RP who inflated CIRP cost without CoC’s approval was to be debarred from taking further assignments

The Insolvency and Bankruptcy Board of India (IBBI) is a regulatory body of the Insolvency and Bankruptcy Code. The Disciplinary Committee headed by Dr. Mukulita Vijayawargiya, Whole Time Member, IBBI, on 15 March 2021 in the matter of Mr. Kiran Chinubhai Shah, Insolvency Professional (IP), REED 2021 IBBI 03631, under Regulation 11 of the Insolvency and Bankruptcy Board of India (Insolvency Professional) Regulations, 2016 read with section 220 of the Insolvency and Bankruptcy Code, 2016, held that Mr. Kiran Chinubhai Shah shall not seek or accept any process or assignment or render any services under the Code for a period of two months from the date of coming into force of this Order. He shall, however, continue to conduct and complete the assignments/ processes he has in hand as on date of this order.

BACKGROUND

The fact of the case is that a Show Cause Notice (SCN) dated 24th September 2020 was issued to Mr. Kiran Chinubhai Shah. Mr. Shah was appointed as an interim resolution professional (IRP) and/or resolution professional (RP) in the corporate insolvency resolution process (CIRP) of 5 Corporate  Debtors (CDs), viz., ORG Informatics Limited (CD 1) vide order dated 27.11.2018  passed by Hon’ble NCLT, Ahmedabad Bench, UIC Corporation Private Limited (CD 2)  vide order dated 19.02.2019 passed by Hon’ble NCLT, Ahmedabad Bench, API  Industries Private Limited (CD 3) vide order dated 19.02.2019 passed by Hon’ble NCLT,  Ahmedabad Bench, Hardik Industrial Corporation Private Limited (CD 4) vide order dated 19.02.2019 passed by Hon’ble NCLT, Ahmedabad Bench and Shri Jalaram Rice  Industries Private Limited (CD 5) vide order dated 12.04.2019 passed by Hon’ble NCLT,  Ahmedabad Bench. 

In exercise of its power under section 196 of the Code read with the IBBI (Inspection and Investigation) Regulations, 2017 (Inspection Regulations), the IBBI vide Order dated 3rd October 2019 appointed an Inspecting Authority (IA) to conduct an inspection of Mr. Kiran Chinubhai Shah, for the purposes as provided under sub-regulation (4) of the regulation (3) of the Inspection Regulations. 

The IBBI had issued the SCN on 24th September 2020 to Mr. Shah, based on material available on record including the report of IA, in respect of his role as an IRP and/ or RP in the CIRPs of the aforesaid CDs. The SCN alleged contraventions of section 208(2)(a) of the Code, regulation 27 and 34 of CIRP Regulations, regulation 7(2)(a) and (h) of the IP Regulations, read with clauses 2, 10, 12, 13 and 14 of the Code of Conduct under regulation 7(2) thereof. Mr. Shah replied to the SCN vide letter which was received by IBBI on 26th October 2020. The IBBI referred the SCN, his reply and other material available on record to the Disciplinary Committee (DC) for disposal of the SCN in accordance with the Code and Regulations made thereunder. 

Mr. Shah availed an opportunity of a personal virtual hearing before the DC on 16th December 2020. Primarily, The Board was of prima facie view that Mr. Shah has violated section 208(2)(a) of the Code, regulation 27 of the CIRP Regulations and regulation 7(2)(a) and (h) of the IP Regulations, read with clauses 10, 13 and 14 of the Code of Conduct as given in the First Schedule of the IP Regulations. 

In the matter of ORG Informatics Limited, it was noted that Mr. Shah did not file an application under section 19 of the Code despite non-cooperation by the ex-directors as recorded in the minutes of the 3rd and 4th CoC meetings. Further, in the 4th and 5th CoC meetings, CoC suggested to Mr. Shah to approach Adjudicating Authority (AA) for necessary directions, in case of non-cooperation by ex-directors. Hence, there was established and acknowledged non-cooperation from the ex-directors of CD. 

Despite this, Mr. Shah failed to file an application under section 19 of the code before AA. The submissions made by Mr. Shah that the ex-directors extended required assistance and the delay were on account of the absence of employees/ workers in the CD as it was closed since 2010 and all the staff members were relieved in 2014, were found to be contradictory to the CoC minutes and hence not acceptable. 

ANALYSIS

In the aforesaid backdrop and based on analysis and findings, the DC  found that Mr. Shah, in the matter of Shri Jalaram Rice Industries Private Limited, has contravened the provisions of section 208(2)(a) of the Code, Regulation 34 of the CIRP  Regulations and 7(2)(a) and (h) of the IP Regulations, read with clause 2, 10, 12 and 14  of the Code of Conduct as given in the First Schedule of the IP Regulations for making cost disclosures to the IPA without approval/ ratification of fee by CoC, and also for obtaining the approval of valuers fee from the Stakeholders’ Consultation Committee during liquidation process and not from CoC during CIRP process. 

