TaxTMI 
TaxTMI 
2020 (7) TMI 295
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....visions of the Code, Regulations, and directions issued thereunder. 1.3 The Board on 18th November 2019 had issued the SCN to Mr. Ashwini Mehra, based on findings of an inspection in respect of his role as interim resolution professional (IRP)/resolution professional (RP) in corporate insolvency resolution process (CIRP) of Educomp Infrastructure & School Limited (CD). The SCN alleged contraventions of several provisions of the Insolvency and Bankruptcy Code, 2016 (Code), the IBBI (Insolvency Professionals) Regulations, 2016 (IP Regulations) and the Code of Conduct under regulation 7(2) thereof, IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations) and IBBI Circular dated 12th June 2018 on "Fees and other Expenses incurred for Corporate Insolvency Resolution Process". Mr. Ashwini Mehra replied to the SCN vide letter dated 9th December 2019. 1.4 The Board referred the SCN, response of Mr. Ashwini Mehra to the SCN and other material available on record to the Disciplinary Committee (DC) for disposal of the SCN in accordance with the Code and Regulations made thereunder. Mr. Ashwini Mehra availed an opportunity of personal hearing before....
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....cision to comply with the directions issued by the Board is awaited. During the personal hearing on 2-3-2020, it was further submitted by the IP that the fees of the legal advisor of the CoC should be a part of the CIRP since they evaluate the resolution plan, protect the interests of the CD, strive for value maximization of the CD etc. Hence, the legal counsel of the CoC becomes an integral part of the CIRP and their fee should be included in the CIRP Cost. Further, the IP informed that after the issue of instructions by the Board, the RP discontinued making payment of the fees to SAM and the part that has already been paid is being reimbursed by the CoC members. The RP also claimed that a CoC member has already advanced part payment towards the re-imbursement. Analysis: It has been observed from the minutes of 2nd CoC meeting held on 1-6-2018 that a proposal was made to appoint SAM as lender"s legal counsel at a fee of Rs. 9 lakh for 75 hours per month whereas additional hours were to be billed at Rs. 12,000 per hour. Further, invoices dated 26-2-2019 and 4-4-2019 have been raised by SAM for an amount of Rs. 9,04,244.07 and Rs. 12,02,043.91 respectively. The IP has also ....
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....ans that any indirect costs shall not be considered as CIRP costs since the provisions of the Code as well as CIRP Regulations, 2016 nowhere provides for inclusion of fee paid to the CoC's legal counsel in the IRPC. Further, Circular dated 12-6-2018 issued by IBBI in relation to CIRP costs and payment of fees of CoC legal counsel clearly states that, "8. It is clarified that the IRPC shall not include: (a) any fee or other expense not directly related to CIRP; (b) any fee or other expense beyond the amount approved by CoC, where such approval is required; (c) any fee or other expense incurred before the commencement of CIRP or to be incurred after the completion of the CIRP; (d) any expense incurred by a creditor, claimant, resolution applicant, promoter or member of the Board of Directors of the corporate debtor in relation to the CIRP; (e) any penalty imposed on the corporate debtor for non-compliance with applicable laws during the CIRP; [Reference: Section 17 (2)(e) of the Code read with circular No. IP/002/2018 dated 3rd January, 2018.] (f) any expense incurred by a member of CoC or a professi....
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....email to the CoC members, the RP cannot cover up the contravention. Findings: It is observed that the RP, despite the directions issued vide6 IBBI Circular dated 12-6-2018, has made a payment of Rs. 73,87,642/- to SAM as on 5-12-2019 which is clearly in contravention of the provisions of the Code. Further, the invoices dated 26-2-2019 and 4-4-2019 raised by SAM for an amount of Rs. 9,04,244.07 and Rs. 12,02,043.91 respectively shows that payments were being made to SAM even after the issue of IBBI Circular dated 12-6-2018. The conduct of RP by making payment of the fee of lender"s legal counsel from the IRPC is in violation of Sections 5(13), 208(2)(a) & (e) of the Code and Regulation 7(2)(a), 7(2)(h) & 7(2)(i) of the IP Regulations read with clause(s) 10 and 14 of the Code of Conduct as given in the First Schedule of the IP Regulations, Regulation 31 of the CIRP Regulations and IBBI Circular dated 12th June 2018. 3.2 Contravention: IP appointed Kroll as Forensic Auditor on 10th August 2018 in this matter. Kroll submitted the Forensic Audit report on 22nd November, 2018. Thereafter, Kroll was again appointed on 11th January 2019 to conduct Forensic Audit for period betw....
