Written by Anubha Dhulia, pursuing Certificate Course in Insolvency and Bankruptcy Code offered by Lawsikho as part of her coursework. Anubha works as a Senior Associate at Jurispetus Law Offices and specializes in Litigation and Alternative Dispute Resolution.

Introduction

Any legal or political system theoretically functions on the sound principle of checks and balances as postulated by French philosopher and judge, Baron de Montesquieu and as further adopted in the Indian Constitution and polity. Under the new Insolvency Regime, on initiation of the corporate insolvency resolution process, the powers of the management/board of the corporate debtor stands suspended and gets vested in Interim Resolution Professional (IRP) appointed by the National Company Law Tribunal (NCLT), the Adjudicatory Authority (AA) under Insolvency and Bankruptcy Code, 2016 (IBC or Code) to manage the operations and assets of the corporate debtor. IRP or Resolution Professional (RP) plays a vital role in the efficient operation of the Corporate Insolvency Resolution Process (CIRP) and regulates, manages and administers the entire insolvency and bankruptcy process as an agent to the adjudicator. As per the Vishvanathan Report on Insolvency (2015), this creates the positive externality of better utilisation of the judicial time. The worse the performance of an RP, the more the adjudicatory authority may need to personally supervise the process which in turn will cause inordinate delay. Efficient regulation by RP, in turn, ensures the maximization of assets and less adverse impact on the investment and economy of the country at large. Such authority and important function of an RP cannot be left unregulated. In this article, endeavor is to look into the discretion given to the Disciplinary Committee (DC) under the Code and how it has been exercised to help us understand whether the checks have been proportionately laid down and practiced.

Fiduciary Capacity: Obligation On Resolution Professional

In order to achieve the objective of judicial and economic efficiency, RP has to act diligently, independently, objectively and impartially as per the Code of Conduct for Insolvency Professionals. He acts in a fiduciary capacity towards the debtor and the creditor. He cannot commit fraud or abuse or exert undue influence on or on behalf of his clients. The CIRP may result in a failure on account of either collusion between the concerned parties (where sometimes RP is party to such collusion) or poor execution or conduct of RP in performing his duties. It is therefore critical to include tough eligibility criteria under the Code to get registered as the professionals. Not merely at the entry level of registration but the entire set up of monitoring is based on a model of “regulated self-regulation” in order to ensure efficient results.

Provisions under IBC

Chapters IV of Part IV of the Insolvency and Bankruptcy Code, 2016 prescribes duties of Insolvency Professionals (IPs). As per Section 18 of the Code, the Interim Resolution Professional takes control and custody of any asset over which corporate debtor has ownership rights and monitors the assets of the corporate debtor and manages its operations until RP is appointed by the Committee of Creditors. According to section 23 of the Code, the RP shall conduct the entire corporate insolvency resolution process and manage the operations of the corporate debtor during the CIRP period and sometimes even after the expiry of the CIRP period, if resolution plan under section 30(6) has been submitted to the NCLT, till an order is passed by the NCLT under section 31 of the Code. The same RP shall be appointed as the liquidator, after obtaining his consent, on initiation of the liquidation process as per section 34 of the Code.

In order to regulate the functioning of RPs, the Code lays down procedure for complaint by any person aggrieved by the functioning of IRP/RP or on contravention by IRP/RP of any provisions of the Code or directions of Insolvency and Bankruptcy Board of India (Board/IBBI) under section 217 of the Code. There is further procedure laid down for inspection and investigation of the RPs by the Investigating Authority appointed by IBBI under section 218 of the Code and a Disciplinary Committee appointed by the IBBI to look into the report prepared by Investigating Authority under section 220 of Code.

Suo Moto Powers of Board

Recently in a matter of disciplinary action against an RP, the RP challenged the show cause notice issued by the RP on the ground that the Board cannot suo-moto take cognizance without a complaint made under section 217 of the Code. However, it was held by the Board/DC that section 218 allows the Board to order investigation or inspection either on receipt of a complaint or when it has a reasonable ground to believe that an IP has contravened the provisions of law. The DC further stated that Board is not a Court which takes cognizance of a matter based on the complaint and decides a matter through an adversarial proceeding. Board, instead is a regulator having a quasi-legislative, executive and quasi-judicial function to ensure that the regulated entities conduct themselves in accordance with law.  

