DISCIPLINARY ACTION AGAINST INSOLVENCY PROFESSIONALS

[Mr. M. GOVINDARAJAN]

Complaints against insolvency professionals

Section 217 of the Insolvency and Bankruptcy Code, 2016 (‘Code’ for short) provides that any person aggrieved by the functioning of the insolvency professional may file a complaint to the Insolvency and Bankruptcy Board (‘Board’ for short) in Form A along with a fee of ₹ 2500/- within forty five days of the occurrence of the cause of the action of the complaint.

Penalty

Section 220(3) provides that where any insolvency professional has contravened any provision of the Code or rules or regulations made there under, the disciplinary committee may impose penalty which shall be-

• three times the amount of loss caused, or likely to have been caused, to persons concerned on account of such contravention; or
• three times the amount of unlawful gain made on account of such contravention

whichever is higher.  Where such loss or unlawful gain is not quantifiable, the total amount of penalty imposed shall not exceed more than ₹ 1 crore.

The Board may direct any person who has made unlawful gain or averted loss by indulging in any activity in contravention of the Code or the rules or regulations made there under, to disgorge an amount equivalent to such unlawful gain or aversion of loss.

The Board may take such action as may be required to provide restitution to the person who suffered loss on account of any contravention from the amount so disgorged, if the person who suffered such loss is identifiable and the loss so suffered is directly attributable to such person.

Investigation by Board

Section 218 provides that where the Board, on receipt of a complaint that any insolvency professional has contravened any of the provisions of the Code or the rules or regulations made or directions issued by the Board there under, it may, at any time by an order, in writing, direct any person or persons to act as an investigating authority to conduct an inspection or investigation of the insolvency professional.

The inspection or investigation shall be conducted within such time and in such manner as may be specified by the regulations.  The investigating authority may require any other person who is likely to have any relevant document, record or information to furnish the same, and such person shall be bound to furnish such document, record or information.

A detailed report of inspection or investigation shall be submitted to the Board by the Investigating Authority.

Show cause notice

Section 219 provides that the Board may, upon completion of an inspection or investigation, issue a show cause notice to such insolvency professional and carry out inspection of inspection of such insolvency professional giving such time for giving reply, as may be specified by the regulations.

The show cause notice shall be in writing, and shall state-

• the provisions of the Code under which it has been issued;
• the details of the alleged facts;
• the details of the evidence in support of the alleged facts;
• the provisions of the Code, rules, regulations and guidelines there under allegedly violated, or the manner in which the public interest is allegedly affected;
• the actions or directions that the Board proposes to take or issue if the allegations are established;
• the manner in which the insolvency professional is required to respond to the show cause notice;
• consequences of failure to respond show cause notice; and
• procedure to be followed for disposal of the show cause notice.

The show cause notice shall enclose copies of documents relied upon and extracts of the relevant portions from the report of investigation or inspection, or other records.

The show cause notice shall be served on the insolvency professional-

• by sending it to the insolvency professional, at the address provided by him or provided by the insolvency professional agency with which he is enrolled, by registered post with acknowledgement due; or
• by an appropriate electronic means to the email address of the insolvency professional, provided by him or provided by the insolvency professional agency with which he is enrolled.

Disciplinary committee

Section 220 provides that the Board shall constitute a disciplinary committee to consider the reports of the Investigating Authority.  The members of the disciplinary committee shall consist of whole time members of the Board only.  On the examination of the report of the Investigating Authority, if the disciplinary committee is satisfied that sufficient cause exists, it may-

• impose penalty; or
• suspend of cancel the registration of the insolvency professional.

The Disciplinary committee shall try to dispose of the show cause notice within a period of six months of the assignment. 

Order

The order disposing of the show cause notice may provide for-

• no action;
• warning;
• imposing penalty;
• suspending or cancellation of the registration; or
• restitution of the loss

The order passed shall not become effective until 30 days have elapsed from the date of issue of the order unless the disciplinary committee states otherwise in the order along with the reason for the same.

The order shall be issued to the insolvency professional, with a copy to the insolvency professional agency with which he is enrolled immediately and be published on the website of the Board.