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....C communicated that they had decided to appoint Kroll to conduct a forensic audit of the Corporate Debtor". The CoC also authorised the RP to finalise the appointment. Hence, it is evident that the appointment of Kroll was made on the decision taken and communicated by the CoC members and in such a scenario, the cost incurred by Kroll should not have formed part of IRPC. Under the provisions of the Code, the responsibilities of CoC and IP are clearly demarcated. The CoC must not encroach upon the role of IP and must not allow the IP to encroach upon its role. Similarly, the IP must not compromise his independence in favour of the CoC. Further, as per the 2nd CoC presentation submitted by IP vide email dated 6-3-2020 and 7-3-2020 as an addendum to reply to SCN, the initial bid of Kroll was for a fee of Rs. 17,00,000 with taxes for a review period of 2 years or Rs. 28,50,000 with taxes for a review period of 5 years. However, it has been observed that the fee for forensic audit conducted for the period of 1-4-2014 - 31-5-2018, even after the forensic audit had already been conducted for financial year 2017 and 2018, was Rs. 50,74,000/-. Even though the scope of the audit had be....
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.... IRP Mr. Manoj Maheshwari nor the RP were Partners in Duff & Phelps India Private Limited, RP was partner in "D&P India Restructuring LLP" which was proposed to be set up as an Insolvency Professional Entity but due to changes in IBBI guidelines and regulations governing IPEs the entity was never operationalized and the RP resigned from the position as partner in D&P India Restructuring LLP. The IP also submitted that the appointment of Duff & Phelps and IRP was finalized by lenders through a competitive bidding process in joint lender"s forum dated February 28, 2018 and fees was duly ratified by CoC members in the CoC meeting dated June 01, 2018. Quotes were invited from reputed resolution professionals and after detailed deliberations, Mr. Manoj Maheshwari as IRP along with proposal of Duff & Phelps were selected. This was the standard appointment process followed in most of the insolvency cases around that time, and the CoC members looked at both, the credentials of the IRP, together with the quality of support that the IRP has. Further, the IP states that in the appointment of Kroll, proper process was followed in terms of inviting bids from major firms. Post discussions amo....
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....pendent of external influences. 14. An insolvency professional must not act with malafide or be negligent while performing his functions and duties under the Code. " It is observed that during the bidding process, 4 proposals were received and EY quoted a lower bid of Rs. 16,00,000 with taxes as their fee for a review period of 2 years or Rs. 28,00,000 with taxes as their fees for a review period of 5 years whereas Kroll had made a bid of Rs. 17,00,000 with taxes as their fees for a review period of 2 years or Rs. 28,50,000 with taxes as their fees for a review period of 5 years. However, the CoC during the 2nd CoC meeting dated 1-6-2018 had agreed to make the appointment of Kroll. The relevant excerpt from the minutes of 2nd CoC meeting is as under: "The proposals received were discussed and most of the COC members agreed that Kroll seemed to be the most suitable on basis of credentials and fees quoted. Axis Bank proposed EY but agreed to go with the consensus and approve Kroll's appointment. It was stated that Duff & Phelps had recently acquired Kroll's business globally. But since the firms are separate entities and have separate teams, the ....
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....he liquidation value in the CIRP can have far-reaching consequences including the effect of undermining of reversing any resolution plan that may be approved based on an incorrect liquidation value. Hence, valuation needs to be conducted independently by the valuers without the influence of any stakeholders. In the aforementioned matter it has been observed from the valuation report that both the valuers revised the fair value and liquidation value on the instructions of CoC. Post this revision, CBRE South Asia Pvt Ltd. decreased the liquidation value by Rs. 176.79 Cr and E&Y decreased the liquidation value by Rs. 248 Cr in contravention to Regulation 35 (2) of the CIRP regulations which states that valuers should provide valuation report(s) directly to the RP only and thereafter, the information in valuation report may be shared with the CoC members only after receiving an undertaking from all the members. IP"s actions indicate misunderstanding of the law and an attempt to mislead the stakeholders on such a crucial aspect. Submission: The IP submitted that the valuations (i.e. relating to fair value and liquidation value) were only disclosed by the RP to the CoC members a....
