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2020 (7) TMI 295
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....tions 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 the DC on 2nd March 2020 when he reiterated th....
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....waited. 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 disclosed that the total amount paid to SAM including TDS is Rs. 73....
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....on 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 professional engaged by the CoC; (g) any expense incurred on travel and stay of a member of CoC; and (h) any expense incurred by the CoC directly; [Explanation: Legal opinion is required on a matter. If that matter ....
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....ntion 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 between 01st April 2014 - 31st May 2018 on directions of the CoC members (minutes of the 10th CoC meeting dated 7th January, 2019). IP is required to take an independent decision on whether there was a need to get forensic audit of the CD again rather than abdicating the auth....
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....s 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 been enhanced, it cannot be ignored that a large amount has been cumulatively paid for conduct of two forensic audits (i.e. Rs. 17,00,000 + Rs. 50,74,000 = Rs. 67,74,000/-) despite the fact that the initial bid made by Kroll was Rs. 28,50,000 with taxes for a review period of 5 years. Sec....
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....d 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 among the CoC members, it was agreed that Kroll seemed to be most suitable on the basis of credentials and fees quoted by them. Also Duff & Phelps India Private Limited had acquired Kroll recently and the same was discussed in the CoC meeting and it was concluded that since the firms are separate entities and have separ....
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....riod 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 COC didn't see a conflict arising due to the same. Moreover, conducting Forensic Audit comes under the domain of IRP/RP and therefore even if the firm is same there will be no conflict of interest if Chinese wall is maintained which was agreed by COC" Hence, it is observed that the CoC members had taken note of the conflict of interest that may arise from the appointment of Kroll for conduct of first forensic aud....
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....ation 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 after resolution plans had been opened and tabled before the CoC members, and confidentiality undertaking had been obtained from each of the CoC members. The IP accepted that valuation is a key exercise and the valuers are supposed to follow appropriate methodology and assumptions. If the assumptions or methodology are incorrect, it might have a significant impact on the process. Hence, clarifications on methodology and assumptions are important....
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....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 compliant resolution plan. Any unwarranted influence or modification in determining the liquidation value during CIRP may affect the decision of prospective resolution applicants while evaluating their bid in potential resolution plan. Hence, valuation needs to be conducted independently by the valuers without influence of any stakeholders. It has been observed from the valuation reports that both the valuers revised the liquidation value. Post the instruction from CoC members, CBRE South Asia Pvt. Ltd. had original....
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....ies 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 place with CoC members before appointing him. Also, it is noted that Protocol Insurance Surveyors & Loss Assessors were appointed for measurement of Built-Up areas at 12 schools for a fee of 7.5 Lakh plus OPE plus GST. However, this exercise should have been a part of valuation exercise. These actions reflect that the professionals were appointed by the IP arbitrarily and in a non-transparent manner. Submission: (a) Appointment of ASA Law Firm IP submitted that the appointment of ASA law firm was conducted through a competitive bidding process ....
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....nd 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 though appointment of Mr. Arun Kathpalia was approved by CoC, he has not appeared on behalf of RP before NCLT in any matter, but only appeared before NCLAT. Mr. Akshay Bhan, senior advocate, was enagaged by the RP and has appeared only in few select hearings before NCLT where the matter was deemed sensitive. (d) Appointment of Protocol Insurance Surveyors: IP highlighted that "measurement" is not a part of scope of work of valuers or the valuation exercise. In case, measurement is included in the scope, the same would lead to much higher costs for appointment of valuers. The appointment of a separate enti....
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....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/client regarding information which is the base for the valuation assignment, the valuer shall mention the fact of such representation and the reliance placed on the same. 38. The existence of a management representation letter shall not preclude the valuer from exercising reasonable skill and care with respect to the information obtained regarding the valuation. The valuer shall carry required procedures in the performance of his valuation assignment in respect of the information included in the management representation letter." Based on standard practice being followed in relation to similar valuations; valuers (EY and CBRE) have relied on the information on buildings shared by....
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....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 the resolution applicants. Further, as per appointment letter dated 26-2-2019 to ASA Law Firm, a professional fee of Rs. 21 lacs was approved as per the lender"s requirement which stated that the total quote should not be more than Rs. 23 lacs. Also, it has been submitted by the IP that, ASA law had already conducted TSR updation in 2013 for a fee of Rs. 22.5 lacs, implying a fee of Rs. 31,250/- per property. For updation of the same in year 2019, fee of Rs. 21.0 lacs has been paid to ASA Legal for 62 properties of the CD implying a fee of Rs. 33,870 per property. This exercise was carried out in order to ensure that there are no additional title issues as was keenly requested by resolution applicants during CIRP. ....
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.... 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, the resolution was adopted." It has been observed that CoC, in its 10th CoC meeting, had given its 100% assent for the appointment of Mr. Sumant Batra. Further, if the RP is of the opinion that to ensure maximization of value of CD an opinion is required on filing a consolidation petition so that parties covered under the consolidation petition could be made part of avoidance application, then as per Section 25 (2)(d) of the Code it is within the responsibilities of the RP to appoint such professionals. (c) Appointment of Senior Advocates It has been alleged that the appointment of Mr. Arun Kathpalia and Mr. Sanjay Bhan for appearing before Hon'ble NCLT at fees of Rs. 11 and 7 lacs per hearing respectively is excessive. However, the IP has su....