Analysis: Balanced Approach or a Tough One

So far as the mechanism of check on RP is concerned it seems to be balanced. It is overseen at three different stages of inspection and investigation under Chapter VI of Part IV by – the IBBI, the Investigating Authority appointed by IBBI and the Disciplinary Committee constituted by IBBI. The important question for the consideration in this regard is whether the disciplinary procedure laid down is way too harsh and, has the disciplinary Committee been given much of discretion to determine the penalty to be imposed on the RP?

To answer this question, it also becomes important to look into several aspects which include: the compensation/remuneration received by an IRP or RP for rendering the services; the penalty prescribed for any violation by the professional; right of hearing provided in the Code; consequences of suspension/cancellation of registration of professionals; provisions of appeal and cases where the discretion and power has been exercised by the Board. All of this needs to be assessed in the background of the fact that RP has the highest professional responsibility. He is not just another professional. His conduct and performance have the highest bearing on the survival of an ailing entity.  

Present scenario: Fees/Remuneration of Resolution Professional

According to section 5(13) of the Code, the fee payable to any person acting as a resolution professional is included in the ‘insolvency resolution process costs to be borne by the corporate debtor. As per the clause 25 of the Code of Conduct for Insolvency Professional provided at the First Schedule [under regulation 7(2)(h)] of the regulations, an insolvency professional must provide services for remuneration which is charged in a transparent manner, is a reasonable reflection of work necessarily and properly undertaken, and in not inconsistent with applicable regulations. The fee payable to him shall be disclosed to insolvency professional agency of which he is a member and the agency shall publish the disclosure on their website. The RP is not allowed to take anything over and above the fee that he discloses and is published. As per the circular by IBBI bearing No. IBBI/IP/013/2018 issued on 12.06.2018, the Resolution Professional must “ensure that not only fee payable to him is reasonable, but also other expenses incurred by him are reasonable. What is reasonable is context specific and it is not amenable to precise definition.” The Circular contains an illustrative list of factors to be considered in the determination of what is reasonable. Therefore, there is no cap that has been set by the Board, however, a criterion has been laid down to check in case an exorbitant fee is charged by the RP.

In one of the matters before the IBBI, the Disciplinary Committee has provided some guidance as to arrive at an appropriate fee for an RP. The DC stated that that “It is difficult to appreciate that any amount of fee can be charged by a professional just because the law does not limit it. The law [Clause 25 of the Code of Conduct for Insolvency Professionals under the First Schedule to the IBBI (Insolvency Professionals) Regulations, 2016] clearly specifies ‘remuneration to be charged as a reasonable reflection of the work necessarily and properly undertaken’ by an IP. It is neither feasible nor desirable to define what is ‘reasonable’. At least an IP, who exercises the powers of the Board of Directors, cannot feign inability that she does not understand what is ‘reasonable’ in the circumstances. There are several ways to look at reasonableness. One way, as rightly observed by the Hon’ble Adjudicating Authority, is the comparison with the compensation payable to the MD & CEO.” The DC went ahead to define the thin line difference between the role of CEO/MD and RP in the following words: The law requires an IRP to run the corporate debtor as a going concern, which is also the responsibility of the MD & CEO. Though the responsibilities of an IRP and those of an MD & CEO overlap to a large extent, the role of IRP is different from that of the MD & CEO.  But the difference must be reasonably appreciated in a way that the fee at least cannot be many folds higher than that of an MD/CEO. In any case the fee cannot be compared with that of a liquidator whose role is quite different from that of an IRP / RP.

Interesting would be to know as to how far the new circular and the amendments have impacted the fee now being sought by the professionals. However, the Disciplinary Committee has already laid down in the above-discussed matter that “One does not join the profession of IP to mint money from a distressed corporate debtor at any cost. If the market has to bear such inexplicable costs for a CIRP, it may look for other less costly options for resolution, defeating the very purpose of the Code.”

