Collusion of RP with erstwhile Member of suspended Board of Directors

Board posted a copy of the orders of the Appellate Authority (NCLAT) dated 18.12.2020 in Mr Rajnish Jain vs Anupam Tiwari Resolution Professional for M/s Jain Mfg (India) Private Limited & Ors.[Company Appeal (AT) (Insolvency) No. 519 of 2020 ] at its website on 21st Dec.2020, under the column “Updates”.

I found the following observations of the Appellate Authority (NCLAT), in the order, quite shocking;

• # 31. It is apparent that every action of Resolution Professional, either about the change of status of ‘BVN Traders’ from financial to Operational Creditor or regarding the elimination of name of ‘BVN Traders’ from the ‘Committee of Creditors’ was being done in collusion with erstwhile Member of suspended Board of Directors, Promoter and Managing Director Mr Rajnish Jain. It is pertinent to mention that, the Resolution Professional even in disregard of the orders of the Adjudicating Authority dated 23rd January 2020, subsequently proposed the Resolution before ‘Committee of Creditors’ for considering BVN Traders as Operational Creditor and further for the elimination of name of BVN Traders from ‘Committee of Creditors’. It is also evident that when Appellant and Resolution Professional could not succeed in getting permission from the Adjudicating Authority to change the status of BVN Traders from Financial Creditor to Operation Creditor, Resolution Professional adopted the route of ‘Committee of Creditors’ for the elimination of name of BVN Traders from ‘Committee of Creditors’. In the last, the Appellant and RP succeeded in getting Resolution passed with 100% of the voting share for withdrawal of Petition under Section 12(A) of I&B Code, in total disregard of the Orders of Adjudicating Authority dated 23rd January 2020, whereby the Adjudicating Authority had not permitted Resolution Professional to change the status of BVN Traders from Financial to Operational Creditor.

The above observations of the Appellate Authority highlight the following;

1. Lack of regulatory control of the Board. Resolution Professional & CoC had the courage to blatantly flout the orders of the Adjudicating Authority.

2. Lack of understanding of the Code by the CoC members.

3. Lack of professionalism amongst CoC members.

To prevent such types of situations, the Board needs to beef-up its regulatory controls, which may include the following reforms in the inspection of CIRP / Liquidation processes. I understand that the Board conducts post facto inspections that too in only 15% to 20% of cases. A large no. of irregularities may / can go unnoticed. 

Board may consider moving from 15% to 20% post-facto inspection, to 100% concurrent inspection of insolvency processes. For concurrent inspections, the Board may appoint  Independent Insolvency Professionals as Inspecting Authority/non voting members in CoC. 

i). These Insolvency Professionals(IP) / Inspecting Authority (IA) may be required to perform the following functions;

1. Participate in the proceedings / discussion of CoC, but do not have the right to vote.

2. Inspection of the CIRP process & books of accounts of CD & CIRP.

3. Submit a monthly report of the concurrent inspection to the Board. If required IA may submit an interim inspection report.

ii). This way, the Board will get regular and timely professional feedback on the working of RP & CoC. 

iii). Independent Insolvency Professional, so appointed as Inspecting Authority / Non Voting CoC member,  should not be;

1. Related part of IRP/RP.

2. Related party of the members of CoC. 

3. Related party of CD & Directors of suspended BOD.

4. Member of CoC or AR of a CoC member.

5. On the panel of any of the members of CoC.

iv). Fees of the Insolvency professional so appointed by the Board, may be fixed by the Board on a sliding scale based on the amount of claims admitted and/or no. of creditors, in the CIRP. Out of pocket expenses may be paid equivalent to payable to the Under Secretary of the GOI. All the Fees & Expenses paid / payable to IP / IA to form part of Insolvency Resolution Process Cost (IRPC).

An Insolvency Professional can be appointed as Inspecting Authority, under the provisions of 

Section 218 of the Code, reading as under;

• Section 218(1). ………..the Board thereunder, 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 agency or insolvency professional or an information utility.

