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TMI Blog2020 (7) TMI 295X X X X Extracts X X X X X X X X Extracts X X X X ..... sharing the same unless permitted by the Code. The IP displayed a negligent approach during the conduct of CIRP. The DC, in exercise of the powers conferred under section 220 of the Code read with Regulation 13 (3) of the IBBI (Inspection and Investigation) Regulations, 2017 and sub-regulations (7) and (8) of Regulation 11 of the IBBI (Insolvency Professionals) Regulations, 2016, issues the following directions: The registration of Mr. Ashwini Mehra as an Insolvency Professional, having Registration No. IBBI/IPA-001/IP-P00388/2017-18/10706, shall be suspended for six months - The DC hereby directs Mr. Ashwini Mehra to secure reimbursement of an amount of ₹ 73,87,642/- which was paid to lender s legal counsel (SAM) and charged to IRPC. The RP shall produce evidence to the Board of deposit of amount of ₹ 73,87,642/- in the account of CD. The DC also directs Mr. Ashwini Mehra to secure reimbursement of an amount of ₹ 50,74,000/- (Rs. Fifty Lakh Seventy-Four Thousand only) which was paid to Kroll for conducting second forensic audit on the directions of the members of CoC and was charged to IRPC. The RP shall produce evidence to the Board of deposit of amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so made a few additional submissions. Thereafter, the IP submitted some additional documents vide email dated 6th and 7th March 2020 in support of his submissions made during the course of personal hearing. 2. Consideration of SCN The DC has considered the SCN, the reply to SCN, written and oral submissions of Mr. Ashwini Mehra, other material available on record and proceeds to dispose of the SCN. 3. Alleged Contraventions, Submissions, Analysis and Findings A summary of contraventions alleged in the SCN, Mr. Ashwini Mehra s written and oral submissions thereon and their analysis with findings of the DC are as under: 3.1 Contravention: In 2nd Committee of Creditors (CoC) meeting dated 24th May, 2018, Shardul Amarchand Mangaldas (SAM) was appointed by CoC members as their legal counsel. Fee of SAM was also decided in the said CoC meeting by the CoC members. CIRP fees does not include such costs, which are incurred by the members of the COC directly. However, it has been observed that fee of SAM was included in CIRP costs in violation to section 5(13) of the Code and regulation 31 CIRP Regulations. Further, even though it was reiterated in the IBBI Circular dated 12-6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. It has further been observed that the RP wrote an email dated 5-12-2019 to the members of CoC directing them to reimburse the legal fees that has been paid to SAM as CIRP costs. The IP has also informed, during the personal hearing, that one of the CoC members namely Punjab National bank has already reimbursed their respective share paid to SAM. Section 5(13) of the Code defines the term Insolvency Resolution Process Costs (IRPC) as follows - 5 (13). insolvency resolution process costs means- (a) the amount of any interim finance and the costs incurred in raising such finance; (b) the fees payable to any person acting as a resolution professional; (c) any costs incurred by the resolution professional in running the business of the corporate debtor as a going concern; (d) any costs incurred at the expense of the Government to facilitate the insolvency resolution process; and (e) any other costs as may be specified by the Board. Further, Regulation 31 of CIRP Regulations, 2016 provides that: 31. Insolvency Resolution Process Costs under section 5(13)(e) shall mean - (a) amounts due to suppliers of essential goods and services under Regulation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er. If that matter is relevant for the CIRP, the IP shall obtain it. If the CoC requires a legal opinion in addition to or in lieu of the opinion obtained or being obtained by the IP, the expense of such opinion shall not be included in IRPC.] (i) any expense beyond the amount approved by the CoC, wherever such approval is required; and (j) any expense not related to CIRP. Thus, in effect, the Circular issued by IBBI further clarifies the position of law that has already been mentioned in the Code and the CIRP Regulations, 2016. It is important to mention that IRPC is an added financial stress on an already ailing CD (who is unable to pay his debt), and is paid in priority before all other dues and claims. By including the lender s legal counsel fees as IRPC, the expenses of CoC will be paid in priority to the legitimate dues and claims of workmen, employees or operational creditors who will have to compromise on their dues by taking additional haircuts in order to accommodate these costs. It is the duty of an IP under section 208(2)(a) of the Code to take reasonable care and diligence while performing his duties, including incurring expenses. He must, therefore, en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dit of the CD again rather than abdicating the authority in favour of CoC and allowing them to usurp RP's authority. Also, since it is the CoC and not RP who decided to conduct the forensic audit again, the cost of the second audit should not have been made a part of CIRP cost in accordance to IBBI Circular dated 12th June 2018. Submission: The IP submitted that based on the findings of serious and