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....t 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 by the RP for a professional fee of Rs. 7.5 lacs for the measurement of built up areas at 12 schools, an exercise that could have been a part of the valuation. However, the IP submitted that measurement was not covered in the scope of work of valuation exercise and if the same would have been included it would have led to a higher fee for valuers. The IP also submitted that, crucial part of the CD"s income is derived from renting of properties thus it was vital to know the exact measurements especially when there was material discrepancy in measured areas of various sites and details provided by ex-management of CD. The minutes of the 7th CoC meeting dated 25-10-2018 notes that, "The RP informed the CoC that both the valuers are facing issue in relation to discrepancy in the school bu....
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.... 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% in the original records provided as per the minutes of 11th CoC meeting. Hence, it was necessary to verify the records to ascertain the exact value of the parcel of land as it was a major source of income of the CD. Therefore, to create the records anew, a land surveyor was required to be appointed. It is noted that the appointment of Colliers International was rejected and they had quoted a fee of 15.5 lacs. Protocol Insurance Surveyors & Loss Assessors Pvt. Ltd was instead appointed for a fee of Rs. 7.5 lacs for 12 properties. In the present case the measurement was not within the scope of the work assigned to the valuers, which if included would have led to higher fees. E&Y in its report in the section "Sources of Information" has stated that the following information as provided by RP have been inter-alia used for estimation of liquidation and fai....
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.... 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 ongoing CIRP. The IP clarifies that the NCLT did not direct that the Process Advisors would be part of opening of the resolution plans. The IP regretted any confusion in this regard. He stated that he only noted that both RP and CoC legal counsels agreed to the methodology that the Process Advisor should be part of opening of the resolution plans. The process for opening of resolution plans was devised by the RP and CoC members, in consultation with both legal counsels based on extensive discussions in the 12th CoC meeting. This was due to multiple litigations in this regard, in which both RP and CoC were party. The IP further stated that the involvement of the Process Advisor as an independent third party in opening of resolution plan added credibility to the whole process, rather than compromise the process in any manner. This is especially true in this case becau....
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....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 the independence and neutrality of the RP. However, as there is no explicit and unambiguously stated provision in the Code or the Regulation or a circular issued to that effect which clearly and strictly demarcates the roles and responsibilities of the RP and the Process Advisor, no contravention could be made out. Findings: In the present case, the RP admitted that the Hon'ble NCLT did not issue any direction with regard to Process Advisors being a part of opening of the resolution plans and also regretted any confusion in this regard in his written submissions. He further clarified that both RP and CoC legal counsels agreed to the methodology that the Process Advisor should be part of opening of the resolution plans. In the absence of any specific circular or provision under the Code or Regulations made thereunder which clearly elaborates the role of Process Advisors, no specific contr....
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.... 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. maximization of value of CD. Section 29(2) of the Code provides that, "29. Preparation of information memorandum. - (1) The resolution professional shall prepare an information memorandum in such form and manner containing such relevant information as may be specified by the Board for formulating a resolution plan. (2) The resolution professional 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" me....
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....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. An IP, under the provisions of the Code, must maintain integrity and act with objectivity in his professional dealings. He must act with due diligence while performing his functions, exercise reasonable care and take all necessary steps to ensure that the CIRP is conducted without any negligence. However, since in the present matter, the RP shared the IM with Mr. Pathak prior to submission of Expression of Interest by DPS Ghaziabad society which manifests that the RP acted with biasness and failed to take reasonable care while performing his duties. It is also pertinent to mention that the Code empowers the RP to hire professionals and experts to assist him in the technical fields and in understanding the education sector yet the RP shared a highly confidential IM with a third party in the guise of seeking their individual expertise and failed to seek the assistance of any independent industry expert. Findings: It is observed that the IP shared the confidential IM with the DPS, Ghaziabad on....
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....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 every last procedural detail about the working of the bankruptcy process. Further, the changing institutional environment in India will imply that many procedural details will need to rapidly evolve in the future. " 4.3 In this matter, the DC observes that Mr. Ashwini Mehra displayed a negligent approach during the conduct of CIRP which can be elaborated as below: i. Despite the IBBI Circular dated 12-6-2018 clearly stating that IRPC shall not include any expense incurred by a member of CoC or a professional engaged by them, the RP charged the fee of lender"s legal counsel to the tune of Rs. 73.87 lakh as on 5-12-2019 from the IRPC. ii. RP on the direction of COC, finalized the appointment of Kroll for the second forensic audit. Hence, the fees of Rs. 50,74,000/- charged by Kroll should be borne by the CoC members themselves and should not be included as IRPC. iii. RP had shared a confidential document i.e. IM discreetly with Mr. Om Pathak of DPS Ghaziabad society prior to the issue of Form G for Invitation of Express....