2020 (1) TMI 103 - Board - Insolvency and Bankruptcy

Duties of Resolution Professional - Disciplinary Action - non-disclosure to his IPA - filing of application by RP for avoidance of transactions in accordance with Chapter III of the Code - allegation is that the RP abdicated his authority in favour of the Committee of Creditors (CoC) and allowed the CoC to usurp his authority - CIRP process - HELD THAT - Since the RP has not been able to provide any satisfactory justification for not acting in adherence to the provisions of the Code and the Circular, his act of non-disclosure to his IPA about taking services from BDO Restructuring Advisory India LLP (of which RP was a partner) is in violation of Section 208(2)(a) of the Code and Regulation 7(2)(a) and 7(2)(h) of the Insolvency and Bankruptcy Board of India (Insolvency Professional) Regulations, 2016, read with clause 12, 13 and 14 of the Code of Conduct as given in the First Schedule of the Insolvency and Bankruptcy Board of India (Insolvency Professional) Regulations, 2016. In view of admission by RP of having charged lender's legal counsel (CAM) fee of ₹ 12,09,90,185/- from IRPC and specifically for the services rendered prior to the Insolvency Commencement date (i.e. period from 17th June 2017 to 25th July 2017) of CD, RP has contravened Section 208 (2) (a) of the Code and also Regulation 7(2)(a) and 7(2)(h) of the IBBI (Insolvency Professionals) Regulations, 2016 read with Clause 3 and 5 of the Code of Conduct as given in the First Schedule of the IBBI (Insolvency Professionals) Regulations, 2016. The role of IP is vital to the efficient operation of the insolvency and bankruptcy resolution process. A well-functioning system of resolution driven by a competent IP plays a significant role in cementing together the interests of the CD with those of the creditors. It is for this reason that the need of specialized professionals to complete the resolution processes has been unequivocally emphasized - The Code also requires an IP to play a catalytic role in CIRP which requires a right combination of experts acting under the overall supervision of the IP. He is the backbone of the resolution process under the Code and success thereof hinges on the conduct and competence demonstrated by him. Also, a CD undergoing CIRP is a representation of interests of several stakeholders who pin their hopes on the outcome of CIRP. During CIRP, it is the utmost responsibility of an IP to run the company of CD as a going concern and conduct the entire CIRP in a transparent manner without creating additional insolvency resolution process costs. Thus, Mr Mahender Kumar Khandelwal has displayed utter misunderstanding of the provisions of the Code and Regulations made thereunder. He has, therefore, contravened provisions of Sections 5(13) and 208(2)(a) of the Code, Regulation 33 and 34 of IBBI (Insolvency Resolution process for Corporate Persons) Regulations, 2016; and Regulation 7(2)(a) and 7(2)(h) of the IBBI (Insolvency Professionals) Regulations, 2016 read with clauses 3, 5, 12, 13 and 14 of the Code of Conduct under the said Regulations. The DC hereby imposes on Mr Mahender Kumar Khandelwal a monetary penalty of ₹ 29,24,167/- which is ten percent of the RP Fee (₹ 2,92,41,667 X 10 percent) forming part of IRPC and directs him to deposit the penalty amount by a crossed demand draft payable in favour of the 'Insolvency and Bankruptcy Board of India' within 30 days of the issue of this Order - It is a fact that the CD has unduly suffered, the Creditors has been unduly benefitted and the RP has deliberately allowed such unlawful gain and loss (i.e. payment of ₹ 12,09,90,185/- to legal counsel of CoC forming part of IRPC) in contravention of the provisions of the Code and Regulations. Therefore, the DC directs the RP to make good the loss by securing reimbursement as minuted in the minutes of 19th Meeting of CoC (Resolution No. 7) held on 10th October, 2018 and produce evidence to the Board of deposit of amount of ₹ 12,09,90,185/- in the account of CD within 30 days of issue of this order. Mr Mahender Kumar Khandelwal shall not accept any new assignment either as IRP or RP till produces evidence to the Board of deposit of ₹ 12,09,90,185/- (Twelve Crores Nine Lacs Ninety Thousand One Hundred and Eighty Five only) in CD's Account. SCN disposed off.

Summary

Issues Involved:
1. Delay in filing application for avoidance of transactions.
2. Failure to make required disclosures.
3. Inclusion of lender’s legal counsel fees in Insolvency Resolution Process Costs (IRPC).
4. Conflict of interest in appointing PwC.
5. Sharing of fees with BDO Restructuring Advisory India LLP.
6. Acceptance of Expression of Interest (EOI) beyond the deadline.

