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Insolvency Professional and the Challenges ahead! – By IP Umesh Goyal and Adv. Aditya Gauri

Insolvency Professional (IP) is an individual, enrolled with Insolvency Professional Agency (IPA) and registered with the Insolvency & Bankruptcy Board of India (IBBI or The Board). An IP is not a Public Servant (as per Section 232 of the IBC) and Section 233 of the Insolvency and Bankruptcy Code, 2016 (The Code or IBC) provides protection to the IP’s for the action taken in good faith.

Insolvency & Bankruptcy Code 2016 has facilitated in improving the index of ease of doing business in India.  The implementation of the IBC is being handled by the Government of India and the Insolvency and Bankruptcy Board of India (IBBI) in a very pragmatic manner by bringing necessary changes as necessitated with the implementation of the IBC, for achieving the intent and purpose of the Code.

An Insolvency Professional is one of the important pillars of the Code.  The IBBI regulates all the processes connected with the Insolvency Professionals. The Requirement for becoming an Insolvency Professional, as per Regulation 5 (a) of the IBBI (Insolvency Professionals) Regulations 2016, is that an individual has passed the Limited Insolvency Examination within twelve months before the date of his application for enrolment with the insolvency professional agency. Regulation 5 (c) provides that an individual has-

“(iii) fifteen years’ of experience in management, after receiving a Bachelor’s degree from a university established or recognised by law; or

(iv) ten years’ of experience as –

(a) chartered accountant registered as a member of the Institute of Chartered Accountants of India,

(b) company secretary registered as a member of the Institute of Company Secretaries of India,

(c) cost accountant registered as a member of the Institute of Cost Accountants of India, or

(d) advocate enrolled with the Bar Council.”

Next in command is Insolvency Professional Agency (IPA) where an individual has to enroll after clearing the requisite examination. There are three IPAs recognized by the Board, formed by the institutes regulating the professions of Chartered Accountants, Company Secretaries, Cost & Management Accountants.  After enrolment with one of these IPAs against payment of registration and annual fee, the individual undergoes a Pre-Registration Course (PREC) conducted by IPA against payment of fee for attending the course.  After getting certificate of PREC, application is made for registration and on the recommendations of the IPA,  Certificate of Registration is granted by the IBBI.  The individual then becomes an Insolvency Professional and he has to apply for Authorisation For Assignment (AFA) from the concerned IPA with which he is enrolled.  After getting AFA, IP has to approach various banks, financial institutions, and whosoever can provide an assignment of Interim Resolution Professional or Resolution Professional or Liquidator or Bankruptcy Trustee as the case maybe.

Section 232 of the IBC provides that the Chairperson, Members, officers and other employees of the Board shall be deemed, when acting or purporting to act in pursuance of any of the provisions of this Code, to be public servants within the meaning of section 21 of the Indian Penal Code (45 of 1860). Section 233 which talks about Protection of action taken in good faith, provides, “No suit, prosecution or other legal proceeding shall lie against the Government or any officer of the Government, or the Chairperson, Member, officer or other employees of the Board or an insolvency professional or liquidator for anything which is in done or intended to be done in good faith under this Code or the rules or regulations made thereunder.” It is clear that Insolvency Professional is not a Public Servant under Section 232. No suit, prosecution or other legal proceeding shall lie against an insolvency professional or liquidator under Section 233.

The Code provides for Creditor controlled regime for the Corporate Debtor (CD) admitted for Insolvency Resolution Process (IRP) initiated by the Financial Creditor under Section 7, by the Operational Creditor under Section 9 or by the Corporate Persons under section 10 of the Code.  With the initiation of the CIRP, the Board/ management of the CD is suspended and the responsibility comes on the shoulders of the IP, proposed by the Creditor and appointed by the Adjudicating Authority-AA (National Company Law Tribunal-NCLT) as Interim Resolution Professional, till such time the Committee of Creditors (COC) approves to recommend an IP for appointment as Resolution Professional by the AA.

The IRP/RP, as the case may be, has to compulsorily follow the provisions of the Code, the Rules and the Regulations made under the Code, which may create discomfort to the creditor and/or the promoters, leading to complaints.  Section 217 of the Code provides that any person aggrieved by the functioning of an insolvency professional agency or insolvency professional or an information utility may file a complaint to the Board in such form, within such time and in such manner as may be specified. Section 218 empowers the IBBI to deal with such complaints. Regulation 11 of the IP Regulations gives power to the IBBI to issue Show Cause Notice (SCN) based on findings of an inspection, investigation or on material otherwise available on record, if the Board is of the prima facie opinion that sufficient cause exists to take actions permissible under section 220.

