Insolvency Professional's Excessive Fee Violates Code of Conduct

The Disciplinary Committee found Ms. Ruia's professional fee of Rs. 13.75 crore unreasonable and in violation of the Code of Conduct for Insolvency Professionals. She pre-empted the Committee of Creditors' rights, misled stakeholders, demonstrated incompetence in understanding the law, and violated various clauses of the Code. As a result, the Committee suspended her registration as an Insolvency Professional for one year to improve her competency and ethical standards.

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Issues Involved:
1. Reasonableness of the professional fee contracted by Ms. Ruia.
2. Pre-empting the Committee of Creditors (CoC) of its legitimate rights.
3. Misrepresentation of facts and misleading stakeholders.
4. Competence and understanding of the law by Ms. Ruia.
5. Violation of the Code of Conduct for Insolvency Professionals.

Detailed Analysis:

Issue 1: Reasonableness of the Professional Fee Contracted by Ms. Ruia
The Disciplinary Committee (DC) noted that Ms. Ruia contracted a professional fee of Rs. 13.75 crore, comprising Rs. 5 crore for the first month as Interim Resolution Professional (IRP) and Rs. 1.75 crore per month for the subsequent five months as Resolution Professional (RP). The DC found this fee exorbitant and not a reasonable reflection of the work to be done. The fee was deemed unreasonable when compared to the compensation of the Managing Director (MD) & CEO of the corporate debtor, the fee charged by other Insolvency Professionals (IPs) in similar Corporate Insolvency Resolution Processes (CIRPs), and the outstanding debt of the corporate debtor. The DC concluded that Ms. Ruia violated clauses 10, 24, 25, and 27 of the Code of Conduct for Insolvency Professionals and section 20 of the Insolvency and Bankruptcy Code (Code).

Issue 2: Pre-empting the Committee of Creditors (CoC) of Its Legitimate Rights
Ms. Ruia signed a term sheet with the operational creditor, who is not legally competent to appoint an RP or fix their fees, thereby attempting to lock in her appointment as RP before the CoC was constituted. This action was seen as an attempt to pre-empt the CoC of its legitimate rights to appoint an IP of its choice as RP and to fix the fees. The DC found that this action compromised Ms. Ruia's independence and indicated possible collusion with the operational creditor. This was a violation of clauses 1, 2, 5, 10, 12, and 24 of the Code of Conduct.

Issue 3: Misrepresentation of Facts and Misleading Stakeholders
Ms. Ruia misled stakeholders by providing inconsistent information regarding what her fee included. The term sheet stated that her fee was exclusive of several costs, such as professional fees for valuers and legal representation, while her submissions later claimed that her fee included these costs. This inconsistency was seen as a deliberate attempt to mislead. The DC found that she violated clauses 1, 2, 10, 12, and 24 of the Code of Conduct by misrepresenting facts and misleading stakeholders, the Board, and the DC.

Issue 4: Competence and Understanding of the Law by Ms. Ruia
The DC found that Ms. Ruia demonstrated an inadequate understanding of the law, including misconceptions about the fee structure for liquidators, the role of operational creditors in appointing RPs, and the responsibilities of an IRP/RP. Her lack of understanding and competence raised doubts about her ability to be entrusted with a CIRP. The DC concluded that she violated clause 10 of the Code of Conduct.

Issue 5: Violation of the Code of Conduct for Insolvency Professionals
The DC found that Ms. Ruia's conduct was not in line with the expectations of an IP, who is required to exercise the powers of the Board of Directors, manage the corporate debtor as a going concern, and protect the value of the debtor's property. Her actions brought disrepute to the profession and compromised her status as a fit and proper person. The DC concluded that she contravened clauses 1, 2, 5, 10, 12, 24, 25, and 27 of the Code of Conduct for Insolvency Professionals under the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016, read with regulation 7(2)(b) of the said Regulations and section 20 of the Code.

Conclusion and Order:
The DC found that Ms. Ruia repeatedly misled stakeholders, compromised her status as a fit and proper person, and damaged the reputation of the profession. Considering that she is new to the insolvency profession and has not undertaken any process under the Code, the DC decided to suspend her registration as an Insolvency Professional for one year. This suspension is intended to provide her with an opportunity to strengthen her competency and ethical standards. The order will come into force 30 days from the date of issue and a copy will be forwarded to the ICSI Institute of Insolvency Professionals where Ms. Ruia is enrolled.

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