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TMI Blog2020 (1) TMI 103X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th Section 220 of the Insolvency and Bankruptcy Code, 2016 (Code). 1. Background 1.1 This Order disposes of the Show Cause Notice (SCN) dated 7th October 2019 issued to Mr. Mahender Kumar Khandelwal, B2A, Sunny Valley CGHS, Plot No. 27, Sector 12, Dwarka, New Delhi- 110078, who is a Professional Member of the Indian Institute of Insolvency Professionals of ICAI and an Insolvency Professional (IP) registered with the Insolvency and Bankruptcy Board of India (Board) with Registration No. IBBI/IPA-001/IP-P00033/2016-2017/10086. 1.2 In exercise of its power under section 218 of the Code read with the IBBI (Inspection and Investigation) Regulations, 2017, the Board vide Order dated 21st June 2018 appointed a Inspecting Authority (IA) to conduct an inspection of Mr. Mahender Kumar Khandelwal, on having reasonable grounds to believe that the IP had contravened provisions of the Code, Regulations, and directions issued thereunder. 1.3 The Board on 7th October 2019 had issued the SCN to Mr. Mahender Kumar Khandelwal, based on findings of an inspection in respect of his role as an interim resolution professional (IRP) and/or resolution professional (RP) in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... However, the RP abdicated his authority in favour of the Committee of Creditors (CoC) and allowed the CoC to usurp his authority. Even after direction of CoC to file application there was a delay of two months (in filing the application). This indicates RP's casualness in performing the duty as an RP and misunderstanding of the law. Submission: RP submits that he had filed an application (C.A No. 330 of 2018) before NCLT on 19th March 2018 under Section 45 of the Code for avoidance of suspect undervalued transactions prior to the application filed on 13th June 2018 after the 11th CoC meeting. Further, in 11th CoC meeting RP simply brought to the notice of CoC of the avoidance transactions and did not seek approval for filing application. The RP also submits that after receiving transaction review report from BDO India LLP, but owing to the size of the CD, the same had to be deliberated at length by legal counsel of RP and several meetings were required with key managerial persons and employees of CD, to determine contraventions under Section 43-66 of the Code. The RP states that he has made every endeavour to comply with requirements and no prescribed timelines with r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tubes has been disclosed to be a related party of the CD in the audited financial statement for the financial year 2016-17 of the CD by virtue of the fact that all three Directors of Aarti Tubes are Key Managerial Persons of the CD. The application for initiating CIRP was filed on 7th July 2017 by Punjab National Bank in its capacity as CD's Financial Creditor and the said application was admitted by the Hon'ble NCLT on 26th July 2017. The application under section 45 read with section 49 of the Code was filed by the RP on 19th March 2018 for avoidance of undervalued transactions entered into by the CD. Thus, the application for avoidance of undervalued transaction was filed after 236 days from the date of commencement of CIRP. In ordinary course, the CIRP is to be completed within 180 days from the date of its commencement i.e. 26th July 2017 in the present case. IRP/RP has the highest professional responsibility during CIRP. His conduct and performance have a substantial bearing on the survival of an ailing entity. He, therefore, is expected to function with a strong sense of urgency and with utmost care and diligence. He should endeavour to fast track t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to make disclosure in this respect for BDO Restructuring Advisory India LLP (IPE) and to mislead the Board, contradictory statements were made by the IP in the reply made to IA. At one instance, it was stated that IPE was not appointed under a separate mandate and hence disclosure in terms of said circular were not required whereas at another instance, it was stated that payment was made to IPE in their individual capacity. Further, the consent terms between IP and IPE were also stated which provides for IPE to raise an invoice of ₹ 1,05,50,000/- (₹ 1,24,49,000/- including GST). Submission: The RP submits that as per Circular No. IP/005/2018 dated 16th January 2018, RP is required to disclose 'relationship' if any with the parties prescribed and since the appointment did not fall under the definition of 'relationship' he was not required to submit any disclosure to IPA. Nevertheless, the IP had complied with the Circular by sending e-mail dated 31st March 2018. The IP submits that the reply made to IA was inadvertent and unintentional and not with view to mislead the Board. The RP clarifies that BDO Restructuring Advisory India LLP was acting in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the receipt of the draft Inspection Report. The same argument has also been reiterated by the RP, in his reply to SCN. A pertinent question that arises for consideration is that, if such disclosures were not required to be made then why the RP made the same (regarding relationships with other professionals) after enquiries were received from the Board. The RP in reply to the SCN has stated that Upon realisation that the specific disclosure of appointment of BDO Restructuring Advisory LLP as IPE in terms of the said IBBI circular, has not been made, the undersigned immediately provided the same to the IPA on September 26, 2019. Findings: 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 Sche ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se the same. Analysis: It is trite to mention that the IRPC is an added financial stress on a CD. Therefore, it becomes crucial to monitor the expenses incurred by the RP to ensure that a CD, who is already entangled in a web of unsustainable liabilities is not further over-burdened with exorbitantly high IRPC. An IP is obliged under section 208(2)(a) of