2020 (6) TMI 555 - Board - Insolvency and Bankruptcy

Insolvency Professional's Compliance Findings: Valuer Appointment Timelines Met, Forensic Auditor Approval Lacked

In Re : Arun Kumar Gupta

The Disciplinary Committee found that the Insolvency Professional did not contravene Regulation 27 of the CIRP Regulations regarding the appointment of ... Disciplinary Action against the Insolvency Resolution Professional (IRP) - Contravention of provisions of the Code, Regulations, and directions issued thereunder on the part of Insolvency Professional - Regulation 11 of the Insolvency and Bankruptcy Board of India (Insolvency Professional) Regulations, 2016 read with Section 220 of the Insolvency and Bankruptcy Code, 2016 (Code) - HELD THAT:- A key supporting institution under the Code is insolvency profession. An IP exercises the powers of the Board of Directors of the firm under resolution, manages its operations as a going concern, and complies with applicable laws on behalf of the firm. He conducts the entire insolvency resolution process: he is the fulcrum of the process and the link between the Adjudicating Authority and stakeholders - debtor, creditors - financial as well as operational, and resolution applicants. The process culminates in a resolution plan that maximises the value of assets of the firm. This presupposes availability of many competing resolution plans and identifying the best of them. The key is generation of many promising resolution plans. This requires provision of and access to complete and accurate information about the firm for prospective resolution applicants and continued operation of the firm. The Code casts this duty on the IP. He organises all information relating to the assets, finances and operations of the firm, receives and collates the claims, prepares information memorandum, and provides access to relevant information, so that there is complete symmetry of information among the entitled stakeholders, while maintaining confidentiality. He thus addresses the market failure arising from information asymmetry. The resolution balances the interests of the stakeholders. This requires the services of a third person who does not side with any stakeholder and has no conflict of interests. The law casts this duty on the IP and makes several provisions to ensure his integrity, objectivity, independence and impartiality. It also requires him to be a fit and proper person. Given the responsibilities, an IP requires the highest level of professional excellence. DC observes that Mr. Aran Kumar Gupta displayed a casual approach during the conduct of CIRP. When a CD is admitted into CIRP, the Code shifts the control of a CD to creditors represented by a CoC for resolving its insolvency. The CoC holds the key to the fate of the CD and its stakeholders. Thus, several actions under the Code require approval of the CoC. The RP has displayed utter misunderstanding of the provisions of the Code and Regulations made thereunder. He has contravened the provisions. The DC is conscious of the fact that the profession of IP is in a stage in which IPs are striving to learn. Even though it is incumbent upon them to build and safeguard the reputation of the profession which should enjoy the trust of the society and inspire confidence of all the stakeholders, they may not be kept away from practicing the profession especially in the absence of any malafide intention and more so when the objective of the Code i.e. resolution has been achieved within the prescribed timelines. The RP is hereby warned to be extremely careful and diligent while performing his duties under the Code. Further, he must strictly act in accordance with the provisions of law and similar contraventions shall not be repeated. Issues Involved:1. Alleged failure to appoint valuers within the prescribed timeline.2. Alleged failure to take effective control and custody of the assets of the Corporate Debtor (CD).3. Alleged delay in appointing a forensic auditor and seeking approval from the Committee of Creditors (CoC).Detailed Analysis:1. Alleged Failure to Appoint Valuers Within the Prescribed Timeline:Contravention:The Show Cause Notice (SCN) alleged that the Insolvency Professional (IP) failed to appoint valuers within seven days as required by Regulation 27 of the CIRP Regulations. The IP was accused of violating Section 208(2)(a) and (e) of the Code, Regulation 7(2)(a) and 7(2)(h) of the IP Regulations, and Clause 13 of the Code of Conduct.Submission:The IP submitted evidence, including emails dated 28.08.2017, showing that valuers were appointed within five days of his appointment. The valuers began their work but requested fee confirmation from the CoC. The IP argued that he was not given a chance to reply to new allegations in the SCN, which is against the principles of natural justice.Analysis:The Disciplinary Committee (DC) noted that the IP had appointed valuers within the stipulated seven days. The valuers had started their work and only sought fee confirmation. The DC found that the IP had complied with Regulation 27 and was not liable for the alleged contravention.Findings:The IP was found not to have contravened Regulation 27 of the CIRP Regulations, Section 208(2)(a) and (e) of the Code, or Regulation 7(2)(a) and 7(2)(h) of the IP Regulations.2. Alleged Failure to Take Effective Control and Custody of the Assets of the CD:Contravention:The SCN alleged that the IP failed to take effective control and custody of the CD's assets and allowed Mr. Sunil Jain to interfere with the process. The IP was accused of violating Sections 18(1)(f), 23(2), 25(2)(a), and 208(2)(a) & (e) of the Code, and Regulation 7(2)(a) and (h) of the IP Regulations, read with Clauses 3, 5, and 14 of the Code of Conduct.Submission:The IP argued that he took immediate steps to address Mr. Sunil Jain's interference and that the CD was a small private company managed by Mr. Jain. The IP believed that removing Mr. Jain immediately would cause chaos. The IP also stated that he did not face resistance before 14.12.2017 and took symbolic control of the assets.Analysis:The DC acknowledged that the IP should have taken complete control of the assets but noted that there was no specific time limit for taking control. The DC found that the IP had taken symbolic control and supplemented security when resistance was faced. The allegation that Mr. Jain was added as a signatory was found to be incorrect.Findings:The IP was not held liable for violating Sections 18(1)(f), 23(2), and 25(2)(a) of the Code. Consequently, there was no contravention of Section 208(2)(a) and (e) of the Code or Regulation 7(2)(a) and (h) of the IP Regulations.3. Alleged Delay in Appointing a Forensic Auditor and Seeking Approval from the CoC:Contravention:The SCN alleged that the IP delayed appointing a forensic auditor and sought CoC approval, violating Section 25(2)(d) and 208(2)(a) and (e) of the Code, Regulation 7(2)(a) and 7(2)(h) of the IP Regulations, and Clause 14 of the Code of Conduct.Submission:The IP argued that he sought explanations from the directors before taking action and appointed the forensic auditor without CoC approval. The IP stated that the appointment process took time and that there is no specific provision for forensic auditors in the Code.Analysis:The DC noted that the IP should appoint professionals, including forensic auditors, without seeking CoC approval. The DC found that the IP compromised his independence by seeking CoC approval but acknowledged that there was no timeline for appointing forensic auditors.Findings:The IP was found to have contravened Section 25(2)(d) and 208(2)(a) and (e) of the Code, Regulation 7(2)(a) and 7(2)(h) of the IP Regulations, and Clause 14 of the Code of Conduct by seeking CoC approval for the forensic auditor's appointment.Conclusion:The DC observed that the IP displayed a casual approach during the CIRP and compromised his independence by seeking CoC approval for the forensic auditor's appointment. The IP was found to have contravened specific provisions of the Code and Regulations but was not barred from practicing the profession due to the absence of malafide intention and the successful resolution of the CIRP within the prescribed timelines.Order:The IP was warned to be extremely careful and diligent while performing duties under the Code and to strictly act in accordance with the law. The order was forwarded to the Indian Institute of Insolvency Professional of ICAI and the Registrar of the Principal Bench of the National Company Law Tribunal, New Delhi, for information. The show cause notice was disposed of accordingly.