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....essional shall provide to the resolution applicant access to all relevant information in physical and electronic form, provided such resolution applicant undertakes- (a) to comply with provisions of law for the time being in force relating to confidentiality and insider trading; (b) to protect any intellectual property of the corporate debtor it may have access to; and (c) not to share relevant information with third parties unless clauses (a) and (b) of this sub-section are complied with. Explanation. - For the purposes of this section, "relevant information" means the information required by the resolution applicant to make the resolution plan for the corporate debtor, which shall include the financial position of the corporate debtor, all information related to disputes by or against the corporate debtor and any other matter pertaining to the corporate debtor as may be specified." The valuation exercise plays a very critical role in protecting the interests of all stakeholders as it forms the basis of decisions taken to arrive at the proportion of the claim or dues that each stakeholder may recover from the CD and also to formulate a compli....
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....the liquidation values could be determined, the IP cannot be held liable for contravening the provisions of Regulation 35 of CIRP Regulations. 3.5 Contravention: It has been observed that unreasonable CIRP costs has been incurred by the IP in appointment of following law firms and advocates when AZB & Associates were already appointed for legal assistance during CIRP at exorbitant costs (Rs. 11 Lakh for upto 100 hours and after that Rs. 12,000 per hour). ♦ Appointment of ASA Law firm for updating title report of 62 properties for a fee of 21 Lakh ♦ Appointment of Sumant Batra for providing legal opinion for a fee of Rs. 2.5 Lakh ♦ Appointment of Mr. Arun Kathpalia and Mr. Sanjay Bhan for appearing before Hon'ble NCLT at a fee of Rs. 11 and 7 Lakh per hearing respectively. With respect to appointment of Mr. Sumant Batra, it was submitted by IP that his appointment took place after discussions in the CoC meetings and he was appointed specifically for handling the consolidation (of Videocon companies) petition. However, from the minutes of 10th CoC meeting dated 7th January, 2019, it has been observed that no such discussion took ....
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....nsure maximization of CD. Since most of these parties in relation to whom consolidation was being contemplated, were already a part of the avoidance application which was filed by the RP, it was discussed between the CoC members and RP to seek a third opinion to understand a best way forward in relation to consolidation petition. Further, the fees for Mr. Sumant Batra was only undertaken post receipt of approval of CoC members in 10th CoC meeting dated 7th January, 2019. (c) Appointment of Senior Advocates The appointment of both Mr. Kathpalia (in 8th CoC meeting dated 28th November, 2018) and Mr. Bhan (in the 11th CoC meeting dated 21st February, 2019) was approved by CoC members, after consultation with both RP's and CoC's legal counsels, at a fees which was transparently discussed and disclosed. It is a common practice to hire senior advocate in sensitive matters and matters which involve questions of law. Further, it was submitted by IP that it is a usual practice for law firms and solicitors to brief senior counsels or outside counsels, who frequently appear in NCLT/NCLAT in IBC cases. Also, the IP clarified that th....
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....e International Valuation Standards does not clearly mention about the measurement. As per page 56- 100.1 on Business Information- "The valuation of a business entity or interest frequently requires reliance upon information received from management, representatives of the management or other experts. As required by IVS 105 Valuation Approaches and Methods, para 10.7, a valuer must assess the reasonableness of information received from management, representatives of management or other experts and evaluate whether it is appropriate to rely on that information for the valuation purpose." Indian Valuation Standards as prescribed by ICAI for its members, ICAI Valuation Standards, "36. A valuer may obtain written representations from the management/client regarding information for performing the valuation assignment. The decision to obtain a representation letter is a matter of judgment by the valuer. A written representation obtained from the management or those charged with governance becomes part of the evidence obtained by the valuer which forms a basis for his valuation report. 37. Wherever a valuer obtains written representations from the management/....
