TaxTMI 
TaxTMI 
2020 (1) TMI 103
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....ions, 2017, the Board vide Order dated 21st June 2018 appointed a Inspecting Authority (IA) to conduct an inspection of Mr. Mahender Kumar Khandelwal, on having reasonable grounds to believe that the IP had contravened provisions of the Code, Regulations, and directions issued thereunder. 1.3 The Board on 7th October 2019 had issued the SCN to Mr. Mahender Kumar Khandelwal, based on findings of an inspection in respect of his role as an interim resolution professional (IRP) and/or resolution professional (RP) in corporate insolvency resolution process (CIRP) of Bhushan Power and Steel Ltd. The SCN alleged contraventions of several provisions of the Insolvency and Bankruptcy Code, 2016 (Code), the IBBI (Insolvency Professionals) Regulations, 2016 and the Code of Conduct under regulation 7(2) thereof, the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations 2016, Circular No. IP/004/2018 on 'Fees payable to an insolvency professional and to other professionals appointed by an insolvency professional' dated 16th January 2018, Circular No. IP/005/2018 on 'Disclosure by Insolvency Professionals and other Professionals appointed by Insolvency Professional....
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....t seek approval for filing application. The RP also submits that after receiving transaction review report from BDO India LLP, but owing to the size of the CD, the same had to be deliberated at length by legal counsel of RP and several meetings were required with key managerial persons and employees of CD, to determine contraventions under Section 43-66 of the Code. The RP states that he has made every endeavour to comply with requirements and no prescribed timelines with respect of avoidance transaction are applicable to CIRP of CD as Regulation 35A of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations 2016 is effective to CIRP commencing on or before 3rd July 2018. Further, the RP states that BDO India LLP report on specific queries by SBI was also filed by RP on 4th February 2019 which he was not obligated under the provisions of law. During the personal hearing on 30th October 2019, it was submitted that there was no guidelines or indication given as to the timeline for filing avoidance transactions application and that even though the forensic audit was not conducted by the RP (but by the lenders) still the RP had filed the application based on foren....
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....P. In ordinary course, the CIRP is to be completed within 180 days from the date of its commencement i.e. 26th July 2017 in the present case. IRP/RP has the highest professional responsibility during CIRP. His conduct and performance have a substantial bearing on the survival of an ailing entity. He, therefore, is expected to function with a strong sense of urgency and with utmost care and diligence. He should endeavour to fast track the process, whenever the situation demands. He is expected to carefully study and analyse the financial statements of the CD. The basis for filing the application dated 19th March 2018 in NCLT was related party transactions which were clearly disclosed in the financial statements of immediately preceding financial year 2016-17. Despite being aware of the same, the valuers were not expeditiously appointed by him and even after their appointment and consequent submission of valuation reports in January 2018, the application for avoidance of transactions was filed belatedly after two months on 19th March 2018. Findings: Prior to Third Amendment to IBBI (Insolvency Resolution Process for Corporate Persons) Regulations 2016, no time was prescribed....
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....ppointment did not fall under the definition of 'relationship' he was not required to submit any disclosure to IPA. Nevertheless, the IP had complied with the Circular by sending e-mail dated 31st March 2018. The IP submits that the reply made to IA was inadvertent and unintentional and not with view to mislead the Board. The RP clarifies that BDO Restructuring Advisory India LLP was acting in capacity of an IPE and the fee was shared as per the consent terms under commercial arbitration petition No. 262 of 2018 approved by Bombay High Court vide order dated 28th March 2018. IPA was intimated on 26th September 2019, once it was found out that inadvertently it was missed out on informing the IPA. During the personal hearing, it was submitted that the approval of CoC for appointment of IPE was unanimous and was done along with the appointment of IP. Further, there was no clarity as to how and to whom fee has to be paid for professional services rendered by IP. The Board has clarified this issue later on vide circular dated 16th January 2018 regarding fees payable to an IP and to other professionals appointed by an IP. Further, the Hon'ble High Court of Bombay insisted ....
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....closure to his IPA about taking services from BDO Restructuring Advisory India LLP (of which RP was a partner) is in violation of Section 208(2)(a) of the Code and Regulation 7(2)(a) and 7(2)(h) of the Insolvency and Bankruptcy Board of India (Insolvency Professional) Regulations, 2016, read with clause 12, 13 and 14 of the Code of Conduct as given in the First Schedule of the Insolvency and Bankruptcy Board of India (Insolvency Professional) Regulations, 2016. 3.3 Contravention: Section 5(13) of the Code read with Regulation 31 of the IBBI (Insolvency Resolution for Corporate Persons) Regulations, 2016 defines 'Insolvency Resolution Process Cost (IRPC)' which does not include fee paid to lender's legal counsel since they are incurred directly by members of CoC. However, RP included the fee payable to lender's legal counsel - Cyril Amarchand Mangaldas (CAM) while calculating IRPC. Submission: It is submitted that CoC, in its 3rd meeting on 31st October 2017, discussed the fees of CAM and it was clarified by representative of CAM that the fee of legal counsel of CoC can be charged to CD as a general practice. At that time, there was no specific provision on thi....
