TMI Blog2020 (6) TMI 555X X X X Extracts X X X X X X X X Extracts X X X X ..... promising resolution plans. This requires provision of and access to complete and accurate information about the firm for prospective resolution applicants and continued operation of the firm. The Code casts this duty on the IP. He organises all information relating to the assets, finances and operations of the firm, receives and collates the claims, prepares information memorandum, and provides access to relevant information, so that there is complete symmetry of information among the entitled stakeholders, while maintaining confidentiality. He thus addresses the market failure arising from information asymmetry. The resolution balances the interests of the stakeholders. This requires the services of a third person who does not side with any stakeholder and has no conflict of interests. The law casts this duty on the IP and makes several provisions to ensure his integrity, objectivity, independence and impartiality. It also requires him to be a fit and proper person. Given the responsibilities, an IP requires the highest level of professional excellence. DC observes that Mr. Aran Kumar Gupta displayed a casual approach during the conduct of CIRP. When a CD is admitted into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 15th November 2019 had issued the SCN to Mr. Arun Kumar Gupta, 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 M/s Divya Jyoti Sponge Iron Pvt Ltd. 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, the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations 2016 (CIRP Regulations). Mr. Arun Kumar Gupta replied to the SCN vide letter dated 16th November 2019 and also submitted additional written responses subsequent to personal hearing on 31st January 2020 and 17th February 2020. 1.4 The Board referred the SCN, response of Mr. Arun Kumar Gupta 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 Regul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not clearly lay down why IBBI has come to a conclusion that valuers were not appointed within 7 days of appointment of IRP since in the SCN, IBBI has already acknowledged that valuers were appointed within 5 days of appointment of IRP. The RP produced emails dated 28.8.17 addressed to both valuers as evidence to show that they were appointed within 7 days. Email dated 18.9.2017 by one of the valuers to RP was also submitted which show that they started to work before 1st CoC meeting held on 20.9.2017. The RP submits that the valuers accepted their appointment by IRP and started to work but only requested confirmation on approval of their fee. They refused to confirm final appointment till their fee is ratified by CoC. Upon request from the valuers and after discussion with applicant financial creditor, necessary advance was also paid to valuers before 1st CoC meeting by applicant financial creditor. Further, there was no reason for appointment of other valuers since the original valuers accepted initial appointment and started work. It is also submitted by the RP that in the draft inspection report dated 25.03.2019, there was an allegation that only Regulation 27 had been viol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aring, the RP submitted that the above resolution was moved only to seek approval of fee payable to valuers since they have already been appointed vide email dated 29.08.2017. Even though, as per the allegation in SCN, the valuers informed the IRP that they would only act after their fees had been paid or approved by the CoC, it is evident from the emails exchanged between IRP and valuers that the valuers started their work, however, requested for confirmation on approval of their fees. Further, it has also been observed that Mr. Subhasish Majumdar and Mr. Basudev Dey submitted their report on 9th November 2017 and 10th November 2017 respectively. The issue for consideration under the circumstances (where the valuers seek confirmation on approval of fees) is whether the IRP should approach other valuers to take up the valuation exercise. In such a situation, it may be presumed that the other valuers may also seek confirmation on approval of their fees since professionals may not be inclined to work with a distressed Corporate Debtor without such confirmation of their fees. If the IRP would have approached other valuers, he might have missed the timeline of seven days. Further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... structions of Mr. Sunil Jain. This shows that the RP failed to take timely steps to take effective control and custody of the assets of CD. He should have deputed his representative at the factory at the time of commencement of CIRP. Further, despite knowledge that Mr. Sunil Jain was not cooperating with the RP, it was resolved to add him as signatory to the bank accounts of the company during 5th CoC meeting. Even after hostile behaviour of Mr. Sunil Jain he was involved in the operations of CD. Thus, the RP has violated sections 18(1)(f), 23(2), 25(2)(a) and 208(2)(a) (e) of the Code as well as Regulation 7(2)(a) and (h) of the IP Regulations read with clauses 3, 5 and 14 of the Code of Conduct. Submission: The RP submits that this allegation principally concerns the wrongful, illegal and contumacious act of Mr. Sunil Jain on 12.12.2017 and 14.12.2017 by which he has sought to restrict and/or prevent the visit of the RP and CoC to factory premises for which RP cannot be held responsible. He took immediate effective steps to restrict such acts on part of Mr. Sunil Jain. RP further submits that the CD in this case is a small private company which did not have professiona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P and thus, SCN should be prepared after due care and review. Further, it is stated that draft inspection report dated 25.03.2019 alleged violation of Section 23, clause 3 and 5 of Code of Conduct but the SCN alleged violation of Section 18(1)(f), 23(2), 25(2)(a) and 208(2)(a) and (e) of the Code, Regulation 7(2)(a) and (h) of IP Regulations and Clause 3, 5 and 14 of Code of Conduct. He submits that he has not been given a chance to reply to the new allegations in SCN which is in violation of principles of natural justice. Analysis: Under the Code, an IP plays a central role in resolution, liquidation and bankruptcy processes. He takes important business and financial decisions that may have substantial bearing on the interests of all stakeholders. In such a scenario, it becomes imperative for an IP to perform his duties with utmost care and diligence. He