Frivolous Section 19(2) Applications - Scope of information & extent of co-operation
In most of the CIRP cases Section 19(2) applications are being filed, demanding a wide range of information & records, sometime as late as (a) after the resolution for liquidation has been approved by the CoC (b) after issuing a series of IM’s (Information Memorandums). This raises the credibility/sanctity of section 19(2) application filed by the IRP/RP. With the passage of time this section 19(2) application has become a tool of harassment in the hands of RP, being precursor to the prosecution under section 70 of the Code.
2. It will be interesting to find, whether application filed under section 19(2) is frivolous or not in light of the provisions of Regulations 3A (CIRP Regulations) read with Section 18, which broadly provide for the parameters of information & extent of co-operation required from the personnel of the corporate debtor, its promoters or any other person associated with the management of the corporate debtor. Further Hon’ble Appellate Authority in the matter of Mr. Venugopal Dhoot & Anr. Vs. Mr. Pravin R. Navandar RP & Ors. [(2021) ibclaw.in 298 NCLAT, Company Appeal (AT) (Insolvency) No. 173 of 2021], questioned the requirement of the information demanded by the RP in section 19(2) application.
3. Let’s notice the provisions of the Code (IBC, 2016) & Regulation (CIRP Regulations) on this aspect.,
3.1. Insolvency and Bankruptcy Code, 2016.
# Section 19. Personnel to extend co-operation to interim resolution professional. -
(1) The personnel of the corporate debtor, its promoters or any other person associated with the management of the corporate debtor shall extend all assistance and cooperation to the interim resolution professional as may be required by him in managing the affairs of the corporate debtor.
(2) Where any personnel of the corporate debtor, its promoter or any other person required to assist or cooperate with the interim resolution professional does not assist or cooperate, the interim resolution professional may make an application to the Adjudicating Authority for necessary directions.
(3) The Adjudicating Authority, on receiving an application under sub-section (2), shall by an order, direct such personnel or other person to comply with the instructions of the resolution professional and to cooperate with him in collection of information and management of the corporate debtor.
# Section 18. Duties of interim resolution professional. -
The interim resolution professional shall perform the following duties, namely: -
(a) collect all information relating to the assets, finances and operations of the corporate debtor for determining the financial position of the corporate debtor, including information relating to -
(i) business operations for the previous two years;
(ii) financial and operational payments for the previous two years;
(iii) list of assets and liabilities as on the initiation date; and
(iv) such other matters as may be specified;
(b) receive and collate all the claims submitted by creditors to him, pursuant to the public announcement made under sections 13 and 15;
(c) constitute a committee of creditors;
(d) monitor the assets of the corporate debtor and manage its operations until a resolution professional is appointed by the committee of creditors;
(e) file information collected with the information utility, if necessary; and
(f) take control and custody of any asset over which the corporate debtor has ownership rights as recorded in the balance sheet of the corporate debtor, or with information utility or the depository of securities or any other registry that records the ownership of assets including -
(i) assets over which the corporate debtor has ownership rights which may be located in a foreign country;
(ii) assets that may or may not be in possession of the corporate debtor;
(iii) tangible assets, whether movable or immovable;
(iv) intangible assets including intellectual property;
(v) securities including shares held in any subsidiary of the corporate debtor, financial instruments, insurance policies;
(vi) assets subject to the determination of ownership by a court or authority;
(g) to perform such other duties as may be specified by the Board.
Explanation. – For the purposes of this 1[section], the term “assets” shall not include the following, namely: -
(a) assets owned by a third party in possession of the corporate debtor held under trust or under contractual arrangements including bailment;
(b) assets of any Indian or foreign subsidiary of the corporate debtor; and
(c) such other assets as may be notified by the Central Government in consultation with any financial sector regulator.
3.2. Implications of non compliance of provisions of section 19.
# Section 70. Punishment for misconduct in course of corporate insolvency resolution process. -
(1) On or after the insolvency commencement date, where an officer of the corporate debtor;
(a) does not disclose to the resolution professional all the details of property of the corporate debtor, and details of transactions thereof, or any such other information as the resolution professional may require; or
(b) does not deliver to the resolution professional all or part of the property of the corporate debtor in his control or custody and which he is required to deliver; or
(c) does not deliver to the resolution professional all books and papers in his control or custody belonging to the corporate debtor and which he is required to deliver; or
(d) fails to inform their resolution professional the information in his knowledge that a debt has been falsely proved by any person during the corporate insolvency resolution process; or
(e) prevents the production of any book or paper affecting or relating to the property or affairs of the corporate debtor; or
(f) accounts for any part of the property of the corporate debtor by fictitious losses or expenses, or if he has so attempted at any meeting of the creditors of the corporate debtor within the twelve months immediately preceding the insolvency commencement date,
he shall be punishable with imprisonment for a term which shall not be less than three years, but which may extend to five years, or with fine, which shall not be less than one lakh rupees, but may extend to one crore rupees, or with both:
Provided that nothing in this section shall render a person liable to any punishment under this section if he proves that he had no intent to do so in relation to the state of affairs of the corporate debtor.
