Reassessing Conflict-Of-Interest Norms For Resolution Professionals Under The IBC

CCL NLUO
Sep 5
7 min read

Fourth year student at National Law School of India University, Bangalore

I. Introduction

Resolution Professionals (‘RPs’) play a fundamental role in steering the Corporate Insolvency Resolution Process (‘CIRP’) under the Insolvency and Bankruptcy Code, 2016 (‘IBC’). They are expected to act as fiduciaries, not only managing the assets of the distressed corporate debtor but also balancing the interests of diverse stakeholders. Recently, there has been growing reliance on large consultancy firms to act as RPs in high-value insolvency cases under the IBC. A significant regulatory lacuna, i.e., the systemic entrenchment of conflict of interest has emerged due to this. The urgency to resolve insolvency process involving large accounts within statutory timelines often results in the appointment of RPs affiliated with major firms like EY, Deloitte, etc. These firms, however, could have historically served as auditors or advisors to the very companies they now administer in insolvency proceedings or to their Financial Creditors (‘FCs’). This leads to a troubling overlap of roles, i.e., professionals who previously audited financials or advised on strategy are now tasked with investigating potential fund diversions or related party transactions (among others), activities that may implicate their own past conduct. This raises concerns, highlighting a clear inadequacy in the current conflict of interest framework.

Recently, the events in Byju’s Case raised such concerns where despite an apparent pre-Committee of Creditors (‘CoC’) settlement with the BCCI (Operational Creditor), the interim resolution professional (‘IRP’) failed to submit the withdrawal to the National Company Law Tribunal (‘NCLT’), allegedly under influence from the FC, GLAS Trust LLC (‘GLAS’) owing to a previous relationship. In this case, while the NCLT appointed Pankaj Srivastava as the IRP for Byju’s insolvency, he delegated the entire process to Dinkar who belonged to EY, the same person who had been working with GLAS. Dinkar vetted and approved or rejected all the claims submitted to the IRP, including admission of GLAS in the CoC (technically, it was thus, GLAS admitting GLAS into the CoC.)

Existing regulations which rely on self-regulation to ensure independence of RPs, are inadequate to address such conflicts of interest. This necessitates an analysis of legal framework governing RPs, particularly in terms of disclosure obligations to ensure the integrity of the CIRP and stakeholder confidence in the IBC process. To this end, the analysis proceeds in two parts: First, I analyse the substantive gaps in the regulations, focusing on the different standard for standards governing conflicts of interest vis-à-vis FCs and the Corporate Debtor (‘CD’). Second, I examine the mode of regulatory enforcement, arguing that the reliance on self-regulation is structurally inadequate.

II. Asymmetrical Standards in Regulating Conflict of Interest

The statutory scheme creates a distinction between consequence of relationship of RP with CD and FC. Regulation 3 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, which governs eligibility, applies only to the relationship between the RP and the CD, thus, leading to disqualification. A prior or existing relationship with a FC, even one that initiates the CIRP, is not a disqualification, although it must be disclosed.

As per Regulation 3, a RP is rendered ineligible to act as an RP if they are related to the CD or its management, or have had a material pecuniary relationship in the recent past. The underlying rationale for this is that the RP, once appointed, assumes control over the CD’s operations, effectively acting as an administrator of the company. Any past association with the CD risks undermining the RP’s objectivity, particularly in detecting preferential or fraudulent transactions, managing claims, or preserving records. The disqualification eliminates both actual and perceived bias.

In contrast, no such disqualification applies to relationships with FCs, even when the RP has previously served as a consultant, advisor, or employee of the FC that initiates the CIRP. Only a disclosure is required. The reason could be that FCs, though they have substantial influence through CoC do not exercise direct control over the CD. Seemingly, the assumption is that relationship with FCs may raise questions of perception but does not inherently compromise the RP’s independence in overseeing the debtor’s affairs.

