Penalty Imposed on Resolution Professional for Code Violations in Insolvency Case

The Resolution Professional (RP) in the case outsourced the verification of claims, failed to include security interest details in the Information Memorandum (IM), and did not specifically mention certain transactions in the Section 43 application. The RP violated various provisions of the Insolvency and Bankruptcy Code and Regulations. The RP was found to have contravened certain rules but was not held strictly liable for all violations. As a result, a monetary penalty of Rs. 1,00,000/- was imposed on the RP, who was also directed not to accept new assignments until the penalty was paid. The Order would come into force 30 days from the date of issue.

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Issues Involved:
1. Outsourcing of verification of claims by the Resolution Professional (RP).
2. Failure to include security interest details in the Information Memorandum (IM).
3. Non-inclusion of certain transactions in the Section 43 application for avoidance of preferential transactions.

Detailed Analysis:

1. Outsourcing of Verification of Claims by the Resolution Professional (RP):

Contravention:
The RP outsourced the verification of claims to M/s EzResolve LLP, which is against regulation 13(1) of the CIRP Regulations and IBBI Circular dated 3rd January 2018, which prohibits outsourcing of such core duties.

Submission:
The RP argued that he only sought assistance from the IPE and that the final verification was done by him. He also defended decisions regarding claims in various Interlocutory Applications (IAs) before the Adjudicating Authority (AA).

Analysis:
The duty to verify claims is a core responsibility of the IP and cannot be outsourced. Evidence from the minutes of the 1st CoC meeting, the appointment letter of the IPE, and emails indicated that the IPE was indeed appointed for verification of claims, which is a clear contravention of the Code and Regulations.

Findings:
The RP outsourced his duty of verification of claims to the IPE, violating Section 208(2)(a) of the Code, Regulation 13(1) of the CIRP Regulations, and Regulation 7(2)(a), (h), & (i) of the IP Regulations read with clauses 2, 3, 10 & 14 of the Code of Conduct.

2. Failure to Include Security Interest Details in the Information Memorandum (IM):

Contravention:
The RP failed to include details of security interest of admitted claims in the IM, as required by regulation 36(2) of the CIRP Regulations.

Submission:
The RP admitted an inadvertent omission and stated that an amended IM with the correct details was later supplied to stakeholders. He provided supporting documents and emails to confirm the inclusion of security interest details.

Analysis:
The IM is crucial for providing a comprehensive view of the Corporate Debtor's operations. Although the initial IM lacked security interest details, subsequent documents and communications indicated that the RP did not deliberately conceal this information.

Findings:
The RP's failure to include security interest details in the original IM was not due to any mens rea or malafide intention. Thus, the RP is not strictly liable for contravening the provisions of the Code in this regard.

3. Non-inclusion of Certain Transactions in the Section 43 Application for Avoidance of Preferential Transactions:

Contravention:
The RP did not include tripartite letters of confirmations/agreements for adjustment of Rs. 63,20,43,151/- in the Section 43 application before the AA.

Submission:
The RP claimed that the information about the tripartite agreements was included in the Special Audit Report, which was part of the IA filed before the AA.

Analysis:
The RP is expected to act with urgency and diligence. Although the IA did not specifically mention the tripartite agreements, the Special Audit Report, which was annexed to the IA, contained the relevant information.

Findings:
The RP did not specifically mention the tripartite agreements in the IA, but the Special Audit Report included this information. There was no mens rea to hide this information, so the RP cannot be held liable for contravening the Code.

Conclusion:

4.1 Role of IRP/RP:
The IRP/RP must conduct the CIRP with fairness, diligence, and independence, following the guidelines of the Code and Regulations to meet the interests of all stakeholders.

4.2 Importance of IP Role:
The role of the IP is central to the CIRP process, requiring a combination of expertise and supervision to ensure the success of the resolution process.

4.3 Responsibilities of IP:
The IP must run the Corporate Debtor as a going concern and conduct the CIRP transparently without creating additional insolvency resolution process costs.

4.4 Observations:
(a) The RP outsourced the duty of claim verification, burdening the Corporate Debtor with additional costs.
(b) The fee paid to the IPE for verification of claims was the primary duty of the RP.

4.5 Contraventions:
The RP contravened Sections 208(2)(a) of the Code, Regulation 13(1) of the CIRP Regulations, and Regulation 7(2)(a), 7(2)(h), and 7(2)(i) of the IP Regulations.

Order:

5.1 Professional Conduct:
An IP must address the distress of a Corporate Debtor beyond the call of duty, considering the nascent stage of the insolvency regime in India.

5.2 Directions:
(a) A monetary penalty of Rs. 1,00,000/- is imposed on the RP.
(b) The RP shall not accept any new assignment until the penalty is paid.

5.3 Effective Date:
The Order shall come into force 30 days from the date of issue.

5.4 Communication:
A copy of the Order shall be forwarded to the Insolvency Professional Agency of Institute of Cost Accountants and the Registrar of the Principal Bench of the National Company Law Tribunal, New Delhi.

5.5 Disposal:
The show cause notice is disposed of.

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