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....alings by ensuring that his decisions are made without the presence of any bias, conflict of interest, coercion, or undue influence of any party, whether directly connected to the insolvency proceedings or not. Clause 5 provides that an insolvency professional must maintain complete independence in his professional relationships and should conduct the insolvency resolution, liquidation or bankruptcy process, as the case may be, independent of external influences. Section 5 (13) of the Code defines the term 'Insolvency Resolution Process Costs' (IRPC) in the following words - "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." As per Regulation 31 of IBBI (Insolvency Resolution ....
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....8. According to the IRPC details furnished by RP vide e-mail dated 11th November 2019, a sum of Rs. 12,09,90,185/- paid to legal counsel of CoC forms part of IRPC. Further, out of above, an amount of Rs. 147,89,315/- has been paid to lender's legal counsel for bills raised on 06.10.2017, 09.01.2018 and 07.03.2018 during CIRP but prior to the issue of the Circular. As per the Addendum dated 30th October 2019, the payment of Rs. 55,62,833/- made on 17th October 2017 relates to service period 17th June 2017 to 31st August 2017. Thus, part of the payment relates to the services rendered by the lender's legal counsel for period prior to the insolvency commencement date i.e. 26th July 2017 from the tagging account. The RP, in spite of the Circular dated 12th June, 2018 clearly and unequivocally stating under para 8 clause (f) that the IRPC shall not include any expense incurred by a member of CoC or a professional engaged by the CoC, agreed with the CoC members, though conditionally, for payment of the fee of lender's legal counsel which shows his disregard to the Circular issued by the Board. An IP is appointed to manage the stressed CD. It is not understood, how he can a....
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....o the Insolvency Commencement date (i.e. period from 17th June 2017 to 25th July 2017) of CD, RP has contravened Section 208 (2) (a) of the Code and also Regulation 7(2)(a) and 7(2)(h) of the IBBI (Insolvency Professionals) Regulations, 2016 read with Clause 3 and 5 of the Code of Conduct as given in the First Schedule of the IBBI (Insolvency Professionals) Regulations, 2016. 3.4 Contravention: PwC was appointed as a valuer to determine the liquidation value of CD on 31st July 2017. During the CIRP, the IP resigned from BDO India LLP and joined PwC as a partner. Thereafter, PwC was again appointed to perform due diligence in relation to Section 29A of the Code. Thus, the IP gave an assignment to PwC, then joined them as a partner and thereafter again engaged PwC to perform due diligence. Thus, IP used his position to derive some benefits to the firm in which he was a partner establishing a clear case of conflict of interest since his position as an IP is in conflict with his position as a partner of PwC. Submission: IP submitted that the appointment of Price Waterhouse & Co. LLP (PWC) as a registered valuer was made in a fair and transparent manner based on competitive biddin....
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....April 2018. PWC, PPL and PPS are not a same entity rather they are three distinct entities. Further, the appointment of PPL for carrying out due diligence under Section 29A of the Code in respect of JSW Steel Limited and Liberty House Group Pte Ltd, and to Ernst & Young LLP in respect of Tata Steel Limited has been made on the basis of a competitive bidding process by inviting bids from prospective agencies for checking the eligibility of Resolution Applicants. From the Company Master Data available on the website of Ministry of Corporate Affairs, it has been observed that Mr Narumanchi Venkata Sivakumar is a common partner between PPL and PPS. However, when PPL was appointed to conduct due diligence (i.e. on 21st May 2018), Mr Narumanchi Venkata Sivakumar was not a partner with RP in PPS. As per the current master data available on the website of Ministry of Corporate Affairs, he joined PPS on 1st October 2018 only. Findings: It is observed that IP appointed PWC as a registered valuer on 31st July 2017 while joined a distinct entity, PPS with effect from 23rd April 2018 i.e. approximately after eight months. Thereafter, he appointed PPL for conducting due diligence. Ho....
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.... dated 28th March 2018. Thereafter, the invoices were raised to the tune of Rs. 14,50,000/- in the name of IP and Rs. 1,05,50,000/- in the name of BDO Restructuring Advisory India LLP in the capacity as IPE. Thus, it is submitted that fee of IP has been raised and received by him in his individual capacity only. During the personal hearing, the IP reiterated that before the Circular No IP/004/2018 dated 16th January 2018 was issued, the mistake committed by IP was bona fide and of technical nature while after the issue of circular, the consent terms filed before the Hon'ble HC of Bombay were followed and invoices were accordingly raised. Further, all actions were duly approved by the members of CoC. Analysis: The IP assumes a pivotal role in CIRP under the Code. He shall befittingly perform a wide array of responsibilities and duties which are bestowed upon him in the process. Hence, success of resolution of insolvency of a CD depends mainly on the professionalism demonstrated by the IP in discharging his functions under the Code as well as the Regulations made thereunder. The IP, either as an IRP or as RP exercises powers of the Board of Directors of the corporate ....