Penalty on Contravention by RP

As per section 220 sub-clauses (2) to (6), the Disciplinary Committee, on being satisfied that sufficient cause exists, may impose a penalty or suspend or cancel the registration of insolvency professional. The penalty prescribed is three times the amount of loss caused or likely to have been caused to persons concerned on account of such contravention or three times the amount of unlawful gain made on account of such contravention. In cases where the amount is unquantifiable, an upper limit of Rs. 1 Crore has been fixed for the imposition of penalty. Additionally, the IBBI may direct any person who has made an unlawful gain or averted loss by indulging in any activity in contravention of the Code, to give an amount equivalent to such unlawful gain or aversion of loss. Further, there are provisions for restitution of such loss to a person who suffered loss and is identifiable.

Adherence to Principle of Audi Alteratum Partem

The discretion given to the DC is wide, however, any conclusion that is arrived at by the DC can only be reached after giving full opportunity to the IP to present its case in writing as well as in an oral hearing. Regulation 11 of the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulation, 2016 provides for the procedure to mandatorily send a show cause notice to the concerned Resolution Professional if IBBI is of the prima facie opinion that sufficient cause exists to take actions permissible under section 220 of the Code, inter alia stating the manner in which the RP is required to respond, the consequences of not responding and the manner in which the show cause notice shall be disposed while enclosing the copies of the documents relied upon by the Board to arrive at the prima facie opinion. While disposing of the show cause notice, the Disciplinary Committee is required to give a reasoned order in adherence to principles of natural justice and after consideration of the submissions, if any, made by the RP amongst other materials on record.

The Disciplinary Committee, while disposing of the show cause notice has been given a fair discretion to make an order merely including a warning or reference the matter to the IBBI to take action under section 220(5) of the Code for reimbursing or restitution of the amount in a loss to meet the ends of justice.  In practice, the Board has also taken into consideration the fact that an RP may be new to the profession and that the action/inaction or contravention may not have lead to any loss as such in which case the Board may simply ask for a token amount to be given as a penalty in proportion to the professional fee of the RP or direct the IP to undergo the revision of pre-qualification courses.

A question came before the Disciplinary committee as to whether the Board has power to issue the show cause notice without an inspection or investigation. The Disciplinary Committee was of the opinion that regulation 11 of the IP Regulations, 2016 enables the Board to issue the show cause notice either on the findings of Investigation Authority and inspection or investigation or on material otherwise available on record. Since one conducts the inspection and investigation to gather material in support of alleged contraventions, there is no reason to waste time and effort on inspection or investigation if adequate material is available before the Disciplinary Committee otherwise.

Circumstances in which RPs have been penalized

In the first ever case of disciplinary action against an RP, a notice was sent on 29.01.2018 to Mr. Dhaivat Anjaria for not including the proof of claim of an operational creditor in the list and for not responding to the operational creditor, even on resubmission of its claim. The RP had further failed to respond to the clarifications sought by the Board on receiving the complaint when finally the Board issued a show cause notice. As a response to the said notice, the RP clarified that the concerned claim was a subject matter of an ongoing legal proceeding and that he has filed an application to the NCLT for seeking guidance on the admission of the claim. Subsequently, the claim was admitted after the directions from the NCLT were issued in this regard. However, the Board was of the opinion that by not considering the claim and not responding to the claimant, the RP was in contravention of section 18(1)(b) of the Code and also failed to comply with the provision of section 196(1)(g) and (h) of the Code. The Board further stated that failure to consider a claim not only deprived the claimant/creditor of its rights but also deprives the potential resolution applicant to have the complete information required to submit a complete resolution plan. The Board, while taking into consideration the fact that the RP was new to the profession, imposed a nominal penalty of the one-tenth of the fee applicable to the resolution professional to meet the ends of justice.

In a recent case, where the resolution professional had connived with the parties to allow One Time Settlement in garb of Resolution Plan and allowed an ineligible resolution Applicant to submit a One Time Settlement Plan, and did nothing to run the business of the corporate debtor or contribute in the duties to run the CIRP, the Disciplinary Committee cancelled his registration for contravention of provisions under sections 17, 23, 25(2)(h),  29A, 30(2)(e), 30(4) and 208(2).