Section 7 of the Prevention of Corruption Act 1988 deals with Public servant taking gratification other than legal remuneration in respect of an official act.

The Disciplinary Committee (DC) of the IBBI has been issuing arising from various complaints or the material otherwise available.  The recent orders issued on 01.12.2020 are the cases on the basis of material otherwise available.

  1. The IBBI order No. IBBI/DC/48/2020 issued on 01st December 2020 in the matter of Mr. Arun Mohan, Insolvency Professional (IP), is on account of SCN issued on 16th January 2020 to Mr. Arun Mehta based on examination of available documentary evidence in respect of his role as IRP/RP in the corporate insolvency resolution process (CIRP) of FR Tech Innovations Private Limited (CD). The fact of the case available in the above IBBI order are as follows:
  • Arun Mohan was appointed as an IRP vide Order dated 14th November 2019 of the AA for the CIRP in the matter of FR Tech Innovations Private Limited.
  • A complaint dated 10.01.2020 was filed against Mr. Mohan by Mr. Nishant Bugalia followed by a FIR on 11.01.2020. Mr. Mohan was arrested on 10.01.2020 and was sent to judicial custody on 12.01.2020. CBI prepared the first verification report on 10.01.2020 itself, i.e., the day of filing of complaint by the complainant and a further verification report on 11.01.2020. The bail application moved before Ld. Special Judge (PC Act) was allowed vide order dated 25.01.2020.
  • Namrata Bugalia (wife of the complainant) filed a claim of Rs 2,80,000/-. As per the submission made by Mr. Arun Mohan to the IBBI, Mrs. Namrata Bugalia neither provided any services to the CD (also admitted by her in email dated 16.12.2019) nor possessed the requisite qualifications or competence to provide such services to the CD. She was neither the employee of CD nor a consultant still she misappropriated a sum of Rs. 15,20,000/- by raising fake and forged invoices.
  • As a consequence, her claim was rejected by Mr. Mohan on the directions of CoC in 1st CoC meeting. The CoC also directed issuance of demand notice and initiation of appropriate legal actions (including criminal proceedings) against the creditors/ claimants who had misappropriated the funds of CD (which included Mrs. Namrata Bugalia).
  • The IP had called the claimants for a meeting to inform them about the decision of CoC and the legal consequences for not repaying the amount which was illegally and unlawfully withdrawn or received or siphoned by them from CD.
  • The call made to Mrs. Namrata Bugalia was answered by her husband, Mr. Nishant Bugalia. Accordingly, a meeting was held on 31.12.2019 at Delhi with Mr. Nishant Bugalia instead of Mrs. Namrata Bugalia. Thereafter, a demand notice was issued to Mrs. Namrata Bugalia by the RP on 07.01.2020 to refund an amount of Rs. 15,20,000/- (together with interest @12% p.a.) after which a complaint was filed by the complainant against Mr. Mohan.
  • Mohan denied that in the meeting a sum of Rs 5 lacs was demanded for hushing up the illegal acts of complainant and his wife and contended that the allegations are made with ulterior motive to protect complainant and his wife from civil and criminal proceedings.
  • A criminal writ petition has also been filed by Mr. Mohan before Hon’ble High Court of Delhi against CBI praying that the Petitioner is not a public servant and, for quashing the FIR and any other proceeding emanating therefrom which was admitted vide order date 24.02.2020. The Hon’ble High Court of Delhi, vide Order dated 03.11.2020, adjourned the matter at the request of the counsel appearing for CBI on the ground of medical emergency. Thus, the matter is next posted on 15.12.2020 and the Hon‟ble Court also clarified that no further adjournments would be granted.

The IBBI has issued directions to Mr. Arun Mohan that he shall not seek or accept any process or assignment in any capacity under the Code, till he is exonerated of the aforesaid charges.

It is the opinion of the authors herein that such orders of the IBBI may encourage the Operational or financial creditors as arm twisting tactics against the Insolvency professionals. Insolvency Professionals who work by the rule books as prescribed in the provisions of the Code many a times reject the claims of the creditors on the ground of insubstantiated documentations. The creditors in order to build undue pressure on the IP may use such complaints tactics to influence the decision of the IP. No IP would ever visualise that the dissatisfied OC will lodge complaint before CBI and not under IBC and CBI will proceed to arrest the IP, who is not a public servant, as Insolvency Professional has not been included under Section 232 of the Code.

