and promote high standards of professional service and conduct. Though IPAA is a self-governing body but the nonadherence to the code issued by it may attract disciplinary action against the members. 3. PRACTICE IN UNITED STATES OF AMERICA Bankruptcy Trustees in US The US Government created the U.S. Trustee Program in 1978 as part of the Bankruptcy Reform Act and Bankruptcy trustees are overseen by the U.S. Trustee Program. United States Trustees appoint and supervise private trustees who are assigned to judicial districts in their respective states. Bankruptcy trustees (Private Trustees) in chapter 7 cases are not government employees, according to the National Association of Bankruptcy Trustees. Chapter 7 bankruptcy trustees are private citizens, usually attorneys or accountants, appointed by the U.S. Trustee Program to administer bankruptcy cases. The bankruptcy trustee s primary role in a Chapter 7 case is to liquidate those assets for the greatest benefit to creditors.

Under 586(a)(3)(F), the trustee is to report to the U.S. Attorney any action which may constitute a crime. Most of the crimes for which the U.S. Trustees watch are listed in Title 11, section 152 of the U.S. Code, and described more thoroughly in Volume 5 of the United States Trustee Manual. These crimes include concealment of property, fraudulent destruction of documents, extortion, bribery and embezzlement. If the trustee detects the elements of these crimes as described in the manual, he is obliged to make a report to the U.S. Attorney. The standing trustee, as a representative of the Department of Justice, reviews the actions of private trustees in individual bankruptcy cases and can remove trustees from the panel of eligible trustees for actions that violate the appropriate ethical standard. Chapter 7 of the US Bankruptcy code deals with the liquidation of the Companies and under that the United States Trustee appoints and supervises administration of Bankruptcy cases by the Bankruptcy Trustees. The responsibilities and duties of a Bankruptcy Trustee are provided under the Chapter itself. In US there is a US Manual which specifically outlines the duties and responsibilities of Bankruptcy Trustee under different chapters of the Bankruptcy Code. Volume 2 of the US Trustee Manual deals with Chapter 7 case administration (liquidation of companies) Which deals with appointment of Bankruptcy Trustee, their remuneration, duties and responsibilities and supervision its administration of the Bankruptcy of the case. The failure by the Bankruptcy Trustee to properly file the Report with the US Trustee and the Court may attract any remedial action (damage can be recovered from the Security Bond given by the Bankruptcy Trustee before taking up the assignment), penalty or removing his name from the panel of the Bankruptcy Trustee depending upon the facts and circumstance of the case. SALIENT FEATURES OF A DESIRED CODE OF ETHICS FOR INSOLVENCY PRACTITIONERS 1. Fundamental Principles a) Integrity: - An Insolvency Practitioner should be straightforward and honest in all professional and business relationships.

b) Objectivity: - An Insolvency Practitioner should not allow bias, conflict of interest or undue influence of others to override professional or business judgements. c) Professional competence and due care: - It is the Duty of an Insolvency Practitioners to maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent professional service. d) Confidentiality: - An Insolvency Practitioner should respect the confidentiality of information acquired as a result of professional and business relationships and should not disclose any such information to third parties without proper and specific authority unless there is a legal or professional right or duty to disclose. Confidential information acquired as a result of professional and business relationships should not be used for the personal advantage of the Insolvency Practitioner or third parties. e) Professional behaviour: - An Insolvency Practitioner should comply with relevant laws and regulations and should avoid any action that discredits the profession. Insolvency Practitioners should conduct themselves with courtesy and consideration towards all with whom they come into contract when performing their work. 2. Conflict of Interest: - An Insolvency Practitioner should take reasonable steps to identify circumstances that could pose a conflict of interest. Such circumstances may give rise to threats to compliance with the fundamental principles. 3. Professional and personal relationships: - The principle of objectivity may be threatened if any individual within the practice, the close or immediate family of an individual within the practice or the practice itself, has or has had a professional or personal relationship which relates to the insolvency appointment being considered. Where a professional or personal relationship has been identified the

Insolvency Practitioner should evaluate the impact of the relationship in the context of the insolvency appointment being sought or considered. 4. Transparency: - An Insolvency Practitioner in the role as office holder has a professional duty to report openly to those with an interest in the outcome of the insolvency. An Insolvency Practitioner should always report on his acts and dealings as fully as possible given the circumstances of the case, in a way that is transparent and understandable. 5. Dealing with the assets of the Company: - actual or perceived threats (for example self interest threats) to the fundamental principles may arise when during an insolvency appointment, an Insolvency Practitioner realizes assets. Save in circumstances which clearly do not impair the Insolvency Practitioner s objectivity, Insolvency Practitioners appointed to any insolvency appointment in relation to an entity, should not themselves acquire, directly or indirectly, any of the assets of an entity, nor knowingly permit any individual within the practice, or any close or immediate family member of the Insolvency Practitioner or of an individual within the practice, directly or indirectly, to do so. 6. Gifts and hospitality: - An Insolvency Practitioner, or a close or immediate family member, may be offered gifts and hospitality. In relation to an insolvency appointment, such an offer will give rise to threats to compliance with the fundamental principles. The significance of such threats will depend on the nature, value and intent behind the offer. In deciding whether to accept any offer of a gift or hospitality the Insolvency. Practitioner should have regard to what a reasonable and informed third party having knowledge of all relevant information would consider to be appropriate. 7. Record keeping: - It will be always for the Insolvency Practitioner to justify his actions. An Insolvency Practitioner will be able to demonstrate the steps that he took and the conclusions that he reached in identifying, evaluating and responding to any threats, both leading up to and during an insolvency appointment, by reference to written contemporaneous records. The records an Insolvency Practitioner maintains, in relation to the steps that he took and the conclusions that

he reached, should be sufficient to enable a reasonable and informed third party to reach a view on the appropriateness of his actions.