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....of Mr Mahender Kumar Khandelwal, an Insolvency Professional (Registration No. IBBI/IPA-001/IP-P00033/ 2016-17/10086) as Resolution Professional in the matter of Corporate Insolvency Resolution Process of Bhushan Power & Steel Limited." RESOLVED FURTHER THAT approval is hereby accorded for fees of INR 1,20,00,000/- (Rupees One Crore Twenty Lakhs only) per month excluding out of pocket expenses and applicable taxes to be paid to the Resolution Professional. There were no comments on the same by the members ad accordingly the resolution was put to vote without any modifications. The Chairman asked the members to vote on the above resolution through e-voting facility as per the instructions for e-voting provided in the Notice of the meeting.' From the above resolutions of the CoC, it is amply clear that CoC has accorded its approval by item no. 11 for the remuneration of INR 1,20,00,000/- (Rupees One Crore Twenty Lakhs only) excluding out of pocket expenses and applicable taxes for payment to the Interim Resolution Professional for a period of 30 days and by item no. 12 for appointment of Mr Mahender Kumar Khandelwal, an Insolvency Professional (Registration No. IBBI/IP....
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....tended, some other interested parties could have also submitted the EOI. This reflects that the IP conducted the whole exercise arbitrarily and in a non-transparent manner with a mala fide intention to prefer some of the resolution applicants. Submission: IP submitted that in 3rd CoC meeting held on 31st October 2017, SBI Caps informed the member that they have received a call from Liberty House Group expressing their intention to submit EOI post the last date of submission i.e. 6th October 2017. Upon discussion and deliberations, it was noted by CoC that any interested party may submit their resolution plan till the 150th or 240th day i.e. 30 days before the expiry of conclusion of CIRP period in accordance with the erstwhile provisions of Regulation 39(1) of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations 2016. Thereafter, RP accepted EOI received from Liberty House and Arcelor Mittal after the last date of submission of EOI since both the parties qualified in terms of eligibility criteria. The EOI was then placed on record in 4th CoC meeting held on 17th November 2017 wherein it was decided that timeline for submission of EOI shall not be extended but R....
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....hin one hundred and eighty days, it may by order extend the duration of such process beyond one hundred and eighty days by such further period as it thinks fit, but not exceeding ninety days: Provided that any extension of the period of corporate insolvency resolution process under this section shall not be granted more than once." The IP, in his reply to SCN dated 22nd October 2018 admitted having accepted EOI of Liberty House Group Pte Ltd and Arcelor Mittal after the last date of submission of EOI since both the parties qualified in terms of eligibility criteria. When the RP placed the EOIs before CoC in 4th CoC meeting dated 17th November 2017, it was decided that timeline for submission of EOI shall not be extended but RP was obliged to accept resolution plans up to 150th day of CIRP in accordance with erstwhile Regulation 39(1) of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations 2016. In this regard, the DC has observed that a specific provision on 'Invitation of Resolution Plans' was inserted by Amendment to IBBI (Insolvency Resolution Process for Corporate Persons) Regulations 2016 with effect from 6th February 2018 only. Fur....
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....s: "The Insolvency Professionals form a crucial pillar upon which rests the effective, timely functioning as well as credibility of the entire edifice of the insolvency and bankruptcy resolution process. ... In administering the resolution outcomes, the role of the IP encompasses a wide range of functions, which include adhering to procedure of the law, as well as accounting and finance related functions. The latter include the identification of the assets and liabilities of the defaulting debtor, its management during the insolvency proceedings if it is an enterprise, preparation of the resolution proposal, implementation of the solution for individual resolution, the construction, negotiation and mediation of deals as well as distribution of the realisation proceeds under bankruptcy resolution. In performing these tasks, an IP acts as an agent of the adjudicator. In a way the adjudicator depends on the specialized skills and expertise of the IPs to carry out these tasks in an efficient and professional manner... This creates Role of Resolution Professionals in CIRP the positive externality of better utilisation of judicial time." 4.2 The Code also requires an IP to pl....
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....comply with the provisions of the Code and Regulations made there under. In the present matter, Mr. Mahender Kumar Khandelwal has shared the fee, which can be paid only to an individual acting as an IP, with BDO Restructuring Advisory India LLP against the provisions of the Code and the Regulations. 4.4 Thus, Mr Mahender Kumar Khandelwal has displayed utter misunderstanding of the provisions of the Code and Regulations made thereunder. He has, therefore, contravened provisions of: i. Sections 5(13) and 208(2)(a) of the Code, ii. Regulation 33 and 34 of IBBI (Insolvency Resolution process for Corporate Persons) Regulations, 2016; and iii. Regulation 7(2)(a) and 7(2)(h) of the IBBI (Insolvency Professionals) Regulations, 2016 read with clauses 3, 5, 12, 13 and 14 of the Code of Conduct under the said Regulations. 5. Order 5.1 The DC is conscious of the fact that the insolvency regime in India is at its infancy. Also, the insolvency profession is new and emerging. During the personal hearing, the counsel on behalf of Mr. Mahender Kumar Khandelwal submitted that the errors committed by IP during CIRP are unintentional and of a technical nature. Furth....