  1. The IBBI order No. IBBI/DC/47/2020 issued on 01st December 2020 in the matter of Mr. Sanjay Kumar Agarwal, Insolvency Professional (IP). The IBBI on 14th February 2020 had issued the SCN to Mr. Sanjay Kumar Agarwal, based on examination of material available on record including the FIR registered with CBI and order of the Special Judge, CBI in respect of his role as interim resolution professional (IRP)/ resolution professional (RP) in corporate insolvency resolution process (CIRP) of Adi Ispat India Pvt Ltd. (CD). Mr. Sanjay Kumar Agarwal replied to the SCN vide letter dated 3rd June, 2020 and also provided his additional reply vide email dated 6th August, 2020. ). The fact of the case available in the above IBBI order are:

A complaint was filed on 03rd February, 2020 against Mr. Agarwal by Mr. Amit Sarawgi (the complainant) inter alia alleging that Mr. Agarwal has demanded an illegal favour of Rs. 2 Lakhs per month for showing leniency in the Insolvency Resolution Process and extended the CIRP period from 9 months to 2 years and also demanded one-time bribe of Rs. 20 Lakhs for obtaining favourable Forensic Audit/ Valuation Report from his chosen Forensic Auditor/Valuer and for extending help to the promoter in re-possession of Plant/Company.

  • Taking note of the aforesaid complaint, CBI, ACB registered the aforesaid FIR against Mr. Agarwal on 10th February 2020 wherein it observed that the complaint and the verification report (of Shri Abhay Kumar) prima facie discloses commission of cognizable offence punishable under Section 7 of Prevention of Corruption Act, 1988 (PCA).
  • FIR was lodged against Mr. Agarwal by the ex-director of the CD on 10th February 2020 and based on FIR filed, Mr. Agarwal was arrested on 11th February 2020 and sent to judicial custody on 12th February 2020 for a period of 14 days.
  • The Special Judge, CBI-cum-Additional Sessions Judge-XI, Dhanbad on request of CBI remanded Mr. Agarwal from judicial custody to custody of CBI for a period of 3 days i.e. 72 hours vide its Order dated 13th February 2020.
  • A trap proceeding was conducted by CBI against Mr. Agarwal wherein he was caught accepting an amount of Rs. 3 lakhs from Mr. Amit Sarawgi (complainant to CBI).
  • The bail petition before the Ld. Special Judge, CBI, Dhanbad was rejected on 24th February 2020.
  • An appeal before the Hon’ble High Court at Ranchi on rejection of the bail petition could not be taken up due to the Covid-19 pandemic and subsequent lockdown and Mr. Agarwal was in the judicial custody for a considerable period of time.
  • The investigating agency could not file the charge sheet within a statutory period of 60 days from date of lodging of FIR a default bail was granted on 8th May 2020.
  • It has been contended by Mr. Agarwal that the said amount was accepted as a part refund of Rs. 10 lakhs illegally withdrawn from the current account of CD held with Andhra Bank by the ex-Director.
  • Agarwal has also been filed a criminal writ petition before Hon’ble High Court of Jharkhand against CBI praying that the Petitioner is not a public servant and, for quashing the FIR and any other proceeding emanating therefrom and the matter is not yet fully decided.
  • The DC has considered the fact that the FIR against Mr. Agarwal is yet to culminate into a charge sheet however, the submission of Mr. Agarwal that the issuance of SCN only on the basis of FIR and subsequent remand orders is not tenable.

The IBBI has issued directions to Mr. Sanjay Kumar Agarwal shall not seek or accept any process or assignment in any capacity under the Code, till he is exonerated of the charges.

Non-cooperation by the suspended management of the CD is not unexpected, but their going to the extent of laying trap by refunding the amount in Cash, withdrawn by them earlier in a fraudulent manner. It is commonly known fact that the IRP/RP is generally starved of the funds to meet the IRP Cost.  Even if otherwise, how the complaint by an ex-Director  of  the suspended management of the CD, is found to be acceptable by the Board to be beyond doubt, and proceeded against the IRP/RP, who is not a Public Servant. 

IP, an individual appointed by the Adjudicating Authority as IRP/RP/Liquidator, as an officer of the court, has to run the CD as a going concern for its resolution to protect the value of assets, employment and interest of all stake holders, as per the provisions contained in the Code and the rules/ the regulations made under the Code.  Necessarily, the expectations from IP are enormous, and these can be met with the support of IPA, IBBI and the Hon’ble Court of Law.