As a result, The IA, in its report dated 31st January 2020 observed that Mr. Shah has violated section 208(2)(a) of the Insolvency and Bankruptcy Code, 2016 (Code) and Regulations 27 and 34 of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations), Regulation 7(2)(a) and (h) of the IBBI (Insolvency Professionals) Regulations, 2016 (IP Regulations) read with clauses 2, 10, 12, 13, 14 and 25 of the First schedule to the IP Regulations. 

It was also observed that Mr. Shah inflated CIRP costs in the matter of Shri Jalaram Rice Industries Private Limited since appointment as well as the fee of valuers was neither approved nor ratified by CoC. 

Lawfully, Clause 12 of the Code of Conduct requires that an IP must not conceal any material information or knowingly make a misleading statement to the Board, the AA or any stakeholder, as applicable. However, it was observed that Mr. Shah made incorrect cost disclosures to the IPA in respect of fees of valuers approved/ ratified by CoC. 

In addition, On the issue of perusal of the minutes of CoC meetings, it was evident that there was no sufficient number of persons/ employees willing to engage themselves with the work of CD 1 and there was no consensus in respect of fee/ remuneration quoted by the ex-employees of CD 1.  Instead, there was non-cooperation by the CoC members for engagement of persons/ employees for completion of the work regarding the CD 1 since they were only inclined to replace the IRP owing to which Mr. Shah could not reach any logical conclusion except for making the ex-directors aware of their duties and responsibilities. 

Further, there was also a limitation since the data for 8-10 years was voluminous and huge, and it was difficult to complete the records within a short span of time by the aged director and his supporting personnel. Further, Mr. Shah was not inclined to claim exemption/ exclusion in the conduct of CIRP by filing an application for non-cooperation against the suspended management and thereby, divert the CIRP period of 180 days into litigation, in consequence, wasting a lot of effective time, in such a case wherein support from suspended management was available. He further submitted that he is well aware of proceedings before AA and had filed an application for non-cooperation in other matters. Regarding the discussions relating to CoC meetings which were covered in SCN, it is amply clear that CoC members have left the decision to file an application for non-cooperation to the discretion of IRP since he has a better understanding of the procedural aspects and the practical outcome of the same, and in none of the meetings, CoC members directed IRP to file an application for non-cooperation. 

Even though Mr. Shah was vested with the powers of the appointment of the RVs according to his best estimate as per the provisions of the Code and Regulations made thereunder, The IRP/ RP has absolute authority for the appointment of the RVs in terms of Section 25(2)(d) of the Code, read with Regulation 27 of CIRP Regulations, but the professional fee/ remuneration in respect of the RVs is required to be approved/ ratified by the CoC members in terms of Regulation 34 of the CIRP Regulations. 

In the matter of ORG Informatics Limited (CD 1), With respect to the first issue regarding the delay in appointment of registered valuers, the DC notes that the CIRP of CD 1 was admitted vide order of Hon’ble NCLT, Ahmedabad Bench dated 27.11.2018 wherein the Hon’ble NCLT, inter alia, directed the applicant operational creditor to make a public announcement which was inconsistent with the provisions of the Code. Therefore, the admission order was subsequently modified on 15.01.2019 with the directions that the IRP shall make a public announcement. Further, the Hon’ble NCLT also exempted the period from 27.11.2018 till 15.01.2019 for computation of the CIRP period. Currently, CD 1 is under liquidation vide order dated 20.11.2019 passed by Hon’ble NCLT, Ahmedabad Bench.

  

The noteworthy point is that without requisite data and records, the RVs cannot commence their work and if such data/ record is unavailable, it will become difficult for them to complete the assignment at hand. Thus, in the present matter, Mr. Shah realized his mistake and took corrective action by issuing a fresh appointment letter in the name of Mr. Harshad Deshpande. Hence, DC was of the view that his conduct reflects his bonafide intent and therefore, DC took a lenient view. 

In the matter of UIC Corporation Private Limited (CD 2), API Industries Private Limited (CD 3) and Hardik Industrial Corporation Private Limited (CD 4), The DC noted that the CIRPs of CD 2, CD 3 and CD 4 was admitted on 19.02.2019 and they are currently under liquidation vide order dated 23.10.2019, 23.09.2019 and 23.09.2019 respectively passed by Hon’ble NCLT, Ahmedabad Bench. In the CIRPs of CD 2, CD 3 and CD 4, the initial appointment letters for conducting valuation were issued in the name of M/s Adroit Valuation Services Private Limited and Mr. Kadar Chikoti on 27.05.2019. However, upon realization of the mistake that M/s Adroit Valuation Services Private Limited is not an RV entity and Mr. Harshad Shaman Deshpande is not associated with Mr. Kadar Chikoti, Mr. Shah issued fresh appointment letters in the names of Mr. Puneet Tyagi, Mr. Brahm Pal Bhardwaj, Mr. Anoop Kumar Goyal and Mr.  Harshad Shaman Deshpande on 03.06.2019. Since the work allotted to Mr. Brahm Pal Bhardwaj and Mr. Anoop Kumar Goyal was neither taken up nor fulfilled by them within due course of time, Mr. Shah was constrained to replace the said RVs and appoint other RVs, i.e., Mr. Dharam Pal Bhatia and Ms. Gunjan Agarwal vide appointment letters dated 31.10.2019. 