However, the RP’s duties extend well beyond managing the CD, they are also expected to remain neutral among all classes of creditors and stakeholders. Influence over the CIRP can manifest in subtler but equally detrimental ways. For example, an RP who has had a long-standing consultancy or audit relationship with a major bank (FC) may be more inclined (consciously or otherwise) to validate its claims, accept its valuations, or support a resolution plan aligned with its preferences. Such bias is particularly problematic given that the CoC controls key decisions in the CIRP, including the admission of claims, selection of valuers, and ultimate approval of the resolution plan. In high-value insolvencies, where institutional lenders dominate the CoC and frequently engage the same professional networks, the probability of such an influence is real. Thus, it must be recognised that influence, not just control, can compromise independence in insolvency proceedings. Incorporating this understanding within existing framework would align with the United Nations Commission on International Trade Law (‘UNCITRAL’) Legislative Guide on Insolvency Law. UNCITRAL stresses the importance of independence “from vested interests, whether of an economic, familial or other nature,” and recognizes that even a prior business relationship with a creditor or a competitor can raise legitimate concerns of partiality. In Dhinal Shah, the NCLT asked the Insolvency and Bankruptcy Board of India (‘IBBI’) to frame suitable guidelines to ensure “Chinese Wall” between the RP and the CoC. In that case, the RP, Mr. Dhinal Shah, was himself a partner at E&Y. Other key actors in the CIRP, including the Power of Attorney holder, members of the RP’s team, and even the investment banker, were all associated with E&Y. This concentration of control in a single firm meant that the CIRP was being conducted through a “single window system,” where one entity effectively held influence and information. Such a situation was termed as an absence of “Chinese wall,” which meant that sensitive information could be misused or manipulated. With E&Y managing all key functions, the CIRP became institutionally captured by one stakeholder, which could lead to self-serving decisions or preferential treatment for certain creditors or resolution applicants.

The current disclosure framework fails to address the above complexity since the definition of “relationship” which requires disclosure is narrow, and it excludes indirect financial ties, institutional affiliations (such as past employment at a bank’s advisory body), or repeated engagements by the same set of creditors. Further, it fails to impose adequate standards of disclosure on RP-FC relationships by focusing on a narrow understanding of control. Coupled with this, the framework places the burden on those least equipped to bear it, i.e., other smaller FCs and stakeholders who may lack access to such information due to the self-regulation process as analysed in the subsequent section.

III. Structural Weaknesses in Self-Regulation

The IBC provides a disclosure-based framework for addressing conflicts of interest. S. 196 of the IBC empowers the IBBI to oversee the professional conduct of RPs. Further, the IBC establishes a statutory self-regulation framework for RPs through Insolvency Professional Agencies (‘IPAs’). While the IBBI licenses RPs, appoints RPs, and retains the power to take disciplinary action, most of the regulatory oversight is exercised by IPAs over RPs. This includes compliance with the Code of Conduct, monitoring disclosures, and maintaining internal grievance redressal mechanisms. Regulation 7(2)(h) of the IBBI (Insolvency Professionals) Regulations, 2016, mandates RPs to abide by a Code of Conduct that includes maintaining independence and disclosing conflicts of interest. Circular IP/005/2018 requires relationship disclosures with stakeholders such as the CD, FCs, and other professionals. All these regulations rely on voluntary self-disclosure. Non-disclosure can be challenged before the IBBI, reinforcing the notion of regulatory autonomy within a statutory framework. Since the state delegates certain regulatory functions to professional bodies, but retains final supervisory authority, this is a system of statutory self-regulation.

Under Indian regime, RPs are considered neutral experts, skilled in valuation, and legal compliance, thus, justifying a regime that relies on compliance with professional ethics and self-regulation. The assumption seems to be that their expertise ensures impartiality and procedural integrity. This ignores the principal-agent problem: While RPs are entrusted to act in the collective interest of all stakeholders, their actions can be disproportionately influenced by dominant FCs, personal incentives, or institutional affiliations. Expertise does not eliminate self-interest but may enhance the ability to selectively apply procedural rules, manipulate timelines, or obscure conflict through incomplete disclosures. The recent case of Byju’s CIRP exemplifies this since the RP delayed the CIRP proceedings seemingly justified on procedural grounds to advantage a specific dissenting creditor. Additionally, the RP’s control over process, from verification of claims to convening of meetings, creates information asymmetry that makes it difficult for other stakeholders to challenge or even recognise procedural violation. Such a framework is an example of “lemon’s problem,” articulated by economist George Akerlof. When stakeholders (such as homebuyers, OCs, or minority FCs) cannot easily distinguish between a genuinely impartial RP and one acting with bias, the entire system becomes suspect. Just as patients cannot fully evaluate a doctor’s advice or clients a lawyer’s strategy, parties to insolvency cannot reliably assess whether an RP’s decision stems from neutral expertise or conflict of interest. In such situations, self-regulation based on disclosure becomes an inadequate safeguard. Disclosures may be made but without the means to interpret them or act on them, thus, stakeholders remain vulnerable.

IV. Conclusion

The current framework under the IBC inadequately addresses conflicts of interest by disqualifying RPs only for ties with the CD, while allowing prior associations with FCs through a weak mechanism of self-disclosure. This creates an unjustifiable asymmetry. The reliance on self-regulation is structurally flawed. Disclosures made to the CoC are often inadequate, as the CoC itself may benefit from retaining a conflicted RP. Stakeholders like homebuyers and smaller creditors, lacking access and influence, are left vulnerable in a framework marked by information and power asymmetry. Therefore, self-regulation is inadequate to regulate conflicts of interest.