Appointment as an Inspecting Authority will not tantamount to an assignment under the Code, as such will not require AFA & secondly, the services of senior Insolvency Professional above the age of 70 years can also be availed.

Here, my observations in the blog  "Fraudulent Transactions in IBC - A case study" dated 16th July, 2020, as follows, has relevance in the matter.

Issues;

1. Independence of the working of the Resolution Professionals. RP in the present case, despite his reservations,  succumbed to the pressures of CoC, as he holds the post of RP at the will of CoC, which has the powers to replace RP without assigning any reasons [section 27]. To help RP to maintain its independence, following reforms in the conditions of appointments of RP are suggested;

• i). The provisions of the replacement of RP under section 27, may provide for specifying  the reasons for replacement in the concerned resolution of the CoC, subject to the approval of AA. 

• ii). Secondly in case CoC does not replace IRP with RP in the 1st meeting of CoC (section 22), IRP may be deemed to be appointed as RP.

 

2. Deficient regulatory control of the Board. In the instant case, regulatory control of the Board was found lacking on the following counts;

i). Board’s inspection of the resolution process failed to identify the fraudulent transaction during CIRP, may be due to; 

• (a) lack of professionalism & objectivity of the inspecting authority or; 

• (b) lack of processing of the inspection reports at the Board's back end office. 

For appointment of inspecting authority Code provides as under;

• Section 218(1). ………..the Board thereunder, 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 agency or insolvency professional or an information utility.

However, under the regulations Board restricted the appointment of inspection / investigating authority, to the officers of the Board, who are usually not qualified professionals;

• Regulation 2; 

• (e) “Investigating Authority” means an officer or a team of officers of the Board, which has been directed by the Board, to conduct the investigation of a service provider;

• (f) “Inspecting Authority” means an officer or a team of officers of the Board, which has been directed by the Board, to conduct the inspection of a service provider;

For objectivity & professionalism in the inspections, insolvency professionals should be associated alongwith officers of the Board, for inspections / investigations of the CIRP.

 

ii). In the instant case, the Board initiated action post facto. The Board, instead of taking post facto actions, should have some system to timely prevent such transactions. Secondly the Board is inspecting only in 15 to 20% cases, a large no. of irregularities may / can go unnoticed. To address both the issues it is suggested that the Board should have authority to appoint an independent insolvency professional as observer/non voting member in CoC, with rights to participate in the proceedings/discussion of CoC. This way, the Board will get regular and timely professional feedback on the working of RP & CoC.

 

3, Lack of professionalism in the working of the CoC. In the instant case, despite RP expressing reservations, CoC went ahead in passing resolution for payment of fees of the lender's legal counsel as IRPC. CoC further decided that if the Board does not allow this arrangement, then the fee amount will be recovered on a pro rata basis from upfront cash recovery amount to be paid to lenders. 

 

Most of the financial creditors in CoC are banks. Banks being impersonal legal entities, usually appoint their employees as their authorised representative in CoC, who are not professionals and do not understand the insolvency ecosystem. Here the provisions of the Code are of quite significance.

• # Section 24(5) Subject to sub-sections (6), (6A) and (6B) of section 21, any creditor who is a member of the committee of creditors may appoint an insolvency professional other than the resolution professional to represent such creditor in a meeting of the committee of creditors:

Provided that the fees payable to such insolvency professional representing any individual creditor will be borne by such creditor.

 

The main import of the Section 24(5) of the code is that a financial creditor can attend the meeting of CoC, through a representative who has to be an insolvency professional other than IRP/RP.

 

The appointment of IP’s as authorised representatives of the banks in CoC will definitely improve the working of the CoC & inculcate the professionalism in the decisions of the CoC. Secondly IP's are being regulated by the Board & IPA’s, their misconduct  can be examined by the Board & IPA’s. It is suggested that the Board may make suitable provisions in the regulations and issue a circular on this aspect.

Disclaimer: The sole purpose of this blog is to create awareness on the subject and must not be used as a guide for taking or recommending any action or decision. A reader must do his own research and seek professional advice if he intends to take any action or decision in the matters covered in this blog.