On the issue of delay in appointment of valuers in the CIRP of CD 2, CD 3 and CD 4, the DC noted that the appointment of valuers was made by Mr. Shah vide appointment letters dated 27.05.2019, 03.06.2019 and 31.10.2019, i.e., after a delay of 49, 56 and 206 days respectively wherein the noteworthy point was that without requisite data and records, the RVs cannot commence their work and if such data/ record is unavailable, it will become difficult for them to complete the assignment at hand. Thus, if the number of days are calculated from the date of receipt of the details and records till the date of appointments of the RVs, it can be observed that the appointment of M/s Adroit Valuation Services Private Limited and Mr. Kadar Chikoti as RVs was done within 19 days from the date on which Mr. Shah was actually eligible to appoint the RVs. Thus, if the date of receipt of details and records from the ex-directors is considered, it can be held that there was no delay in the appointment of RVs.  

On the issue of appointment of Mr. Dharam Pal Bhatia and Ms. Gunjan Agarwal on 31.10.2019, the DC noted that the appointment of Mr. Dharam Pal Bhatia and Ms. Gunjan Agarwal was in the nature of replacement because of non-performance of work by the RVs, i.e., Mr. Brahm Pal Bhardwaj and Mr. Anoop Kumar Goyal and no fresh appointment was made by Mr. Shah. Hence, alleged contravention about delay in appointment is not made out. 

On the issue of that for cost disclosures in respect of valuers’ fee submitted by Mr.  Shah to his IPA were not made by the approval of CoC, the point to be noted was that the IPs and the CoC constitute key institutions of public faith under the Code while observing that, when a corporate debtor is admitted into CIRP, the Code shifts the control of a corporate debtor to creditors represented by a CoC for resolving its insolvency. Several actions under the Code require the approval of the CoC. In addition, an additional point will be that the provisions of the Code that an IP is not required to take the approval of the CoC for appointment or replacement of valuers or engaging other professionals under section 28 of the Code. 

In the matter of Shri Jalaram Rice Industries Private Limited (CD 5), For the third and fourth issue in the SCN that Mr. Shah inflated CIRP costs in the matter of CD 5 by not seeking approval or ratification of the appointment as well as the fee of valuers by CoC and by including the same in the cost disclosures made to the IPA, the DC notes that the CIRP of CD 5 was admitted on 12.04.2019. CD 5 is currently under liquidation vide order dated 19.09.2019 passed by Hon’ble NCLT, Ahmedabad Bench.  

The noteworthy point herein was that the fee of the above-mentioned valuers was not approved/ ratified by the CoC under Regulation 34 of the CIRP Regulations. While adding that, The DC also noted from the submissions of Mr. Shah that no payment was made to the RVs unless approval/ ratification was received from the members of the Stakeholders’ Consultation Committee, who were none other than the members of the erstwhile CoC.  

CONCLUSION

Insolvency Professionals (IPs) are persons having domain knowledge and experience. They lay down the benchmark for their quality, efficiency and good governance. Under the provisions of the Code, an IP is recognized as an important component of the ecosystem that has been entrusted with a wide range of functions to effectively strive to maximise the value of debtor assets during the resolution process. The credibility of the whole process under the Code hinges upon the conduct and professional competence of IP who is required to comply with the provision of the Code and regulations and to observe the code of conduct. A well-functioning system of resolution driven by a competent IP plays a significant role in cementing together the interests of the CD with those of the creditors and in establishing the credibility of the process. For this reason, the need for specialized professionals for processes under the Code has been unequivocally emphasized as the hon’ble court envisaged the guidelines, as mentioned in the introduction.

Insolvency and Bankruptcy Board of India, on 15th March 2021 vide order no. IBBI/DC/69/2021 held that the Disciplinary Committee, in the exercise of the powers conferred under Section 220 of the Code read with Regulation 11 of the IBBI (Insolvency Professionals) Regulations, 2016 and Regulation 13 of IBBI (Inspection and Investigation) Regulations, 2017, disposed of the SCN with the following directions, such as, firstly, Mr. Kiran Chinubhai Shah shall not seek or accept any process or assignment or render any services under the Code for a period of two months from the date of coming into force of this Order. He shall, however, continue to conduct and complete the assignments/ processes he has in hand as of the date of this order. Secondly, This Order shall come into force on the expiry of 30 days from the date of its issue. Thirdly, A copy of this order shall be forwarded to the Indian Institute of Insolvency Professionals of ICAI where he is enrolled as a member and Lastly, A copy of this Order shall also be forwarded to the Registrar of the Principal Bench of the National Company Law Tribunal, for information.