significant nature in the transaction audit conducted by Kroll, the CoC sought a larger audit on an enhanced scope of forensic audit to be conducted in relation to the affairs of the CD and the RP agreed with the same. Accordingly, the engagement letter for Kroll was executed by the RP in relation to this additional scope with an understanding that it is part of the CIRP cost. The IP further submitted that after the clarification by IA regarding the inclusion of the cost of second forensic audit in IRPC, he has discussed with the members of CoC and has asked them to refund the amount of ₹ 50,74,000/- (including TDS) paid towards Kroll fees for such enhanced work vide email dt.08-12-2019. During the personal hearing, it was submitted by the IP that taking a principle direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the initial bid made by Kroll was ₹ 28,50,000 with taxes for a review period of 5 years. Section 25 (2)(d) of the Code clearly provides that: 25. (2) For the purposes of sub-section (1), the resolution professional shall undertake the following actions, namely: - (d) appoint accountants, legal or other professionals in the manner as specified by Board; In the present case, the IP also submitted that when IA pointed out the inclusion of cost incurred on the conduct of second forensic audit in IRPC, the RP discussed the same with the members of CoC and consequently asked the lenders to refund the amount of ₹ 50,74,000/- (including TDS) paid towards Kroll fees for such enhanced work vide email dated 8-12-2019. Thus, it can be observed that the IP had based the appointment of Kroll solely upon the decision of CoC and only when the IA pointed out the contravention to the RP, he rushed to mitigate the violation by requesting the CoC members to refund the amount so paid. Findings: Since the RP has made the appointment of Kroll to conduct a forensic Audit of the Corporate Debtor on the basis of a decision of the COC, he has contravened provisions of Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the same was discussed in the CoC meeting and it was concluded that since the firms are separate entities and have separate teams, the CoC does not perceive any conflict of interest arising due to the same, based on the discussions with the legal counsel. At the time of personal hearing, it was submitted by the IP that during the presentation of 2nd CoC meeting it was also disclosed to the CoC members that the RP was in the founding team of Restructuring practice at Duff Phelps India. Hence, there is no conflict of interest. Analysis: Section 208(2) of the Code provides that: 208. (2) Every insolvency professional shall abide by the following code of conduct: - (a) to take reasonable care and diligence while performing his duties; (b) to comply with all requirements and terms and conditions specified in the bye-laws of the insolvency professional agency of which he is a member; (c) to allow the insolvency professional agency to inspect his records; (d) to submit a copy of the records of every proceeding before the Adjudicating Authority to the Board as well as to the insolvency professional agency of which he is a member; and (e) to perform his fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hence, it is observed that the CoC members had taken note of the conflict of interest that may arise from the appointment of Kroll for conduct of first forensic audit, however remarked that there will not be any conflict of interest if a Chinese wall is maintained between the RP's team and the Kroll auditing team. Since, the appointment of Kroll was made after discussion by CoC (considering the fact that Kroll has been acquired recently by Duff Phelps India, however, both the firms are separate entity), no conflict of interest could be established. Further, the Code of Conduct under Regulation 7(2)(h) of the IP Regulations provides that: 3A. An insolvency professional must disclose the details of any conflict of interests to the stakeholders, whenever he comes across such conflict of interest during an assignment. It has also been observed that the IP had already informed the members of CoC that he was a member of the founding team of Restructuring Practice at Duff Phelps India Private Limited in his 2nd CoC Presentation and the CoC had taken note of the Kroll s acquisition by Duff Phelps India Private Limited prior to his appointment in the 2ndCoC meeti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... methodology and assumptions. If the assumptions or methodology are incorrect, it might have a significant impact on the process. Hence, clarifications on methodology and assumptions are important to arrive at correct valuations. The IP also submitted that the RP/CoC have not interfered with the valuation exercise or the value, the CoC had queried about the methodology and assumptions, which the valuers agree with and then accordingly revised the report. This was an objective and transparent process. At no point of time have the RP or the CoC members asked the valuers to revise the values that they had arrived at and that no stakeholders were misled based on the actions of the RP. During the personal hearing and also vide his email dated 6-3-2020 and 7-3-2020 as an addendum to his SCN reply, it was submitted by the IP that as per the International Valuation Standards it has been provided that: 100. Business Information 100.1 The valuation