Mistakes they make: Common violations that land insolvency professionals in trouble

Given the kind of responsibility and power that comes with the role of a resolution professional, it is only pertinent that the regulator keeps a close eye on the working of resolution professionals. No wonder many of these professionals have been caught making mistakes or violating rules laid down by the Insolvency and Bankruptcy Code (IBC).

Some of these mistakes or breaches are minor ones but there are those which are of serious nature and the regulator – the Insolvency and Bankruptcy Board of India – and its disciplinary committee have dealt those violations in the strictest possible way including cancellation of IP registration, imposing penalty, etc.

Take for example the case of Mukesh Mohan, a resolution professional in the CIRPs of Carnation Auto India Pvt Ltd, Athena Demwe Power Limited, etc, who made many mistakes and was found to be indulged in many irregularities leading to cancellation of his registartion.

It was found that he had outsourced his responsibility of certifying eligibility of a resolution applicant to a CA, who in turn asked the resolution applicant to obtain and submit a certificate from a CA that it was eligible to submit resolution plans.  In another violation, Mukesh Mohan failed to report to the NCLT about irregular transactions detected by the forensic auditor.

In another CIRP involving corporate debtor Athena Demwe Power Limited, Mohan did not appoint a forensic auditor but used the services of a forensic auditor, who was earlier appointed by one of the financial creditors in the same account.

Then in the CIRP of Tirupati Inks Limited, Mohan handed over custody of the assets of the corporate debtor to the members of suspended board of directors, ignoring his statutory duties. In the same CIRP, the valuers engaged by Mohan was providing consulting services to a financial creditor.

Mukesh Mohan’s many misdemeanors didn’t go well with the regulators, who not only cancelled his registration but also barred him from fresh registration for 10 years.

We list out some of the most common kind of mistakes or violations committed by insolvency professionals landing themselves in trouble.

Outsourcing his/her duties and responsibilities: An IBBI Circular issued on 3 January 2018 directs that the IP will not outsource any of his duties and responsibilities under the IBC.

Resolution professional Koteswara Rao Karuchola in the CIRP of Viceroy Hotels Limited was found to have outsourced his responsibility of verifying and certifying the claims received by creditors to EzResolve, and Insolvency Professional Entity.

The RP in his defence said that he only obtained support services/assistance from the IPE in carrying out the verification and the same was only recommendatory in nature. He submitted that upon receipt of claims, they were examined by him as to their validity and correctness and thereafter, were sent to the IPE.

However, the disciplinary committee found in clear contravention of Section 208 (2) (a) of the Code, Regulation 13 (1) of the CIRP Regulations and Regulation 7 (2) (a), (h) & (i) of the IP Regulations read with clause(s) 2, 3, 10 & 14 of the Code of Conduct as given in the First Schedule of the IP Regulations.

Conflict of interest: Oftenresolution professionals have been found engaging firms with which they already have some prior professional relations.

For example, Bangalore-based Ashwini Mehra was the resolution professional in the CIRP of Educomp Solutions. He had appointed Duff & Phelps, where he was a Partner, for providing infrastructure and back office support for monthly fees of Rs. 18 lakhs (excluding out of pocket expense and applicable taxes). Besides, Kroll a division of Duff & Phelps was appointed as a Forensic Auditor for this matter not just once but twice. The disciplinary committee of the IBBI found that the position as the RP was in clear conflict with his position as a partner of Duff & Phelps.

Raising CIRP cost by including unrelated costs: Mukesh Mohan, the resolution professional in CIRPs of Carnation Auto, Athena Demwe Power, etc, was found including the cost of public announcement in the CIRP cost, which is paid in priority over other creditors.

Ashwini Mehra, in the Educomp Solution CIRP, had included the fee of law firmShardul Amarchand Mangaldas, which was appointed by the CoC, in the CIRP cost. The disciplinary committee observed that CIRP fees does not include such costs, which are incurred by the members of the COC directly.

Non-disclosures of details, facts in the information memorandum:  Koteswara Rao Karuchola was found in breach for not including in the information memorandum details of security interest of the admitted claims even though these details were provided to him by the secured financial creditors.

Bhupesh Gupta, who was engaged as an interim resolution professional, resolution professional and liquidator in CIRP and liquidation of Supreme Tex Mart Ltd, was found in contravention of IBC law for not recording all the assets of the corporate debtor.

Change in valuers/valuation of assets under duress: In the Educomp Solution CIRP, it was found that both the valuers in this case revised (decreased) the fair value and liquidation value on the instructions of CoC. Resolution professional Ashiwni Mehra was found to be in contravention of Regulation 35 (2) of the CIRP regulations which states that valuers should provide valuation report(s) directly to the RP only and thereafter, the information in valuation report may be shared with the CoC members only after receiving an undertaking from all the members.

Failing to report irregular transactions by CD to adjudicating authorities: In the CIRP of Athena Demwe Power Limited, resolution professional Mukesh Mohan did not report to the NCLT the irregular transactions detected by the forensic auditor.

Apart from these, the other most common mistakes are engaging unregistered valuers or accepting RP assignments without a valid Authorisation for Assignment from his Insolvency Professional Agency (IPA).