THE RESOLUTION PROFESSIONAL CANNOT OUTSOURCE HIS DUTIES IN THE COURSE OF CORPORATE INSOLVENCY RESOLUTION PROCESS

[Mr. M. GOVINDARAJAN]

On the admission of the application for the corporate insolvency resolution process under section 7 or section 9 or section 10, the Adjudicating Authority shall, by an order-

• declare a moratorium for the purposes referred to in section 14;
• cause a public announcement of the initiation of corporate insolvency resolution process and call for the submission of claims under section 15; and
• appoint an interim resolution professional in the manner as laid down in section 16.

The public announcement shall be made by the interim resolution professional within three days of the date of appointment.  The public announcement shall contain all the details relating to corporate insolvency resolution process and also invite the claimants to submit their claims within the last date mentioned in the public announcement to the address of the interim resolution professional as indicated in the public announcement.

Section 18 of the Code provides the duties of interim resolution professional after he is appointed as interim resolution professional in respect of corporate insolvency resolution professional.   One among the duties is to receive and collate all the claims submitted by creditors to him, pursuant to the public announcement made under sections 13 and 15.  Section 20(2)(a) gives powers to the interim resolution professional to appoint accountants, legal or other professionals as may be necessary for his assistance.

In respect of verification of claims from the claimants by the interim resolution professional Regulation 13 (1) of Insolvency and Bankruptcy Code (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 provides that the interim resolution professional or the resolution professional, as the case may be, shall verify every claim, as on the insolvency commencement date, within seven days from the last date of the receipt of the claims, and thereupon maintain a list of creditors containing names of creditors along with the amount claimed by them, the amount of their claims admitted and the security interest, if any, in respect of such claims, and update it.

Vide circular no. IP/003/2018, dated 03.01.2018 issued a circular to all registered resolution professionals and three Insolvency Professional Agencies in which the Board reiterates that the resolution professional shall not outsource his duties in the course of corporate insolvency resolution process.  The circular provides that the Insolvency and Bankruptcy Code, 2016  read with regulations made there under cast specific duties and responsibilities on an insolvency professional. An insolvency professional is required to perform certain tasks under the Code while acting as an Interim Resolution Professional, a Resolution Professional, a Liquidator or a Bankruptcy Trustee for various processes. For example, an insolvency professional is required to manage the operations of the corporate debtor as a going concern. He is also required to invite resolution plans, examine them and present to the committee of creditors for its approval such resolution plans which comply with the provisions of the Code. To assist him in carrying out his responsibilities, the Code read with regulations allow insolvency professional to appoint accountants, legal or other professionals, as may be necessary.

The Board observed that a few insolvency professionals are advising the prospective resolution applicants to submit a certificate from another person to the effect that they are eligible to be resolution applicants. This requirement amounts to outsourcing responsibilities of an insolvency professional to another person. Further, this adds to cost of the resolution applicant and delays submission of resolution plans. The Code read with regulations does not envisage such a certification from a third person.  The Board directed that an insolvency resolution professional shall not outsource any of his duties and responsibilities under the Code.

The Board appointed on Inspecting Authority to conduct an inspection of Mr. Koteswara Rao Karuchola, (‘RP’ for short) on having reasonable grounds to believe that the IP had contravened provisions of the Code, Regulations, and directions issued there under vide their order dated 17.01.2019.  The Board issued a show cause notice one resolution professional on 22.10.2019 based on findings of an inspection in respect of his role as an interim resolution professional and / or resolution professional in corporate insolvency resolution process of Viceroy Hotels Limited.   The show cause notice  alleged contraventions of several provisions of the 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) and IBBI Circular No. IP/003/2018 dated 3rd January 2018.

One of the contraventions of the RP mentioned in the show cause notice is that the RP has outsourced his responsibility to verify claims of the financial creditors to the Insolvency Professional Entity (‘IPE’ for short).  Pursuant to Regulation 13 (1) of the CIRP Regulations, it is the duty of the IP to verify every claim received by him. Further, the IBBI Circular dated 03.01.2018 directs that the IP shall not outsource any of his duties and responsibilities under the Code. It has been observed from the minutes of the 1^st Committee of Creditors meeting that claims received from the creditors have been verified and certified by EzResolve, IPE which shows that the RP has outsourced his responsibility to verify the claims of the financial creditors to the IPE.

On 30.01.2018 the RP issued a letter to the IPE that he is appointing IPE as Claims Verifier for the said company with a professional fee of ₹ 3,00,000 plus applicable GST with terms mentioned in this engagement letter.  The other terms contained in the offer letter are as below-

• The IPE is required to verify claims as per regulations of Insolvency and Bankruptcy Board of India (Insolvency resolution Process for Corporate Persons) (Amendment) Regulations, 2018 as and when received the claims from creditors and verify with Books of the company.
• The IPE shall certify the admissibility or rejection of each claim with reasons after satisfying the regulations and requirements whether proper stamp duty was paid, affidavit enclosed, board resolutions enclosed, authorization letters enclosed etc.
• Intimation letters/ mail correspondence shall be prepared if any deficiencies found in the claims of creditors or reject the claims with reasons.