the Code to take reasonable care and diligence while performing his duties, including incurring expenses. He must, therefore, ensure that not only fee payable to him is reasonable, but also other expenses incurred by him are reasonable. Clause 3 of the Code of Conduct as given in the First Schedule of the Insolvency and Bankruptcy Board of India (Insolvency Professional) Regulations, 2016 provides that an insolvency professional must act with objectivity in his professional dealings by ensuring that his decisions are made without the presence of any bias, conflict of interest, coercion, or undue influence of any party, whether directly connected to the insolvency proceedings or not. Clause 5 provides that an insolvency professional must maintain complete independence in his professional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CoC has a statutory role. It discharges a public function. It must, therefore, apply the highest standards of duty of care. It must not only follow the due process, but also be fair towards all stakeholders and transparent in discharge of its responsibilities for maximising the value of the assets of the company. The provisions of the Code as well as IBBI (Insolvency Resolution Process for Corporate Persons) Regulations 2016 does not provide for inclusion of fee paid to the lender's legal counsel in the IRPC. The RP, during the personal hearing, admitted of having charged the fee of lender's legal counsel to CD and also, in Addendum dated 30th October, 2019 provided details of the fees paid to lender's legal counsel in relation to the services rendered by them prior to the issuance of Circular on 'Fee and other Expenses incurred for CIRP' dated 12th June 2018. According to the IRPC details furnished by RP vide e-mail dated 11th November 2019, a sum of ₹ 12,09,90,185/- paid to legal counsel of CoC forms part of IRPC. Further, out of above, an amount of ₹ 147,89,315/- has been paid to lender's legal counsel for bills raised on 06.10.2017, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3rd CoC meeting dated 31st October 2017 clearly states under the para 8 ' The representative of CAM explained the members that in case the same (the fee of lender's legal counsel) was to be borne by the lenders they in turn would file additional claims against the Company and the said would eventually be charged to the Company '. About filing of additional claims, it is pertinent to mention that claim amount is as on the CIRP commencement date (though lender's counsel fee cannot be a part of claim). Expenditure incurred during CIRP by an RP cannot be claim amount. Thus, the RP permitted something unlawful because he was indemnified by parties who were interested in that unlawful action and the RP did this deliberately. Findings: 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of JSW Steel Limited and Liberty House Group Pte Ltd., and Ernst Young LLP for Tata Steel Limited. It was further submitted, during the personal hearing, that PWC and PPS are two different professionally owned and managed entities, and they function independently without any influence in the working of each other. The appointment of PPL for conducting due diligence in the present matter was a conscious decision of the members of CoC since PPL already possessed the experience of conducting due diligence for Liberty Group Pte Ltd in another insolvency matter. Analysis: CIRP of CD commenced on 26th July 2017 and Mr. Mahender Kumar Khandelwal was appointed as IRP and subsequently he was confirmed as RP. He appointed PWC as the registered valuer on 31st July 2017 and PPL for performing due diligence in relation to Section 29A of the Code on 21st May 2018. The RP joined PPS in the capacity of a partner with effect from 23rd April 2018. PWC, PPL and PPS are not a same entity rather they are three distinct entities. Further, the appointment of PPL for carrying out due diligence under Section 29A of the Code in respect of JSW Steel Limited an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue of the Circular No IP/004/2018 dated 16th January, no fees due to IP has been received by BDO Restructuring Advisory India LLP and no fees due to BDO Restructuring Advisory India LLP has been paid to or received by the IP. Further, the fees paid to BDO Restructuring Advisory India LLP was strictly confined to services rendered by them in their capacity as IPE. Further, the consent terms between IP and BDO Restructuring Advisory India LLP were filed in Bombay HC as below: 'The parties agree that if CIRP mandate of BPSL is extended or any reason beyond April 2018, then every month during which the CIRP mandate subsists, the Respondent (RP) shall raise an invoice of ₹ 14,50,000/- (₹ 17,11,000/- including GST) and Petitioner No. 2 (BDO) shall raise an invoice of ₹ 1,05,50,000/- (₹ 1,24,49,000/-including GST) on the Corporate Debtor and the same will be paid to Respondent and Petitioner No. 2 respectively.' These consent terms were approved by Bombay High Court vide order dated 28th March 2018. Thereafter, the invoices were raised to the tune of ₹ 14,50,000/- in the name of IP and ₹ 1,05,50,000/- in the name of BDO Restruc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Process for Corporate Persons) Regulations, 2016 and other applicable provisions, if any, of the Insolvency and Bankruptcy Code, 2016 and in accordance with rules and regulations made there under, remuneration of INR 1,20,00,000/- (Rupees One Crore Twenty Lakhs only) excluding out of pocket expenses and applicable taxes for payment to the Interim Resolution Professional for a period of 30 days immediately, be and is hereby approved and ratified. There were no comments on the same by the members ad accordingly the resolution was put to vote without any modifications. The Chairman asked the members to vote on the above resolution through e-voting facility as per the instructions for e-voting provided in the Notice of the meeting. Item No. 12 APPOINTMENT OF RESOULTION PROFESSIONAL AND FINALISE HIS FEES: Mr. Prem Gupta read the resolution to be voted upon. RESOLVED THAT pursuant to Section 22(2) Insolvency and Bankruptcy Code, 2016 and in accordance with rules and regulations made thereunder, approval is hereby accorded for appointment of Mr Mahender Kumar Khandelwal, an Insolvency Professional (Registration No. IBBI/IPA-001/IP- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his part (which is of technical nature) with regard to sharing of fee from the date of commencement of CIRP i.e. 26th July 2017 to 31st December 2017. Findings: Since the IP has not been able to clarify as under which provision the fee payable to IRP/RP has been shared with BDO Restructuring Advisory India LLP, such sort of arrangement is against the provisions of the Code/Regulation and in violation of Section 5 (13) and Section 208 (2) (a) of the Code, and also Regulation 33 and 34 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations 2016. 