Issue-wise Detailed Analysis:

1. Delay in Filing Application for Avoidance of Transactions:

Contravention: The RP failed to file an application for avoidance of transactions immediately with the NCLT, instead allowing the Committee of Creditors (CoC) to usurp his authority, resulting in a two-month delay.

Submission: The RP argued that he filed an application under Section 45 of the Code on 19th March 2018 and that the delay was due to the complexity and size of the Corporate Debtor (CD). He also contended that there were no prescribed timelines for such filings at that time.

Analysis: Section 25(2) of the Code mandates the RP to file applications for avoidance of transactions. The RP took 236 days from the commencement of CIRP to file the application, which was seen as a casual approach and misunderstanding of the law.

Findings: The DC noted that prior to the Third Amendment to the IBBI Regulations, there was no explicit timeline for filing such applications. However, the RP's delay and casual approach were criticized, though he was not held liable due to the absence of explicit provisions in the law at that time.

2. Failure to Make Required Disclosures:

Contravention: The RP failed to make timely disclosures regarding the appointment of BDO Restructuring Advisory India LLP and other professionals, as required by the Circular dated 16th January 2018.

Submission: The RP claimed that the appointments did not fall under the definition of 'relationship' requiring disclosure and that any omissions were inadvertent and unintentional.

Analysis: The RP failed to make disclosures within the stipulated time and provided contradictory statements regarding the appointment of BDO Restructuring Advisory India LLP.

Findings: The RP's non-disclosure was found to be in violation of Section 208(2)(a) of the Code and Regulation 7(2)(a) and 7(2)(h) of the IBBI Regulations, 2016.

3. Inclusion of Lender’s Legal Counsel Fees in IRPC:

Contravention: The RP included fees paid to the lender’s legal counsel in the IRPC, which is not permissible under the Code.

Submission: The RP argued that the inclusion was based on CoC's decision and that there was no clarity on this aspect at the time. He also mentioned that the CoC had agreed to reimburse the fees if the Board objected.

Analysis: The inclusion of lender’s legal counsel fees in IRPC was seen as a violation of the Code. The RP's agreement with the CoC to include these fees indicated a deliberate disregard for the law.

Findings: The RP was found to have contravened Section 208(2)(a) of the Code and relevant regulations by including lender’s legal counsel fees in IRPC.

4. Conflict of Interest in Appointing PwC:

Contravention: The RP appointed PwC as a valuer and later joined PwC as a partner, raising concerns about a conflict of interest.

Submission: The RP argued that PwC and the entity he joined (PPS) were distinct entities and that the appointments were made through a competitive bidding process.

Analysis: The RP joined PPS after appointing PwC, and there was no direct conflict of interest on the relevant dates.

Findings: The DC found no direct relationship between the RP and PwC on the relevant dates, and thus no conflict of interest.

5. Sharing of Fees with BDO Restructuring Advisory India LLP:

Contravention: The RP shared his fees with BDO Restructuring Advisory India LLP, which is against the provisions of the Code.

Submission: The RP argued that the fee-sharing arrangement was approved by the Bombay High Court and that the fees were paid in accordance with the consent terms.

Analysis: The RP was appointed in his individual capacity, and sharing fees with BDO Restructuring Advisory India LLP was against the provisions of the Code.

Findings: The RP's fee-sharing arrangement was found to be in violation of Section 5(13) and Section 208(2)(a) of the Code and relevant regulations.

6. Acceptance of Expression of Interest (EOI) Beyond the Deadline:

Contravention: The RP accepted EOIs from Liberty House and Arcelor Mittal after the last date of submission, without officially extending the deadline.

Submission: The RP argued that the acceptance was based on CoC's decision and in accordance with the provisions of Regulation 39(1) of the IBBI Regulations, 2016.

Analysis: The DC noted that the specific provision on 'Invitation of Resolution Plans' was inserted later, and the RP acted in accordance with CoC's directions.

Findings: The DC did not hold the RP liable for accepting EOIs after the last date, as there was no specific provision in the regulations at that time.

Conclusion:

The RP displayed negligence in conducting CIRP, including failure to make required disclosures, improper inclusion of lender’s legal counsel fees in IRPC, and sharing fees with BDO Restructuring Advisory India LLP. The RP was found to have contravened several provisions of the Code and Regulations. The DC imposed a monetary penalty of ?29,24,167/- on the RP and directed him to reimburse ?12,09,90,185/- to the CD. The RP was also barred from accepting new assignments until compliance with these directions.