(2) If an insolvency professional deliberately contravenes the provisions of this Part the shall be punishable with imprisonment for a term which may extend to six months, or with fine which shall not less than one lakh rupees, but may extend to five lakhs rupees, or with both.
3.3. Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.
# 3A. Assistance and cooperation by the personnel of the corporate debtor.
(1) The interim resolution professional or resolution professional, as the case may be, shall take custody and control as specified under this regulation from the personnel of the corporate debtor, its promoters or any other person associated with the management of the corporate debtor as the case may be, of the following:-
the records of information relating to the assets, finances and operations of the corporate debtor referred in clause (a) of section 18 and such other information required under regulation 36;
the assets recorded in the balance sheet of the corporate debtor or in any other records referred in clause (f) of section 18.
(2) The personnel of the corporate debtor, its promoters or any other person associated with the management of the corporate debtor shall provide to the interim resolution professional or resolution professional, as the case may be, a list of assets and records while handing over their custody and control, and the interim resolution professional or resolution professional may, after taking such custody and control, if deemed necessary, identify person(s) in whose possession these assets and records will be held.
(3) Where any asset or record has not been handed over or the list has not been provided under sub-regulation (2), the interim resolution professional or resolution professional, as the case may be, shall himself prepare a list of assets and records while taking custody and control of assets and records, and the interim resolution professional or resolution professional may, after taking such custody and control, if deemed necessary, identify person(s) in whose possession these assets and records will be held.
(4) Each list of assets and records under sub-regulation (2) and (3) shall be signed by the parties present and by at least two individuals who have witnessed the act of taking control and custody of such assets and records.
(5) The interim resolution professional or resolution professional, as the case may be, shall requisition from the personnel of the corporate debtor, its promoters or any other person associated with the management of the corporate debtor as the case maybe, the information relating to the assets, finances and operations of the corporate debtor referred in clause (a) of section 18 and such information required under regulation 36 which were required to be maintained by the corporate debtor but have not yet been handed over.
(6) The interim resolution professional or resolution professional, as the case may be, shall requisition from the personnel of the corporate debtor, its promoters or any other person associated with the management of the corporate debtor as the case maybe, the assets which are recorded in the balance sheet or in any other records referred in clause (f) of section 18 and whose custody has not been handed over.
(7) An application made under sub-section (2) of section 19 in respect of failure to provide any asset or record as requisitioned under the Code and this regulation, shall show presence of such asset or record in the notice of requisition and absence of such asset or record in the list of assets and records taken in control and custody under sub-regulation (2) and (3)
3.4. Case Law;
NCLAT (2021.07.05) in Mr. Venugopal Dhoot & Anr. Vs. Mr. Pravin R. Navandar RP & Ors. [(2021) ibclaw.in 298 NCLAT, Company Appeal(AT)(Insolvency) No. 173 of 2021], held that;
This Appellate Tribunal was repeatedly asking the parties the requirement of various documents and sources from where the documents can be obtained. Based on these observations on 10.06.2021 both the parties agreed the suggestions for a list of requisite documents and from where the documents can be obtained by the RP.
The sum and substance of both the submissions of Appellant and Respondents reveals that the Financial Statement of the CD is available with RP. What he is seeking is the details of the assets of the subsidiaries which is governed by the explanation to Section 18 of the Code and the same is stated as below:…..
The most important thing is the tally data of the CD which has to be obtained from Resolution Professional of VIL i.e. its holdings Company of CD. The bank accounts details for the last five years can be obtained by the Respondent No.1 from the Bank which are under his control at the moment and details of the Directors can be obtained from the MCA website.
On a specific query by the Bench, why RP for more than one year could not get the books reconstructed with the assistance of expert IT Professional from outside to ascertain avoidable transactions of the Code, if he suspects something based on inputs available with him.
What we find basically that a culture has come were Accounts people wants to do the job of Auditor, Auditor wants to do the job of Vigilance and Vigilance wants to do the job of CBI.
The RP being a competent professional and bankers within his charge, he should have reconstructed a book showing cash flow for the specified period as per the Code and by this time could have detected that whether any preliminary finding is for avoidance transactions and then the other party could have proved either way by this time.
The RP can take the assistance of concerned Registrar of Company / MCA website and could have obtained financial statements /annual return and his apprehension could have been proved either way.
Hence, we are unable to confirm that Appellants are fully responsible for non- availability of the documents with whatever data what has been provided to us. Hence, we are unable to sustain the Adjudicating Authority order at this juncture which has been passed in haste.
[ Link Synopsis ]
-------------------------------------------------
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, commercial or otherwise. One 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.
No comments:
Post a Comment