The IPE vide its email dated 3rd April 2018 while submitting the report on Financial Claims Submitted up to 3rd April 2018 has intimated the RP that the claims have been verified under regulations of IBC.  A payment of ₹ 3,00,000/- plus GST has been paid to the IPE for verification of claims which could have been saved, had the verification been done by the RP himself.

The minutes of the 1st meeting of the Committee of Creditors held on 09.04.2018 provides that the claims received have been verified and certified by an IPE who were appointed for claims verification.  The Chairman has briefed the Committee of Creditors about the appointment of IPE for verification of claims received from Creditors and verifies the claims as per regulations 7, 8, 9, 9A, 10, 12, 13, 14 and 15 of the Insolvency and Bankruptcy Board of India Regulations, 2018 and taking up overall responsibility for claims process. The time period for appointment is up to the date of approval of Resolution Plan by the Committee of Creditors  and the remuneration fee payable is ₹ 3,00,000/- plus GST as per engagement letter dated 30.03.2018.

A resolution was also passed in the meeting which reads as follows-

RESOLVED THAT pursuant to the provisions of the Insolvency and Bankruptcy Code, 2016, the Committee of Creditors be and hereby unanimously ratified and approved the engagement of EZresolve LLP for a remuneration of ₹ 3,00,000/- plus GST as per engagement letter dated 30.03.2018 for claims received up to 31.05.2018 or till approval of resolution plan by Committee of Creditors, whichever is later.

The Committee of Creditors, in the said meeting, took note and vote the CIRP cost incurred by IRP.

CMA K.K.Rao informed about the CIRP cost of ₹ 3,11,520/- regarding the paper advertisement and appointment of IPE.

Of which, ₹ 1,50,000/- was paid to M/s. Ezresolve LLP, as 50% advance payable on appointment. … RESOLVED THAT pursuant to the provisions of the Insolvency and Bankruptcy Code, 2016, the Committee of Creditors be and hereby unanimously ratified and approved the payment of ₹ 1,50,000/- to Ezresolve LLP.

The RP submitted his replies to the Disciplinary Committee of the Board.  A personal hearing was granted to the RP.  In the personal hearing the RP produced some additional documents.  On hearing the submissions of the RP the Disciplinary Committee observed that-

• It is trite to mention that the IRPC is an added financial stress on a Corporate Debtor. Therefore, it becomes crucial to monitor the expenses incurred by the RP to ensure that a Corporate Debtor, who is already entangled in a web of unsustainable liabilities is not further over-burdened with exorbitantly high IRPC. The payment made to the IPE has been included in the IRPC by the RP, thereby creating an additional burden on the Corporate Debtor.
• In the present case, the RP failed to produce any document which substantiates that the IPE was engaged for re-verification of claims and thus, the same could not be established. On the other hand, the documents submitted by the RP i.e. the engagement letter issued to the IPE, minutes of 1^st Committee of Creditors meeting and email dated 1st March 2020 received from the IPE clearly proves that the IPE was engaged for the verification of claims.

The Disciplinary Committee found that since the RP has outsourced his duty of verification of claims to the IPE as substantiated from various documents, it is found that there is a clear contravention of 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 clause(s) 2, 3, 10 & 14 of the Code of Conduct as given in the First Schedule of the IP Regulations.

The Disciplinary Committee further observed that-

• An IRP or RP is appointed by the Adjudicating Authority. He is an officer of the Court and he is duty bound to conduct CIRP with fairness and diligence and must maintain absolute independence in discharge of his statutory duties without any external influences. The entire resolution process of a Corporate Debtor is dependent on the IRP/ RP who is primarily responsible for efficiently and effectively steer it towards resolution. It is due to this reason that the role of the IRP/ RP becomes paramount during CIRP. Further, it is the duty of the IP to follow the guidelines laid down under the Code and the Regulations made there under so as to legitimately meet the interests of all stakeholders.
• The Code also requires an IP to play a catalytic role in CIRP which requires a right combination of experts acting under the overall supervision of the IP. He is the backbone of the resolution process under the Code and success thereof hinges on the conduct and competence demonstrated by him. Also, a Corporate Debtor undergoing CIRP is a representation of interests of several stakeholders who pin their hopes on the outcome of CIRP. During CIRP, it is the utmost responsibility of an IP to run the company of Corporate Debtor as a going concern and conduct the entire CIRP in a transparent manner without creating additional insolvency resolution process costs.

The Disciplinary Committee imposed on Mr. Koteswara Rao Karuchola, a monetary penalty of ₹ 1,00,000/- (Rs. One Lakh only) and directed him to deposit the penalty amount by a crossed demand draft payable in favor of the ‘Insolvency and Bankruptcy Board of India’. The Board in turn shall deposit the penalty amount in the Consolidated Fund of India.  Further he shall not accept any new assignment as an IP till he deposits the monetary penalty of ₹ 1,00,000/- (Rs. One Lakh only) with the Board and produces evidence to the Board of such deposit.   This Order shall come into force on expiry of 30 days from the date of its issue.