of a business entity or interest frequently requires reliance upon information received from management, representatives of the management or other experts. As required by IVS 105 Valuation Approaches and Methods, para 10.7, a valuer m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hout influence of any stakeholders. It has been observed from the valuation reports that both the valuers revised the liquidation value. Post the instruction from CoC members, CBRE South Asia Pvt. Ltd. had originally estimated liquidation value at ₹ 614.259 Cr, however, decreased the same liquidation value to ₹ 437.47 Cr i.e. by ₹ 176.79 Cr. On the other hand, E Y had originally estimated liquidation value at ₹ 734.69 Cr, however, decreased the same to ₹ 487.3 Cr i.e. by ₹ 247.39 Cr. However, it has been observed that no evidence has been placed on record to prove that the RP or the CoC have interfered with the valuation exercise or the liquidation values. The IP submitted that CoC had only enquired about the methodology and assumptions and made certain suggestions to which the valuers agreed with and revised the report accordingly which is acceptable. Further, the RP has placed reliance on the International Valuation Standards and has submitted that a valuer frequently places reliance upon information received from management, representatives of the management or other experts but a valuer must assess the reasonableness of such informat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns reflect that the professionals were appointed by the IP arbitrarily and in a non-transparent manner. Submission: (a) Appointment of ASA Law Firm IP submitted that the appointment of ASA law firm was conducted through a competitive bidding process and their fees was duly ratified by the CoC members in 11th CoC meeting dated 21st February, 2019. Quotes were invited from legal firms for conducting title search and after detailed deliberations, ASA law firm was selected. Also, the appointment of ASA law firm resulted in significant cost saving for CD as the quote provided by ASA law firm was very reasonable compared to the agreed rates at which AZB Partners was appointed as RP's legal counsel. The IP also stated that engagement of ASA law firm was for a specific mandate and there was no overlap of work between ASA law firm and AZB Partners, in their capacity as RP's legal counsel. The scope of work for ASA law firm was clearly demarcated and restricted to updation of title reports of 62 properties as requested by resolution applicants. Also, ASA law firm was previously appointed by lenders of CD to conduct title search of the assets of CD few years back, an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt is not a part of scope of work of valuers or the valuation exercise. In case, measurement is included in the scope, the same would lead to much higher costs for appointment of valuers. The appointment of a separate entity for undertaking measurements was critical due to the nature of operation of CD, i.e. the CD derives its rental income from various parcel of lands, for which it was required to know the exact measurement area of each land parcel. As there was material discrepancy between the measurement areas of various sites as was provided in the registered lease deeds and the details which were provided by the ex-management of CD. This was discussed in 7th CoC meeting and it was agreed to appoint an external entity to conduct measurement of certain critical land parcels based on the discrepancy. Accordingly, Protocol Insurance Surveyors was appointed through a competitive bidding process, and appointment and fees were duly ratified by the CoC members in 8th CoC meeting dated 28th November, 2018. The appointment of Protocol Insurance Surveyors was conducted in a fair and transparent manner. During the personal hearing and in his email dated 6-3-2020 and 7-3-2020 as an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luation assignment in respect of the information included in the management representation letter. Based on standard practice being followed in relation to similar valuations; valuers (EY and CBRE) have relied on the information on buildings shared by management/RP. Further, IP asked valuers to carry out physical verification which they mentioned that same is not part of their standard scope and accordingly, a third party specialist/surveyors (Protocol Insurance and Surveyors) was hired to carry out physical verification and their professional fee was approved by CoC. The IP further submitted that physical verification of real estate assets is a specialized exercise, and normally carried out by the surveyors who also provide CAD layout plans along with floor wise structures. Analysis: The primary focus of the Code is revival and continuation of a failing, but a viable CD. To ensure the continuation of the CD as a going concern, the Code mandates that the cost of continuation of essential services and the cost incurred by the RP in running the business of the CD is required to be paid in priority over other payments made to any creditor or stakeholders. The IRPC by its nat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in year 2019, fee of ₹ 21.0 lacs has been paid to ASA Legal for 62 properties of the CD implying a fee of ₹ 33,870 per property. This exercise was carried out in order to ensure that there are no additional title issues as was keenly