2020 (7) TMI 322 - Board - Insolvency and Bankruptcy

Insolvency Practitioner's Negligence and Contraventions in Asset Disclosure

In Re : Bhupesh Gupta

The IP was found negligent but not strictly liable for a typographical error in the Information Memorandum (IM) as it was corrected in a subsequent ... Disciplinary action against the Insolvency Resolution Professional (IP) - allegation that IP had contravened provisions of the Code, Regulations, and directions - Liquidation of Corporate Debtor - HELD THAT:- The Code envisages the role of an Insolvency Professional to manage the entire resolution process and to conduct liquidation of a Corporate Debtor. The RP is appointed by the Adjudication Authority and is given wide power by them to effectively run and manage the entity as a going concern, and also to manage the assets of the entity at all times during the process of CIRP. Further, the RP have been given immense powers under the Code, but they also have the corresponding responsibility to abide by the Code, rules, regulations and guidelines at all times. In India today, there are professionals and intermediaries that offer services to resolve financial distress of both registered entities as well as individuals. These include lawyers, accountants and auditors, valuers and specialist resolution managers. However, given the critical role that the Code envisages for these entities in the resolution process, the Committee believes that the Board should set minimum standards for the selection of these professionals, along with their licensing, appointment, functioning and conduct under the Code. The duties of IP and CoC are clearly provided under the provisions of the Code. In the present case, the RP permitted conduct of third valuation upon the desire of CoC despite his disbelief in conducting the third valuation. He further incurred additional financial costs upon an over-burdened CD through conduct of such third valuation. Thus, he allowed the members of CoC to usurp his powers thereby putting additional burden on an already ailing CD - Regulation 4(3) of IBBI (Liquidation Process) Regulations, 2016 clearly states that in cases where the Liquidator fees has not been decided by the CoC, then the liquidator is entitled to a fee as per the table provided in the abovementioned provision. Despite such clear and unambiguous position of the law, the IP continued to charge the same fees during liquidation process which he was charging while acting as an RP. 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, DC hereby directs Mr. Bhupesh Gupta to deposit an amount of ₹ 31,09,000/- (Rs. Thirty-One Lakh Nine Thousand only) in the Liquidation Estate of CD which he has drawn without any authorisation during the period 8th August 2018 to 31st October 2019 while acting as liquidator. However, Mr. Bhupesh Gupta is at liberty to claim liquidator fee in accordance with the provisions of Regulation 4(3) of the IBBI (Liquidation Process) Regulations, 2016. This Order shall come into force on expiry of 30 days from the date of its issue. Issues Involved:1. Preparation and accuracy of Information Memorandum (IM).2. Inclusion of all assets in the IM.3. Appointment of third valuer.4. Drawing of liquidator's fee.5. Handling of insurance claim settlement.6. Provision of agenda along with notice for CoC meetings.Detailed Analysis:1. Preparation and Accuracy of Information Memorandum (IM):Contravention: The IP was alleged to have shown negligence by recording varying amounts for the same claim in the IM and the progress report submitted to NCLT.Submission: The IP admitted a typographical error in the IM and stated the correct amount was reflected in the 5th Progress Report.Analysis: The IP is required to prepare an accurate IM as per Section 25(2)(g) and Section 29(1) of the Code. Despite the error, the correct amount was later submitted in the progress report.Findings: The IP was found negligent but not strictly liable for the typographical error as it was corrected in the subsequent report.2. Inclusion of All Assets in the IM:Contravention: The IP failed to capture two assets of the CD in the IM despite having information from a financial creditor.Submission: The IP claimed the assets were included under different descriptions and were also mentioned in the valuation reports.Analysis: As per Regulation 36(2)(a) and (d), the IM must contain accurate asset details. The IP provided documents showing the assets were indeed included under different descriptions.Findings: The DC concluded that the IP had adequately disclosed the assets in the IM and was not liable for the alleged contravention.3. Appointment of Third Valuer:Contravention: The IP appointed a third valuer based on CoC's desire without a significant difference in the two initial valuations.Submission: The IP admitted there was no significant difference between the two valuations and the third valuation was done for CoC's satisfaction.Analysis: Regulation 35(1)(b) allows the appointment of a third valuer only if the initial valuations are significantly different. The IP's action resulted in unnecessary costs for the CD.Findings: The IP abdicated his authority to the CoC, contravening Section 208(2)(a) and (e) of the Code, Regulation 35(1)(b) of CIRP Regulations, and Regulation 7(2)(a) and 7(2)(h) of IP Regulations.4. Drawing of Liquidator's Fee:Contravention: The IP continued to draw the same fee as a liquidator which he was drawing as an RP, contrary to Regulation 4(3) of IBBI (Liquidation Process) Regulations, 2016.Submission: The IP argued that the fee was charged only while the units were operational and he was entitled to additional fees as per the liquidation estate.Analysis: Regulation 4(3) provides a structured fee for liquidators. The IP's actions were found to disregard the regulation, displaying a lack of understanding of the law.Findings: The IP contravened Regulation 4(3) and Section 208(2)(a) and (e) of the Code by unilaterally drawing fees without proper authorization.5. Handling of Insurance Claim Settlement:Contravention: The IP failed to act on behalf of the CD in an arbitration proceeding, resulting in an ex-director handling the settlement.Submission: The IP claimed ignorance of the settlement and stated that the ex-director acted without his knowledge.Analysis: The IP should have been aware of the proceedings and the settlement amount deposited in the CD’s account. The IP's ignorance of the large transaction was deemed untenable.Findings: The matter requires further investigation with additional documents to ascertain the IP's role and actions.6. Provision of Agenda Along with Notice for CoC Meetings:Contravention: The IP allegedly failed to provide the agenda along with notices for CoC meetings.Submission: The IP provided evidence that the agenda was sent along with notices in hard copies and emails.Analysis: Regulation 21(3) mandates the inclusion of the agenda with the notice. The IP submitted documents proving compliance.Findings: The DC found the IP had complied with the requirements and was not liable for this contravention.Conclusion:The IP displayed negligence and misunderstanding of the Code and Regulations, specifically in the appointment of a third valuer and the drawing of liquidator's fees. The IP was directed to deposit Rs. 31,09,000 in the Liquidation Estate of CD and was warned to exercise due diligence in future assignments. The Board was also directed to re-examine the handling of the insurance claim settlement.