Going by the actions taken by the DC in various matters before it, one may conclude that the orders of the DC are fairly reasoned and detailed and carry discourse on duties of an RP and her role in the entire process vis-a-vis other players. DC, in disposing off the show cause notice has also discussed the legal provisions in detail. Following is the list of disciplinary actions taken by the Board as on date:

S.No.	Case No. and Date	Findings	Penalty
	No. IBBI/DC/14/2018 Dated 28th January, 2019	Failed to timely file Progress report or make public announcement, appoint registered valuer, circulate information memorandum; Resigned from the post without prior permission of AA; Did not run the CD as a going concern;	Monetary penalty equal to one hundred percent of the total fee payable to him as IRP and as RP
2.	No. IBBI/DC/ 13/2018 Dated 7th January, 2019	Displayed a laid-back attitude, gave up even before trying and practically abandoned the CIRP. During his term as RP, he did not do anything, which an RP is required to do, except having one meeting of the Committee of Creditors (CoC) and submitting two progress reports and, therefore, contravened provisions of sections 20 and 23 of the Code.	Monetary penalty equal to one hundred percent of the total fee payable to him as IRP and as RP in the CIRP of Upadan Commodities Private Ltd. a
3.	No. IBBI/DC/12/2018 dated 12th November, 2018	RP, by his conduct and action, allowed director and promoter of CD to pursue an OTS with the Bank and only after the OTS was approved by Bank, he issued invitation to Expression of Interest (EoI). There was meeting of minds of the Resolution Applicant, the sole Financial Creditor in the CoC and the RP.	Registration cancelled. Debarred from applying for fresh registration for 10 years as an IP.
4.	No. IBBI/DC/10/2018 dated 15th October, 2018	RP conducted only one meeting of the CoC during the entire CIRP. The fact that he did not receive any resolution plan was not informed to the CoC. Instead of working for resolution of the corporate debtor, he worked for its liquidation	Keeping in view that insolvency regime is new in India and that IRP tendered an unconditional apology for all his inadvertent and unintentional errors in his understanding, the DC imposed a monetary penalty equal to one hundred percent of the total fee payable to him as IRP and as RP in the CIRP and directed him to undergo the pre-registration educational course.
5.	No. IBBI/DC/09/2018 dated 6th September, 2018	An insolvency agency of an RP was registered in the name of ‘IBBI Insolvency Practitioners LLP’ As a registered professional, he cannot do anything that misleads the stakeholders of insolvency and bankruptcy. RP also misled the Board stating that name change has been approved.	Not to take up any new assignment till “IBBI Insolvency Practitioners LLP” is removed from the Company / LLP Master Data. The registration as an insolvency professional shall be suspended for three months from the date of issue of order.
6.	No. IBBI/DC/08/2018 dated  23rd August, 2018	Professional fee of the RP was illegally paid to third agency (Ernest and Young in which he was a Partner) for escaping his personal income tax liability. E&Y was not appointed for any professional work relating to resolution process.	RP is appointed in an individual capacity; Monetary penalty of Rs. 1 lakh
7.	No. IBBI/DC/07/2018 Dated 23rd August 2018	The RP failed to comply with the directions of the Board to issue a fresh Expression of Interest. Mislead the AA and the Board regarding approval which was by just one creditor rather than the CoC which is breach of trust. RP outsourced his responsibility of certifying eligibility to a CA. Outsourced the claim verification a related party Engaged a forensic advisor who was already engaged by a financial creditor	Registration cancelled and debarred from seeking fresh registration for 10 years.
8.	No. IBBI/DC/04/2018 dated 3 rd May, 2018	Exorbitant fee quoted by IRP as Rs. 5 Crores till the First Committee of Creditors Meeting. Fee for the subsequent months as IRP/RP on a per month basis was R. 1.75 Crores. The RP locked-in her appointment as RP even before the commencement of the CIRP. RP made many misrepresentations and mislead the stakeholders.	As the submission by the RP reflected poorly on the competence as an IP and are further in violation of clauses 1, 2, 10, 12 and 24 and 27 of Code of Conduct, the registration was suspended for a year.
9.	No. IBBI/Ref-Disc.Comm./02/2018 dated 13 th April, 2018	RP did not consider and respond to the Claim filed by a Claimant even after repeated reminders. Also did not answer the communication from Board. Disregarded the timeline. Failed to provide a copy of the proceeding to the Board.	Imposed a monetary penalty equal to one tenth of the total fee payable to him as IRP and RP in the CIRP