requested by resolution applicants during CIRP. Hence, it was for the confidence of the resolution applicants that the RP undertook the exercise and the fee was also reasonably negotiated. The scope of the valuation exercise is limited only to ascertain the Fair Value and Liquidation Value of Educomp Infrastructure and School Management Limited. E Y in its report in the section Sources of Information has stated that the following information as provided by RP have been inter-alia used for estimation of liquidation and fair value of EISML- -Title Search Report (TSR) for 12 properties vide e mail dated 23rd April, 2019 and 27thApril, 2019. Further E Y in its statement of limiting conditions has mentioned that we have relied solely on the title documents received for such documents for such assets or properties. For the purpose of this report we have not verified such representations against any title documents . The CBRE in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hin the responsibilities of the RP to appoint such professionals. (c) Appointment of Senior Advocates It has been alleged that the appointment of Mr. Arun Kathpalia and Mr. Sanjay Bhan for appearing before Hon'ble NCLT at fees of ₹ 11 and 7 lacs per hearing respectively is excessive. However, the IP has submitted that Mr. Kathpalia has only appeared before NCLAT and Mr. Bhan appeared only in selective hearings before NCLT when the matter was deemed sensitive. Further, it was submitted that it is a common practice to hire senior advocates to make representations in sensitive matters and matters which involves question of law. Also, it is a usual practice for law firms and solicitors to brief senior counsels or outside counsels, who frequently appear in NCLT/NCLAT in IBC cases. It is observed from the minutes of the 8th CoC meeting held on 28-11-2018 that, Given the criteria of the avoidance application, it was proposed that a senior counsel needs to represent the RP in the proceedings at NCLT, Chandigarh. After considering various options, the RP shortlisted Mr. Arun Kathpalia, who has agreed to reduce his fees from ₹ 12.5 lac/hearing to a fee of INR 11 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it was vital to know the exact measurements especially when there was material discrepancy in measured areas of various sites and details provided by ex-management of CD. The minutes of the 7th CoC meeting dated 25-10-2018 notes that, The RP informed the CoC that both the valuers are facing issue in relation to discrepancy in the school building area as per agreements and as per information shared with Corporate Debtor. The discrepancies present in all the 25 operating schools were presented to the CoC. RP's team has reached out to colliers for measurement of the school buildings. To start the process, 12 locations have been identified based on materiality/impact in the first phase. The valuers have been asked to submit draft analysis based on current information available and revise the same post the measurement. Cost of measurement by Colliers has been quoted at approx. INR 15.5 lacs for the 12 shortlisted locations. The following resolution was therefore placed before the members of the Committee of Creditors for consideration: RESOLVED THAT, pursuant to the applicable provisions of the Insolvency and Bankruptcy Code, 2016 and in accordance with rules and r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 7.5 lacs for 12 properties. In the present case the measurement was not within the scope of the work assigned to the valuers, which if included would have led to higher fees. E Y in its report in the section Sources of Information has stated that the following information as provided by RP have been inter-alia used for estimation of liquidation and fair value of EISML- -Site Measurement Report for the built-up area of 12 Operational Schools vide e mail dated 25 February, 2019, The CBRE in their critical assumptions noted that This appraisal exercise is based on the premise that the subject properties have a clear title and are free from any encumbrances, disputes, claims etc. CBRE has not made any inquiries in this regard with the relevant legal/statutory authorities. Since, site measurement report has been provided by RP it appears that this was not a part of valuation exercise. Hence it cannot be said that IP has appointed the firm arbitrarily. Findings: The RP has been able to provide satisfactory justification for the IRPC incurred by the CD for the appointment of various professionals. Hence, the DC cannot hold the IP liable for payment of exor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discussions in the 12th CoC meeting. This was due to multiple litigations in this regard, in which both RP and CoC were party. The IP further stated that the involvement of the Process Advisor as an independent third party in opening of resolution plan added credibility to the whole process, rather than compromise the process in any manner. This is especially true in this case because of various unfounded allegations and litigations were initiated against RP and CoC members by ex-directors of CD. During the personal hearing the IP reiterated the same submissions made in the reply to the SCN. Analysis: A specific duty and responsibility is cast on the IP under the Code read with regulations made thereunder, mandating him to perform certain tasks under the Code while acting