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.... fees payable to the professionals are not exorbitant which may further cripple the CD. (a) Appointment of ASA Law Firm It has been observed from the minutes of 11th CoC meeting dated 21-2-2019 that a technical due diligence of properties of CD was sought by the resolution applicants, hereby noting that: "The RP further informed that basis the request of RAs to get a technical due diligence of the properties of the Corporate Debtor conducted, proposals had been sought from two firms to undertake the mandate. The quotes received were discussed and it was deliberated that same can be initiated at a later stage based on the feedback from the Resolution Applicants. Further, the RP informed that two quotes (from Acuity and ASA legal) had also been invited for getting the Title Search Reports updated. The quotes received were deliberated and the lenders were of the view that ASA legal can be appointed post negotiation provided that the total quote is not more than INR 23 lacs." It has been observed that for the updation of title reports, conduct of due diligence of 62 properties in 10 states of India, which were mortgaged by the CD was based upon the request of....
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.... legal opinion specifically for handling consolidation petition. However, the IP has submitted that since there was a difference of opinion between the RP and CoC's legal counsel in relation to filing of consolidation application, it was decided that Mr. Batra, who had previously been involved in Videocon consolidation matter, should be approached to obtain an opinion to ensure maximization of value of CD. Since most of the parties on whom consolidation petition was being considered were part of avoidance application, it was discussed amongst the CoC members and RP to seek a third opinion and the fee for the same was approved in 10th CoC meeting. The relevant excerpts from the 10th CoC minutes are, "The RP informed the CoC that he had reached out to Mr. Sumant Batra to seek legal opinion on certain queries under the Insolvency and Bankruptcy Code, 2016, and related matters. Mr. Sumant Batra had agreed to undertake the engagement at a lumpsum fee of INR 2.50 lacs and the engagement letter has been executed to initiate the engagement. ... The resolution was unanimously approved by all the CoC members. Since members representing 100.00% assented to the matter,....
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....e below resolution, "The RP informed the CoC that even though the CoC members had approved the appointment of Mr. Arun Kathpalia at a fee of INR 11 lacs for representing the RP in the avoidance application, Mr. Kathpalia was not available for the hearing on February 19. 2019. Hence, the RP had engaged Mr. Akshay Bhan at a fee of INR 7 lacs and this was informed to the lenders vide email dated February 12, 2019. Ratification was sought for the appointment of Mr. Bhan to represent the RP in the avoidance application and confirmation was also sought for his continuing to represent the RP in the avoidance application." It has been observed that the senior lawyers were appointed in select hearings in the sensitive matters such as for dealing with avoidance application. Hence, it cannot be said that the fee paid to senior advocates was exorbitant as it is a usual practice to engage senior advocate in critical and crucial matters and the fee is charged based on the quantum and scope of operation of the CD as per market practice. (d) Appointment of Protocol Insurance Surveyors & Loss Assessors Pvt. Ltd. Protocol Insurance Surveyors & Loss Assessors Pvt. Ltd were appointed....
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....t total fees of INR 7.5 lacs for 12 properties. The same was discussed in the meeting and the CoC members took note of the appointment of Protocol Insurance Surveyors & Loss Assessors Pvt. Ltd." Further, the minutes of the 11th CoC meeting dated 21-2-2019 notes that, "Protocol has prepared a draft analysis for 9 schools and the same was presented to the CoC members. Based on the survey, they have found that the built up area for 9 schools was cumulatively about 30% greater than the area specified in the lease deeds." Furthermore, the IP submitted that neither the International Valuation Standards nor ICAI Valuation Standards clearly mentions that measurement shall be done as part of the valuation exercise. However, it permits the valuer to rely on the information received from management but he must assess the reasonableness of the information so obtained. In cases, where a written representation has been obtained from the management or those charged with governance, it becomes part of the evidence obtained by the valuer which then forms a basis for his valuation report. It has been further observed that there was material discrepancy to the extent of 30%....
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....solution plans in 12th CoC meeting dated 5thMarch 2019. IP had submitted that the Hon'ble NCLT had directed that Process Advisors would be part of the process of opening of resolution plans, however, no such order has been furnished by IP where such direction was provided to him by Hon'ble NCLT. Thus, the actions of the IP attempt to mislead the stakeholders including the Board. Submission: IP submitted that the appointment of SBI Capital Markets (the "Process Advisor") was conducted through a fair and competitive bidding process and their appointment and fees was duly ratified by the CoC members in 4th CoC meeting dated 9-8-2019. Quotes were invited from various entities undertaking process advisory and after detailed deliberations, SBI Capital Markets was selected as the Process Advisor. The Process Advisor is an independent entity, which advises the RP in relation to the process to be followed in relation to CIRP of CD. SBI Capital Markets has also been appointed in several other IBC matters for similar scope of work. Further, it is customary for the process advisors to be part of CoC meetings and to make presentations before CoC in relation to progress and updates on....