must also manage, preserve and protect the assets of the distressed CD and is also required to ensure continuance of the business operations of the CD. Section 18 of the Code casts specific duties upon the IRP. Clause (f) of Section 18 provides as follows: - (f) take control and custody of any asset over which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is submitted by the RP that before 14.12.2017, he did not face any resistance from the workers or employees of the CD and thus, he could not contemplate non- cooperation/ resistance by them in future. Further, it is also submitted that when Mr. Sunil Jain resisted RP and CoC to enter the factory premises on 14.12.2017, the RP supplemented the existing security guards at the factory premises by employing more security guards to protect the factory and the incident was also reported by the RP to Hon'ble NCLT by filing an application under section 19 of the Code. Further, during the personal hearing, the RP submitted that he only took symbolic control over the assets of the CD from the time of commencement of CIRP since the need for taking physical control or replacing the existing security was not felt considering the circumstances of the present case. Undisputedly, the IRP should have taken complete control over the assets of the CD by replacing the existing personnel with the personnel in whom he can repose his trust. If the IRP would have replaced the existing personnel, he would not have suffered resistance to enter the factory premises on 14.12.2017. Furthermore, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Conduct as given in the First Schedule of the IP Regulations. 3.3 Contravention: As per provisional balance sheet as on 23rd August 2017, the closing stock of CD was ₹ 27,74,69,889.42 while as per the valuation reports submitted to RP (dated 9.11.2017 and 10.11.2017) by valuers Mr. Shubhasish Majumder and Mr. Basudev Dey, liquidation values of the stock were reported as ₹ 6,70,43,000 and ₹ 6,18,40,000 respectively. It was admitted by RP in his reply dated 8.04.2019 to the Board that the difference in value of inventories was highlighted by him in 3rd CoC meeting dated 14.11.2017. Further, the RP sought explanation from Mr. Sunil Jain on the difference in value of inventories. There is no specific provision in the Code or Regulations which requires seeking such explanations from exdirectors. The RP should have appointed the forensic auditor immediately on receiving valuation reports, but forensic auditor E Y was appointed on 2.1.2018 i.e. after a delay of two months after consultation with CoC during 5th CoC meeting. As per section 25(2)(d), in order to preserve and protect the assets of the CD, RP shall appoint accountants, legal or other professionals. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olution professional shall undertake the following actions namely: - (d) appoint accountants, legal and other professionals in the manner as specified by Board; Thus, as per provisions of Section 25(2)(d), the RP shall appoint professionals himself. He is neither permitted to delegate his duties to others nor can he abdicate his authority in favour of CoC. If the law provides for a certain manner to do something, it must be done in that manner only. Thus, the RP shall appoint professionals (including forensic auditor) himself without seeking approval of CoC. The counsel for the RP during the personal hearing submitted that there is no specific provision under the Code which allows the RP to appoint forensic auditor and there is no concept in the Code for appointment of forensic auditor. However, the submission of RP is untenable since a forensic auditor is also a professional who can be appointed by the RP himself under the provisions of Section 25(2)(d) of the Code. However, from the minutes of 5th CoC meeting dated 18.12.2017, it has been observed that the RP informed the CoC about his discussion with the forensic auditors for appointment. Item 14 of the minutes of 5th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appointment of forensic auditor. Since the RP has abdicated his authority in favor of CoC and allowed them to approve appointment and other terms and scope of work of the assignment of forensic audit, he has contravened the provisions contained in Section 25(2)(d) and 208(2)(a) and (e) of the Code, Regulation 7(2)(a) and 7(2)(h) of the IP Regulations read with clause 14 of the Code of Conduct as given in the First Schedule of the IP Regulations. 4. Conclusion: 4.1 A key supporting institution under the Code is insolvency profession. An IP exercises the powers of the Board of Directors of the firm under resolution, manages its operations as a going concern, and complies with applicable laws on behalf of the firm. He conducts the entire insolvency resolution process: he is the fulcrum of the process and the link between the Adjudicating Authority and stakeholders - debtor, creditors - financial as well as operational, and resolution applicants. The process culminates in a resolution plan that maximises the value of assets of the firm. This presupposes availability of many competing resolution plans and identifying the best of them. The key is generation of many promisin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ust of the society and inspire confidence of all the stakeholders, they may not be kept away from practicing the profession especially in the absence of any malafide intention and more so when the objective of the Code i.e. resolution has been achieved within the prescribed timelines. 5.2 In view of the above, the DC, in exercise of the powers conferred under Regulation 13 (3) (b) of the IBBI (Inspection and Investigation) Regulations, 2017 and Section 220 (2) of the Code read with sub-regulations (7) and (8) of Regulation 11 of the IBBI (Insolvency Professionals) Regulations, 2016, disposes of the SCN with the following directions: 5.2.1 In view of the circumstances of the present case concerning the CIRP of CD, the RP is hereby warned to be extremely careful and diligent while performing his duties under the Code. Further, he must strictly act in accordance with the provisions of law and similar contraventions shall not be repeated. 5.3 A copy of this order shall be forwarded to the Indian Institute of Insolvency Professional of ICAI where Mr. Arun Kumar Gupta is enrolled as a member. 5.4 A copy of this Order shall also be forwarded to the Registrar of the Principal B ..... X X X X Extracts X X X X X X X X Extracts X X X X
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