An important aspect of Marcellus’ investment philosophy is avoiding companies with dodgy accounting and we see accounting quality as a proxy for promoter integrity. This article reinforces the importance of that. If bankruptcy professionals appointed by the courts to turnaround defaulting companies and recover lender’s interests can be subject to this treatment, what hope in hell do minority shareholders have when it comes to dealing with a dodgy promoter. It doesn’t matter how good the business is if the promoter has no intention to be fair to minority shareholders. There is no stock price that can factor that in, as the plight of debtholders shows through this piece.
RPs face a peculiar set of problems. As no promoter wants to let go of his/her company, the resolution professional is seen as an outsider trying to grab control. That leads to non-cooperation and even harassment in some cases.
As of 30 September, there were 3,182 insolvency professionals who have passed a specific test and got themselves registered to act as turnaround specialists. Despite being appointed by a tribunal, these professionals are often left at the mercy of frivolous intimidation tactics by irked workers of the company whose debt is being resolved or, as seen in a recent case, by uniformed policemen.
According to lawyers, at times, the harassment reaches a level where tackling that becomes a priority and not turning around a stressed company, the original role envisaged in the IBC.
“A lot of intimidation is faced by resolution professionals not only from corporate debtors or authorities but also from employees, workers, creditors and in some remote areas even from locals as well. It is really difficult to steer the process in such an environment,” says Ashish Pyasi, associate partner at law firm Dhir & Dhir Associates.”
Besides, promoter aggression there seems to be a learning curve for the enforcement agencies too as they grapple with understanding the bankruptcy process:
“Experts believe that the primary reason for insolvency resolution professionals being harassed is because of a disconnect between the tribunal and other courts. Policemen, they said, are quite unaware of the provisions of the company laws, how the National Company Law Tribunal (NCLT) functions and the safeguards given to the RPs. It is important to note that the authority of the tribunals is limited when compared to a trial court.
“The regular judicial forums do not seem to be connected to company forums like the NCLT. There is a disconnect between the tribunals and the trial courts, otherwise the police would have been far more aware of the IP’s responsibilities under the Code. Since the police do not report to Tribunals in proceedings and have to go and stand in front of the district and session courts, they are less accountable for their inappropriate actions in such matters.” said Vivek Parti, a New Delhi-based insolvency resolution professional.”
And the bankruptcy professionals themselves seem new to the process in terms of training and ability to run companies and turn them around:
“There’s another factor: by its very nature, India’s insolvency process adds to this baptism by fire. Resolution professionals, more often than not, come from various backgrounds, with very few having prior experience of running a company. A lot of the challenges faced by resolution professionals today is also because while many know the law like the back of their hand, they are not used to managing corporations.
A banker-turned-insolvency professional said that while the insolvency board has mandated 50 hours of pre-registration training for potential applicants, hands-on experience is lacking.
“IBBI should allow newly-registered professionals to assist someone senior in the day-to-day resolution process of a company. This will allow development of leadership and negotiation skills, perhaps the two most important aspects in our line of work,” he said.”


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Note: the above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services. Marcellus Investment Managers is also regulated in the United States as an Investment Advisor.

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