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....it was observed that, "It was discussed that the resolution plans will be submitted in the presence of the CoC members, representative of SBI Capital Markets Limited (the "Process Advisor"), RP and the RA. Post submission of all resolution plans, each of the resolution plans will be opened in the presence of Resolution Professional, Process Advisor, the relevant RA and the CoC members. The key pages (viz. resolution plan and financial bid) would be counter-signed by the RP, a few authorized representatives of CoC, representative of Process Advisor and the authorized representative of RA." It has been submitted by the IP that it is customary for the Process Advisor to be part of the CoC meetings and to make presentations before CoC in relation to progress and updates on ongoing CIRP. A process advisor is meant to be an independent body which assists and advices the RP in relation to CIRP of CD such as selection of prospective resolution applicants, evaluation of resolution plan, preparation of VDR etc. However, there is a blurring of line between the responsibilities of the RP and scope of work of the process advisor, and the involvement of the process advisor affects th....
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....licant as they only submitted an EoI but never paid the VDR fees and did not go ahead with due diligence and also did not participate in the process. The list of prospective resolution applicants who paid VDR fee and conducted due diligence was provided by the IP. The IP also highlighted the minutes of 6th CoC meeting in which it was disclosed to the CoC that DPS Ghaziabad Society has not shown any interest to take VDR access. Analysis: An IM is a very crucial document and the information provided under the IM provides a complete picture of the financial position of the CD which is confidential in nature. This information is vital as the prospective resolution applicant, based on the information furnished, would decide to make a bid for the CD by submitting a resolution plan. Further, the IM may also contain forecasts and projected financial information based on the data available with the RP and his financial advisors. Hence, the sensitive nature of the data contained in IM could lead to insider trading, breach of intellectual property, breach of trust and compromising of confidentiality resulting in loss to the CD and violation of the solemn objective of the Code i.e. ma....
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.... not pay the VDR fee but had only submitted an Expression of Interest. However, it has been observed that Form G for Invitation of Expression of Interest was issued on 18-7-2018 while the RP shared the IM with Mr. Pathak of DPS Ghaziabad society on 10-7-2018 i.e. before they submitted their Expression of Interest and before the RP conducted due diligence to ensure if they would qualify as eligible prospective resolution applicants. Section 29 (2) (c) prohibits the RP from sharing relevant information with third parties unless clauses (a) and (b) of this sub-section are complied with. Thus, this is clearly in contravention of section 29. However, the DC cannot take the contravention suo moto as the same has not been indicated in the SCN and consequently, the RP has not got any chance to respond. Further, it has been observed that Regulation 36B of the CIRP Regulations was inserted w.e.f. 3-7-2018 and is made applicable to CIRP commencing on or after 3-7-2018. The CIRP in the present matter commenced on 25-4-2018 i.e. before the above amendment was introduced. In such circumstances, Regulation 36B of the CIRP Regulations shall not be applicable to the facts of the present case. ....
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....ssessing immense powers however, the RP also has the corresponding responsibility to abide by the Code, rules, regulations and guidelines at all times. During the CIRP, IP has to face many hurdles. He holds the information of the CD in trust which should be shared with third parties as permitted by the Code. There may be many outsiders interested in knowing the sensitive information, but RP must refrain from sharing the same unless permitted by the Code. 4.2 The BLRC also noted that: "The Committee recommends that an industry of regulated professionals be enabled under the Code (Burman and Roy, 2015). These Insolvency Professionals will be delegated the task of monitoring and managing matters of business by the Adjudicator, so that both creditors and the debtor can take comfort that economic value is not eroded by actions taken by the other. The role of the professional is also critical to ensure a robust separation of the Adjudicator's role in to ensuring adherence to the process of the law rather than on matters of business, while strengthening the efficiency of the process. The Committee recognizes that it is not possible, at present, to fully design eve....