Threats, physical and legal, loom large on insolvency professionals. Adequate insurance covers to insulate such executives are still underwhelming
Devendra Jain, a veteran insolvency professional recently faced a tough time when he was kidnapped from a Mumbai suburb. A group of investors, attempting to derail insolvency proceedings, mistook him for a company official in relation to a ponzi-scheme case.
Jain, who is also the founder-chairman and managing director of NPAsource.com, an NPA-listing portal for banks, feels that there is a need to take insurance. Feeling the heat from physical assault and legal threats by stakeholders on the way they manage distressed companies, insolvency professionals have individually started buying insurance covers.
“Insurance should also cover professional charges of the insolvency professionals. We have operational dangers in several cases where insolvency is initiated. Compliance costs are also high,” he told Moneycontrol.
Just like Jain, another New Delhi-based insolvency professional was thought to be part of top management of a debt-ridden financial services firm and beaten up by individuals who lost money.
Rising NCLT cases
Any creditor has the right to take a corporate entity to the National Company Law Tribunal for insolvency proceedings if there is a default on debt or interest payment. These cases are referred to the NCLT on priority under the Insolvency and Bankruptcy Code.
An insolvency professional, who then takes over the running of the company, gets 180 days (six months) to come up with a viable solution to enable repayment of loans. The period can be extended by another 90 days.
Though exact numbers are not available, it is estimated that oover 2,000 cases pertaining to insolvency proceedings are pending before the NCLT. India is said to have about 1,300-1,500 fully-qualified insolvency professionals.
While the number of cases filed at the NCLT are on the rise, challenges faced by insolvency professionals too are aplenty.
Sanjay Radhakrishnan, CEO of JLT Independent Insurance Brokers said that they have structured an insurance policy, especially for insolvency professionals to help mitigate risks. “We have already sold about four policies to insolvency professionals handling some of the largest cases at NCLT. We are working with another 28 such professionals to offer products. Both private sector and public sector insurers have been providing the product,” he added.
Unlike India, several markets such as the United Kingdom have made it mandatory for the resolution professionals to take insurance.
Industry sources told Moneycontrol that while only six to eight such specially-worded policies for individual insolvency professionals have been sold, the demand is much higher. Insurers expect the number of policies on offer to rise to at least 80-100 in the next three months.
Not all insolvency professionals are able to afford the insurance costs, especially if they do not work with a large legal or accounting firm.
Jain of NPAsource.com said while they asked IBBI to provide insurance to insolvency professionals like him, there has not been any progress yet. He added that they are also seeking a formal tie-up with an insurance company to provide insurance cover for insolvency professionals.
What does this insurance cover?
Several insolvency professionals still take a professional indemnity cover that offers basic insurance against legal proceedings if a case is filed against their conduct. But, specialised covers for insolvency professional are not yet a norm.
Radhakrishnan of JLT Independent Insurance Brokers explained that a typical cover would have a sum insured from USD 3 million to up to USD 80 million. The premium here is 1.25-3.5 percent of the sum assured. He added that the reinsurance as well as the wordings of the policy are done from the London market which is considered to a global hub for high-risk insurance products.
The insurance covers legal liabilities of the individual insolvency professionals and if any costs are incurred due to a case being filed against them, this product will cover that. Further, crimes committed against IPs to derail debt resolution proceedings will be provided against.
Could IPs be charged of misconduct?
In 2017, there were a few cases of alleged partisan behaviour. According to a report, Edelweiss ARC had approached the National Company Law Appellate Tribunal (NCLAT) in September, 2017, opposing the debt recast plan for Synergies Dooray Automotive on the grounds that the deal was fraudulent, void, and set a wrong precedent.
The report said that Edelweiss ARC has also complained to IBBI about what it termed as partisan action by Mamta Binani, the resolution professional appointed for Synergies Dooray Automotive.
However, Binani refuted these allegations saying that the resolution had happened with the NCLT approval, which had heard and set aside Edelweiss’s objections.
There is a potential threat of insolvency professionals getting sued for any misconduct. Insurers said that considering several professionals are not paid very high fees, such individuals could potentially go bankrupt if they are slapped with heavy fines.
NPAs mount, insurance paces slowlyWhile the number of companies being dragged to NCLT has increased, industry players said that the pace of insurance has been lower. Though no insolvency professional has yet been asked to pay heavy legal damages for leading to worsening of a company financials during the time they have taken over, insurers believe that the risks at stake are very high.