as an IRP, a RP, a Liquidator or a Bankruptcy Trustee and he shall not outsource his responsibilities to another individual. The IP may appoint various professionals such accountants, legal or other professionals, as may be necessary in accordance with the provisions of the Code to assist him in conducting the business and management of the CD, however, the IP cannot outsource the core functions that a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd also regretted any confusion in this regard in his written submissions. He further clarified that both RP and CoC legal counsels agreed to the methodology that the Process Advisor should be part of opening of the resolution plans. In the absence of any specific circular or provision under the Code or Regulations made thereunder which clearly elaborates the role of Process Advisors, no specific contravention could be made out. Hence, the DC cannot hold the IP liable for involvement of the Process Advisor in the opening of resolution plans and also for communication with the Resolution Applicants. 3.7 Contravention: Information Memorandum (IM) contains all confidential information related to CD. It is therefore required that a fair and transparent process must be followed by the RP to maintain this confidentiality. It has been observed that the IP shared a copy of IM discreetly with one of the resolution applicants (DPS, Ghaziabad) vide an email on 10-7-2018 in priority to all other resolution applicants with whom it was shared from 10-9-2018 onwards (as discussed in 6th CoC meeting). IP submitted that he signed an NDA with DPS Ghaziabad. However, signing an NDA with one par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... undertakes- (a) to comply with provisions of law for the time being in force relating to confidentiality and insider trading; (b) to protect any intellectual property of the corporate debtor it may have access to; and (c) not to share relevant information with third parties unless clauses (a) and (b) of this sub-section are complied with. Explanation. - For the purposes of this section, relevant information means the information required by the resolution applicant to make the resolution plan for the corporate debtor, which shall include the financial position of the corporate debtor, all information related to disputes by or against the corporate debtor and any other matter pertaining to the corporate debtor as may be specified. Further Regulation 36B of the CIRP Regulations provides that, 36B. Request for resolution plans. (1) The resolution professional shall issue the information memorandum, evaluation matrix and a request for resolution plans, within five days of the date of issue of the provisional list under sub-regulation (10) of regulation 36A to - (a) every prospective resolution applicant in the provisional list; and (b) every prospective ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o pertinent to mention that the Code empowers the RP to hire professionals and experts to assist him in the technical fields and in understanding the education sector yet the RP shared a highly confidential IM with a third party in the guise of seeking their individual expertise and failed to seek the assistance of any independent industry expert. Findings: It is observed that the IP shared the confidential IM with the DPS, Ghaziabad on 10-7-2018 i.e. prior to the publication of the Form G on 18-7-2018 and before ensuring that they would qualify as eligible prospective resolution applicants. Since Regulation 36B of the CIRP Regulations was inserted w.e.f. 3-7-2018 and is made applicable to CIRP commencing on or after 3-7-2018, it will not apply to the facts of the present case. However, indisputably the RP shared the confidential IM with Mr. Pathak of DPS Ghaziabad society on 10-7-2018 i.e. before invitation of Expression of Interest and before the RP conducted due diligence to ensure if they would qualify as eligible prospective resolution applicants. This is in violation of section 208(2)(a) of the Code and Regulation 7(2)(h) of the IP Regulations, read with clause 1, 2, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l to the tune of ₹ 73.87 lakh as on 5-12-2019 from the IRPC. ii. RP on the direction of COC, finalized the appointment of Kroll for the second forensic audit. Hence, the fees of ₹ 50,74,000/- charged by Kroll should be borne by the CoC members themselves and should not be included as IRPC. iii. RP had shared a confidential document i.e. IM discreetly with Mr. Om Pathak of DPS Ghaziabad society prior to the issue of Form G for Invitation of Expression of Interest and even before the conduct of due diligence (by the RP) to ensure that they would qualify as eligible prospective resolution applicants. This is too glaring to be ignored. 4.4 Thus, Mr. Ashwini Mehra has displayed utter misunderstanding of the provisions of the Code and Regulations made thereunder. He has, therefore, contravened provisions of: i. Sections 5(13), 208(2)(a) and (e) of the Code, ii. Regulation 31 of the CIRP Regulations; and iii. Regulations 7(2)(a), 7(2)(h) and 7(2)(i) of the IP Regulations, 2016 read with clauses 1, 2, 3, 10, 14, 17 and 25 of the Code of Conduct under the said Regulations. iv. IBBI Circular dated 12th June 2018. 5. Order 5.1 During the personal hearing ..... X X X X Extracts X X X X X X X X Extracts X X X X
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