The Disciplinary Committee (DC) of the Insolvency and Bankruptcy Board of India (Board) noted that the Resolution Professional (RP) has violated section 14(1)(b) and 208(2)(a) of the Insolvency and Bankruptcy Code, 2016 (Code), regulation 7(2)(a) and 7(2)(h) of IP Regulations read with Clause 1, 2, 3 and 14 of the Code of Conduct as specified in the First Schedule of IP Regulations (Code of Conduct) for payment of pre-CIRP expenses during Moratorium.
The Hon’ble NCLT, Mumbai Bench (AA) vide order dated 01.02.2019 admitted the application under section 7 of the Code for initiating the Corporate Insolvency Resolution Process (CIRP) of Pratibha Industries Limited (CD). Mr. Anil Mehta was appointed Resolution professional (RP) on 14.03.2019. Since no resolution plan was approved by the Committee of Creditors (CoC), the CD was ordered into liquidation on 08.02.2021 and Mr. Anil Mehta was appointed as liquidator.
As per the Progress Report for the quarter June-September, 2022, the e-auction notice for the sale of the CD as a going concern was put on 21.01.2022 which was conducted on 15.02.2022 wherein M/s VDB Projects Private Limited emerged as the highest bidder. The Letter of Intent was issued on 07.03.2022. In accordance with Schedule I of the IBBI (Liquidation Process) Regulations, 2016, the balance sale consideration was to be paid within 90 days, however the same was not deposited. Hence, the sale process was cancelled and the bank guaranteed, submitted in lieu of EMD, was invoked. On 13.06.2022, M/s VDB Projects Private Limited filed IA No. 1517/2022 and IA No. 1718/2022 before the AA seeking stay on invocation of EMD and the same in sub judice.
The Board, in the exercise of the powers conferred to it under section 218 of the Code read with the Inspection Regulations, appointed an Inspecting Authority (IA) to conduct the inspection of RP vide order dated 23.11.2021. A draft inspection report (DIR), prepared by the IA, was shared with RP on 11.05.2022, to which RP submitted his comments vide email dated 28.05.2022. The IA submitted the Inspection Report to Board on 16.06.2022.
Based on the material available on record including the Inspection Report, the Board issued the SCN to the RP on 07.09.2022. The SCN alleged contravention of section 14(1)(b), section 208(2)(a), 208(2)(e), regulation 7(2)(a), Regulation 7(2)(h) of IBBI (Insolvency Professional) Regulations, 2017 (IP Regulations) read with Clause 1, 2, 3, 14 and 15 of the Code of Conduct as specified in the First Schedule of the IP Regulations. The RP replied to the SCN on 22.09.2022.
The Board referred the SCN, written and oral submissions of the RP, 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.
The RP availed an opportunity of personal hearing before DC on 11.10.2022 physically where he was represented by Mr. Abhinav Vasisht, Senior Advocate, Mr. Ashish Rana, Advocate, Mr. Anurag Singh, Advocate and Mr. Akshita Sachdeva, Advocate. Mr. Mehta submitted further written submissions on 14.10.2022.
Breach of Moratorium by RP:
Section 14(1)(b) prohibits transferring, encumbering, alienating or disposing of by the CD any of its assets or any legal right or beneficial interest therein. After perusal of details provided by RP during the inspection, it has been observed that he made payment to the tune of Rs. 3.89 crores for expenses such as internet charges, salary dues, fuel expenses, rent and certain payments to contractors, pertaining to the period prior to CIRP commencement date.
As per the scheme of Code and IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations) and IBBI (Liquidation Process) Regulations, 2016 (Liquidation Regulation), any dues pertaining to per-CIRP period must be admitted as a claim. The RP was duty-bound to act in accordance with the provisions of the Code and regulations made thereunder. However, by making the payment of pre-CIRP dues from the account of CD during the CIRP, the moratorium as required has been breached.
In view of the above, the Board is of the prima facie view that RP has inter alia violated section 14(1)(b) and 208(2)(a) of the Code, regulation 7(2)(a) and 7(2)(h) of IP Regulations read with Clause 1, 2, 3 and 14 of the Code of Conduct as specified in the First Schedule of IP Regulations (Code of Conduct).
In view of the submission made by RP, and materials available on record, DC noted that RP has violated section 14(1)(b) and 208(2)(a) of the Code, regulation 7(2)(a) and 7(2)(h) of IP Regulations read with Clause 1, 2, 3 and 14 of the Code of Conduct as specified in the First Schedule of IP Regulations (Code of Conduct) for payment of pre-CIRP expenses during Moratorium. The contraventions in terms of payment of pre-CIRP dues to the vendors in violation of the statute are established beyond doubt which is not consistent with section 14 of the Code. The point to be considered is whether such contravention can be ignored as it stems from the actions which are firstly not taken with any mala fide intention and secondly are taken as a requirement arising from commercial judgement to run the CD as a going concern. There is no evidence which can raise doubts about the intentions of RP for not being bona fide. The case for running the CD as a going concern is strong, and evidence suggests that payment of preCIRP dues became of crucial importance to keep the CD as a going concern. However, procedural lapses about not explicitly mentioning to the CoC the fact that consideration of the agenda of clearing Pre-CIRP dues are beyond its competence and not approaching AA to seek appropriate direction on such payments, point towards dereliction of duty by the RP.
Hence, DC strictly warned the RP for avoiding such contraventions in future. To keep reminding the IBC ecosystem and its players that areas of explicit prohibition are no-go areas and if one venture into such territory, he needs to approach AA for further direction before suo moto taking a call on the basis of wrong interpretation of the provisions, DC imposed a monetary penalty.
In view of the above, the Disciplinary Committee, in the exercise of the powers conferred under section 220 (2) of the Code read with Regulation 13 of the Inspection Regulations hereby imposed a penalty on RP of Rs. five lakhs and directs him to deposit the penalty amount directly to the Consolidated Fund of India (CFI) under the head of “penalty imposed by IBBI” on https://bharatkosh.gov.in within 45 days from the date of issue of this order and submit a copy of the transaction receipt to the Insolvency and Bankruptcy Board of India.
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