3.6 Contravention: The invitation of Expression of Interest (EOI) for Resolution Plans was made vide publication dated 21st September 2017 and the last date of submission of EOI was 6th October 2017. However, in the 4th CoC meeting dated 17th November 2017, the last date was extended allowing resolution plans submitted after the expiry of last date of submission of EOI (6th October 2017) if they meet the eligibility criteria. Thus, EOI of some companies were accepted without officially extending the date of submission of EOI. Had the last date been officially extended, some other interested pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olution applicant shall endeavour to submit a resolution plan prepared in accordance with the Code and these Regulations to the resolution professional, thirty days before expiry of the maximum period permitted under section 12 for the completion of the corporate insolvency resolution process. Section 12 of the Code on time-limit for completion of insolvency resolution process provides: (1) Subject to sub-section (2), the corporate insolvency resolution process shall be completed within a period of one hundred and eighty days from the date of admission of the application to initiate such process. (2) The resolution professional shall file an application to the Adjudicating Authority to extend the period of the corporate insolvency resolution process beyond one hundred and eighty days, if instructed to do so by a resolution passed at a meeting of the committee of creditors by a vote of seventy-five per cent. of the voting shares. (3) On receipt of an application under sub-section (2), if the Adjudicating Authority is satisfied that the subject matter of the case is such that corporate insolvency resolution process cannot be completed within one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 UNCITRAL Legislative Guide on Insolvency Law recognizes the role of an IP in the following words: However appointed, the insolvency representative plays a central role in the effective and efficient implementation of an insolvency law, with certain powers over debtors and their assets and a duty to protect those assets and their value, as well as the interests of creditors and employees, and to ensure that the law is applied effectively and impartially. Accordingly, it is essential that the insolvency representative be appropriately qualified and possess the knowledge, experience and personal qualities that will ensure not only the effective and efficient conduct of the proceedings and but also that there is confidence in the insolvency regime. The BLRC, the recommendations of which has led to the enactment of the Code, in its Final Report, has also laid empha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd. ii. The Code shifts the control of a CD, when it is admitted into CIRP on its failure to service a debt, to creditors represented by a CoC for resolving its insolvency. The CoC holds the key to the fate of the CD and its stakeholders. Several actions under the Code require approval of the CoC. An IP and the CoC have defined roles. IP's duty is to preserve and protect the value of CD. Mr. Mahender Kumar Khandelwal, in the present matter, allowed charging fee of ₹ 12,09,90,185/- payable to lender's legal counsel as an IRPC and abdicated his authority in favour of CoC. Paying for expenses of third party from CD and including in IRPC is amounting to looting the CD and making the CD bleed. The RP did something unlawful because he was indemnified by a party who was interested in that unlawful action and he did this deliberately. Thus, in defiance of statutory duty to preserve and protect the value of CD, he deliberately in connivance with some stakeholders squandered the assets (money) for unlawful purpose. RP's job is to conduct CIRP. That job does not include hiring legal services of Financial Creditors and definitely does not include paying for legal ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er Kumar Khandelwal, RP and the members of the CoC were well aware that the expenses incurred by financial creditors on legal assistance are not part of IRPC. That is why they reached an understanding that if the Board objects to inclusion of such expenses in IRPC, this amount would be reimbursed to CD by the FCs in proportion to their voting share. They knew that the Board does not scrutinise every record of every CIRP to notice inclusion of such expenses and, therefore, the possibility of the Board noticing, and objecting is remote. Even if that remote possibility materialises, they will make it good from the common property, that is, resolution plan. It is incidental that the Board conducted an inspection and came across this unlawful loss to the CD. Otherwise, the RP and the members of the CoC would have succeeded in their design. In the process, they included a sum of ₹ 12,09,90,185/- (Twelve Crores Nine Lacs Ninety Thousand One Hundred and Eighty Five only) in the IRPC causing loss of this amount to the CD, reached a conspiracy for an unlawful act and attempted to deprive stakeholders to the extent of ₹ 12,09,90,185/- from resolution plan, in blatant disregard of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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