Signing Financial Statements of Company under CIRP

If any corporate debtor commits a default, a financial creditor or operational creditor or the debtor itself may initiate a corporate insolvency resolution process (CIRP) to pay off the debt from assets of the debtor. ‘Default’ means non-payment of debt when the whole or part of any installment of the debt has become due and isn't paid by the company debtor as per the section 3(12) of codes.

The manner in which debt recovery action takes place is provided under Chapter II, Part II – section 6 of IBC. CIRP or insolvency process is often initiated when a company debtor commits a default stated in section 4(1) of Insolvency and Bankruptcy Code, 2016 (IBC). The default should be a minimum of Rs. 1 Lakh (which was raised to 1 cr. during pandemic).

Process after Insolvency initiation

After commencement of the insolvency resolution process under section 7, 9 or 10 of the Codes, 2016, further action will take place before the Adjudicating Authority which in these cases is NCLT. As per section 16(1), the Adjudicating Authority (NCLT) appoints an interim RP or resolution professional within 14 days from the commencement of insolvency. The appointment continues till the date of appointment of the RP under section 22 of Insolvency Code – section 16(5).

“Resolution professional”, as per Part II of Insolvency Code, 2016 (which relates to Corporate Persons), means an insolvency professional appointed to conduct CIRP and includes an interim resolution professional – Section 5(27).

Management of Affairs of Corporate Debtor

Section 17(1) of the IBC provides that from the date of appointment of the Interim RP:

(a) The management of the debtor company’s affairs will be done by the interim resolution professional.

(b) The powers of the board of directors and the partners (whatever the case may be), shall stand suspended. The powers and rights are shifted and exercised by the Interim RP till completion of CIRP.

(c) The administrative officers of the debtor shall report to the Interim RP and give him access to documents and records of the debtor company that could be needed by the Interim RP.

(d) The financial institutions maintaining accounts of the company debtor should act on the instructions of the IRP. Whenever asked for information about such accounts of debtors, the institutions must furnish all information available with them to the IRP.

Responsibility of IRP after CIRP

(a) Act, execute, and submit on behalf of the debtor all the deeds, receipts, and other documents (if any).

(b) Take actions, as per the manner and restrictions specified by the Board (IBBI).

(c) Has the authority to access all the records of the corporate debtor related to any financial information.

(d) Has the authority to access the books of accounts, records, and other relevant documents of corporate debtor. This includes records available with government authorities, statutory auditors, accountants, and any other person.

(e) Be liable for complying with the wants under any law for the nonce effective on behalf of the company debtor.

Signing of Monetary Statements

Section 134(1) of the Companies Act, 2013 mandates that the budget, inclusive of the consolidated budget (if any) should be approved by the Board of Directors of the company before being signed on behalf of the Board by:

• The chairperson (authorized by the Board) the firm.
• directors.
• Chief Executive Officer (CEO), Chief Financial Officer(CFO), or the Company Secretary.

In the case of listed companies, Regulation 33(2) of SEBI-LODR states that the approval and authentication of the financial results should be done via a listed entity in the subsequent manner:

• The financial results submitted for the quarter must be approved by the board of directors. Hence, while placing the financial results before the board of directors. The CEO and the Chief Treasurer of the listed entity should certify that the financial results don't contain any misleading or inaccurate statements. The results do not omit any fact which can make the data or figures contained misleading.
• The financial results submitted to the stock market should be signed by either the chairperson or the director (or acting director). If none of them is available, it can be signed by any other director of the listed entity who is authorized by the board of directors for the signing.
• The review report should be placed in the Board of Directors meeting for approval to be submitted to the stock exchange(s).
• Even for the listed companies, the annual financial results of the audits should be approved by the board of directors. They should be signed as mentioned in clause (b) of sub-regulation (2).

Powers of Directors Vested to IRP during CIRP:

As noted before, section 17(1) of the IBC states the rights of the RP from the date of appointment:

(a) The management of debtor company’s affairs lie with the IRP after commencement of CIRP.

(b) The powers and rights of the board of directors and the partners of the debtor firm stand suspended and be exercised by the IRP.

Thus, the signing of monetary statements of a corporation that is undergoing CIRP is the responsibility of the IRP. In other words, after initiation of insolvency through CIRP, the rights of the Board of Directors of the corporation are suspended and can only be exercised by IRP. This suggests that the financial statements of companies under the resolution process would need to be approved and signed by IRP.

IRP as CEO of the debtor firm undergoing CIRP:

MCA through it’s Circular on 4/2020 and 8/2020 clarified:

• Once the INC-28 form is approved, only the IP (IRP/RP/Liquidator) will be allowed to file any form on behalf of the debtor firm. For all subsequent filings, the IP will choose his/her designation as “Chief Executive Officer”(CEO).
• The Master Data of the corporation shall clearly display that the said company is under CIRP or Liquidation. The data should state the IP's name in the CEO's column.
• The IP will be responsible to file all the necessary documents/disclosures/returns to meet the requirements of compliances mentioned in the Companies Act, 2013 and other regulations.

CFO's resignation before signing of financial statements:

In case the Chief treasurer of a corporate debtor had resigned without signing a detailed budget for the year, the transactions undertaken by the company in his tenure could lead to delay as the resolution professional (RP) won't be ready with the financial statements to be placed in the Annual General Meeting. In such a scenario, to avoid the delay in the insolvency process, a resolution professional could appoint an interim CFO by exercising his rights. This has been approved by NCLT as well. The earlier the insolvency matter is resolved, the better are the chances of recovery.

Referring to the cases of Sri Vinayaka Paper & Board Ltd. v. Union Bank [CP(IB) NO. 173/10/HDB/2017] the NCLT-Hyderabad with no rebuttal, considered the situation where a Resolution Professional has written a letter to Statutory Auditor for Audited Financial statements. The letter stated that as per the provisions of Sec. 17(b) of the IBC, 2016, the IRP has the rights of the Board of directors and can sign the financial statements himself. However, the prevailing practices states that the financial statements should be signed by both Directors (suspended) and the IRP. The NCLT upheld the stand taken by the IRP which further approves the right of the Resolution Professional in these matters.

Can IRP sign by putting the words “taken on record”?

The whole procedure of insolvency includes the documents and materials produced by various parties constituting records. It implies something has been officially noted or written down. Considering the fact that under section 17 of IBC, upon initiation of the CIRP, the powers of administering the debtor firm are in hands of the IRP and powers of board of directors are suspended, it might be implausible to place the words “taken on record” while the IRP signs the financial statements. This is because signing such things would signify that the IRP has noted something which has been administered or discharged by a suspended board of directors.

Liability of Suspended Directors

Although Section 17(1)(b) of the IBC states that the powers of the board of directors or the partners of the Debtor stand suspended during CIRP. They still have the liability to provide all the assistance to IP as only the powers of the Board are suspended, not their duties. Additionally, section 19 (1) of the IBC gives info about the administrators of the Debtor, its promoters or the other person related to the management. All of them should extend all assistance and cooperation to the IRP as it could also be required by him in management of the affairs of the debtor company. As mentioned above, the IRP/RP alongside existing Directors of Corporate Debtor will sign the financial statements of Debtors undergoing CIRP.

To Conclude…

In this blog, we studied about the powers of the IRP vested by the IBC for signing of official documents and financial statements. IBBI comes with various regulatory clarifications regarding the code from time to time. To get more clarity on such matters, corporate creditors can contact the various insolvency professionals in India available through insolvency law firms.