Consequences of cancellation/suspension of Registration

Of various discretions given to be exercised by the DC under the Code, the most draconian of all is the suspension and cancellation of the registration of an IRP or RP. The suspension of the registration is usually done by the Disciplinary Committee for few months and the RP can resume its profession after that period. In case of cancellation, as such the Code or the Regulations (Regulations 4, 5, 6 or 7 of the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulation, 2016) are silent on the consequences of cancellation of the registration. However, suspension or cancellation has not been made a ground of rejection of an application for registration of an individual as an RP.

As on date there is only one matter where the registration has been cancelled by the DC. Thus, suspension and cancellation power has been exercised by the Board/Disciplinary Committee with much caution and scrutiny and with detailed and reasoned orders.

Provisions for Appeal by RPs

As an interesting observation, the Regulations do not provide for the appeal against the order of the DC under Regulation 11 of the IP Regulations, of the Disciplinary Committee constituted by the Board. This is in contrast to the provision of appeal given in case of any action by the Disciplinary Committee against an Insolvency Professional Agency.  Further, the decision of the disciplinary committee constituted under Bye-law regulations of the Code can be appealed before an Appellate Panel as constituted under the relevant Bye-law regulations.

This clearly shows a loophole in the legislation where no remedy has been provided under the law against the order of a quasi-judicial authority and the only way to object such a decision, as on date, seems to be the doors of the higher courts under the writ jurisdiction.

Conclusion

Recently in the valedictory address by Dr. Rajiv Kumar, Vice-Chairman, NITI Aayog, it was urged to IBBI and other stakeholders to have a systematic plan to improve India’s Ease of Doing Business. Needless to repeat that IBC has been enforced with the similar objective. The insolvency matters involve extremely high stake for not only the parties, i.e. the corporate debtor and the financial and operational creditors, but also a deep impact on the economy of the nation. In this light, the Disciplinary Committee has rightly laid that the responsibilities of an RP requiring highest level of standing, calibre and integrity which inspire confidence and trust of the society and the stakeholders. In such a scenario, where India is looking towards a creditworthy economy for more investments in form of FDIs and ECBs in order to expand the economy and make the GDP more robust, there is a urgent requirement of strict checks for the smooth running of the insolvency resolution process and in turn on the sole professional who runs the show.

Adjudicatory Authority in one of the cases has held that since there is “no pleading or defending party, the terminology like petitioner/respondent or plaintiff/defendant is not present under this Code….” What was intended by the AA in the matter was to observe that in an adversarial proceeding, the opposite party contests actions of the other party and the truth comes out. However, in a CIRP, when there is no opposite party, the IP has a greater responsibility towards the conduct of fair and efficient process. In this background, it is compelling to conclude that that the procedure and the practice has been laid down in a apt manner under the Code in relation to disciplinary action against the Insolvency Professional who fail to perform efficiently or who shows vested interest and works for personal games, thus adversely affecting the CIRP or keeping the entire process at stake.

Reference:

1. Conference on ‘Insolvency and Bankruptcy Code, 2016: A Roadmap for the Next Two Years’ dated 18th December 2018 organized by Insolvency and Bankruptcy of India and Vidhi Centre for Legal Policy.

2. DF Deutsche Forfait AG and Anr. vs. Uttam Galva Steel Ltd. [C.P. No.45/I&BP/NCLT/MAH/2017]

3. Sections 7, 9 and 10 of the Code

4. Section 17 of the Code

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