First disciplinary case

The Board, for the first time, issued show cause notice to Shri Mr. Dhaivat Anjaria, PWC House, 252, Veer Savarkar Road, Shivaji Park, Dadar, Mumbai City, Maharashtra - 400028, who is a Professional Member of the Indian Institute of Insolvency Professionals of ICAI, and an Insolvency Professional (IP) on 29.01.2018.   The facts of the case run as follows-

• The corporate insolvency resolution process (CIRP) of the corporate debtor, Electrosteel Steels Limited commenced on 21st July, 2017. Mr. Anjaria was appointed as Interim Resolution Professional (IRP) by the Hon’ble Adjudicating Authority.
• He issued a public announcement on 21st July, 2017 which invited claims by 4th August, 2017 and stated that estimated date of closure of the CIRP is 16th January, 2018.
• In response to the public announcement, M/s National Sales (Claimant), a proprietorship firm, submitted a claim on 16th August, 2018.
• The IRP did neither include the claim in the list of operational creditors nor respond to the claimant.
• The claimant resubmitted the same claim on 3rd October, 2017. It met the same fate.
• As the IRP failed and neglected to consider the claim, the claimant submitted a complaint to the Board seeking a direction under section 196(g) of the Insolvency and Bankruptcy Code, 2016 (Code) to Mr. Anjaria.
• the Board, after receipt of the said complaint, sought clarifications from Mr. Anjaria on the complaint vide email dated 17th November, 2017.
• The Board followed up for a response vide emails dated 21st December, 2017 and 3rd January, 2018.

Since Mr. Anjaria failed and neglected to respond to three communications of the Board and the CIRP was to close on 16th January, 2018, the Board issued the SCN on 29th January, 2018 “to show cause as why disciplinary action should not be initiated against him for failure to respond to the clarifications sought through various mails by IBBI”.

Mr. Anjaria responded vide his communication dated 5th February, 2018 stating that the claim of the claimant was a subject matter of an ongoing legal proceedings. Therefore, he filed an application on 9th January, 2018 before the Adjudicating Authority seeking guidance on admission of disputed claims. Based on the directions of the Adjudicating Authority, he accorded a hearing to the claimant on 25th January, 2018 and admitted the claim. However, he could not respond to the Board previously as he was taking all steps to address concerns and issues raised by claimants.

The Board found that-

• Mr. Anjaria, as IRP, did not consider the claim of the claimant. He did not even respond to him. He was subsequently appointed as RP on 21st August, 2018. As RP, he did neither consider the claim nor respond to the complainant. He utterly disregarded his statutory duty under section 18(1)(b) of the Code, which mandates him to receive and collate all claims. He contravened the provisions of section 18(1) (b) of the Code.
• The CIRP was estimated to close on 16th January 2018. Mr. Anjaria disregarded the claim of the claimant and remained incommunicative. He sent a mail on 22nd January, 2018, that is, after the estimated closure date of CIRP, to the claimant, based on guidance of the Adjudicating Authority. Therefore, Mr. Anjaria disregarded the timeline provided under the Code and thereby contravened clause 13 of the Code of Conduct which mandates him to adhere to timeline.
• Mr. Anjaria repeatedly failed to respond to the claimant despite follow up. It is no excuse that he was otherwise busy. If he does not have resources to manage a CIRP in time, he should not take up an assignment. Thus, Mr. Anjaria contravened clause 13 of the Code of Conduct which requires him to promptly communicate to his stakeholders.
• Mr. Anjaria also disregarded repeated requests of the Board for a response on the complaint. He responded to the Board only after a show cause notice was issued to him. He made the stakeholder as well as the Board helpless. It is unbecoming of a professional to ignore repeated requests of the claimant and the Board for the entire CIRP period. Therefore, he failed to comply with the provisions of section 196(1)(g) and (h) of the Code which empowers the Board to monitor the performance of an IP and call for information and records from an IP. He also failed to comply with clauses 1 and 19 of the code of Conduct which require an IP to be honest, straight forward and forthright and to provide all information and records, as may be required by the Board.
• Failure to consider a claim not only deprives the claimant of his rights, but also deprives the potential resolution applicants to have complete information required to submit a complete resolution plan. While implementing the resolution plan, if the resolution applicant discovers a liability to a claimant which has not been factored into the plan, the resolution plan will be frustrated. This failure on the part of Mr. Anjaria is serious dereliction of the duty cast on an IP under section 23 read with section 25(2)(e) and 29 of the Code and regulation 36 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. This has potential to vitiate the entire CIRP and frustrate the objectives of the Code.
• Mr. Anjaria is required under section 208(2)(d) of the Code to submit a copy of the records of every proceeding before the Adjudicating Authority to the Board. He did not provide a copy of the proceeding to the Board.

The Board, considering the fact that Mr. Anjaria is new to the insolvency profession and the claim was ultimately admitted, a penalty equal to one tenth of the total fee payable to him as IRP and RP in the CIRP of Electro steel Steels Ltd. would meet the ends of justice.