Can Insolvency Professionals Deviate from their Designated Role under the IBC 2016?

IBBI (Insolvency and Bankruptcy Board of India) has iterated numerous times that the role of an Insolvency Professional (‘IP’) is sacrosanct to achieve the legislative intent of the IBC 2016. IBBI expressed via its various orders and circulars that any small deviation from the scope of duties enshrined on the IP as per the Codes will attract strict disciplinary action from the Board.

The IBBI recapitulated its intent by pulling up all the working IPs through a recent order passed against a well-known Insolvency Professional, Mr. Vijay Kumar Garg. The order highlighted why an IP’s role is of utmost vitality to the CIRP? and how an IP’s dutifulness in the process is the soul of the IBC. The following sections discuss the key takeaways from the order.

Backdrop of the Disciplinary Action

The IBBI’s disciplinary committee with the order last year on 8th June 2020 had significantly penalized the Resolution Professional (mentioned above) of the Infamous Nakshatra World Limited, Nakshatra Brands Limited, and M/s Gitanjali Gems Limited for contravening several norms of the Insolvency and Bankruptcy Code 2016.

The IA administered investigations against the said RP concerning his role as the Interim Resolution Professional for the continuing CIRP of aforementioned companies managed by renowned diamond businessman Mr. Mehul Choksi. The controversy started with the appointment of Duff & Phelps, a multinational advisory firm by IP Mr. Garg using his rights as the Resolution Professional (‘RP’) of GGL, NWL & NBL. The company was appointed to provide support services or assistance in the ongoing CIRP.

Scope of Appointment of an Executive by IP

The IRP has to take the endeavor to guard and preserve the value of the property of the Debtor company and manage the operations of the company. The IRP also has the right to appoint professionals like accountants, lawyers, and valuers as per section 20(1)(a) and section 25 (2)(d) of the IBC, 2016. Further, the regulations (34 and 35) their explanations clearly suggest that the total expenses incurred by the RP/IRP will also include the fees paid to the appointed professionals under the norms stated earlier.

The contention in the case mentioned earlier in the appointment of Duff & Phelps was that the intent of the law or codes was not to only give the Insolvency Professionals the right to appoint individual professionals only and exclude the appointment of any firms or company or any other group. However, the board discarded this argument.

The IBBI clearly emphasized that the rationale behind the fairly recent legislation was not ambiguous. It had been cleared within the order of 8th June 2020 that the section 20(1)(a) and section 25 (2)(d) of the Codes allow the IRP or RP to appoint qualified individuals/firms/groups of executives. These people could render services and will be held accountable for it. The Board further clarified that any firm or corporation is not excluded from appointment if it is duly registered with its regulators.

The clarification from the Board established that a firm can only be employed by an IP if it has the registration from the regulator of its field of work. For example, an IP can only appoint a company secretary firm registered with the regulator ICSI (Institute of Company Secretaries of India) to provide professional services and not any company with some company Secretaries as employees but no approval from the regulator. Likewise, it can only appoint a Bar Council of India (BCI) registered law firm to render legal services to the firm.

The whole idea behind giving clarification was to introduce a method of checks and balances within the CIRP or the Liquidation process. This is similar to working in other professional bodies like the ICSI or the BCI. These regulators too adhere to rules and Code of Conduct and initiate disciplinary action against its member if found any lapse of duty from his part.

It was also contended by IP in question that a bar on the appointment of a firm or a group for support might cause a multiplicity of executives with no coordination between the services rendered. This may lead to successively higher costs of the CIRP and which would mean an increased financial burden on the Financial Creditors and Debtors.

The DC completely discredited the above argument by saying that integrating the professional services of the executives is the only job of the appointed RP during the course of the CIRP and thus, an RP can’t say that he won’t be able to maintain coordination or else he should quit and let someone else manage the CIRP.

The Board propagated the importance of an IPE (Insolvency Professional Entity) to avail the backend support services concerning the CIRP. The Board further stressed that a comparison between an appointed IPE whose objective as per law is to give the backend support to RP, and an appointed unregulated firm like Duff & Phelps within the case was misplaced. It was stated that a corporation/LLP like the given firm in the case generally pursues its activities as per the objectives contained in its charter and can apply for registration for any legal objects. But this type of firm is not allowed to be registered as per the rule. As of now, no restrictions are imposed on the incorporation of this type of firm in terms of their net worth, holding of shares, or majority capital contribution from its members.

On the other hand, a recognised IPE is authorised by the Board as per Regulation 12 (1) of the IP Regulations. Its sole objective is stated as giving backend or additional support services to IPs. An IPE could be a regulated firm or an individual recognised by the Board to help the IPs during the CIRP.

Finally, the Board after carefully examining the scope of labor envisaged within the minutes of the CoC meetings and the engagement letters issued by the Resolution Professional in favour of Duff & Phelps came to the conclusion that D&P was only engaged to give personnel, infra based, and back-office support services. As per Board’s decision, these cannot be classified as “professional services’ falling within the definition given within the Law. Further, Duff & Phelps couldn’t be considered IPE as it was not recognized by the Board under Regulation 12. This decision made the appointment of D&P as null and void and led to penalisation of the IP in the case.

FEE for IP must be Reasonable

In the same case, the IBBI noted As per the information in Circular No. IBBI/IP/013/2018 released on 12th June 2018 that the fees payable to an appointed IPE should be reasonable. It concluded that the fee that was finalized with Duff & Phelps was exorbitant and was not meeting the set provisions. As per the findings of the IA, it was found that the Duff & Phelps were engaged at an astonishing price which was 19 times the fee paid to the RP. The services rendered in return were not at par with the price.

The Board further disbanded the arguments from RP which stated the reason for such a high fee to be paid to Duff & Phelps was due to the inherent peculiarities and complexities of the job involved. As per the RP, a few other services which were to be given by Duff & Phelps involved liaising with CBI, EOW, claim verifications, conducts of CoC meetings, etc. The Board further held take like liaising or conducting CoC meetings should be completed by the RP himself or his employees. These are the basic services expected from an RP as per the IBC and regulations of the Board. The board strongly objected to these services being outsourced to a third party by the RP.

The Board, based on the data submitted and observations made by IA held that the scope of services (given below) of Duff & Phelps included in the case

• Taking control of business,
• Initial analysis and strategy,
• Monitoring business and cash,
• Assistance in development and finalization of business resolution plan,
• Final approval of resolution plan,

do not come in the stated definition of an IPE or a “professional” as defined in the codes. All the aforementioned belonged to either the RP or the CoC or the debtor firm. Thus paying such a huge amount to a third party is unreasonable and is utter wastage of the creditors’ money.

Other Observations by the Committee

The Disciplinary Committee (DC) constituted by the Board also held:

• Appointment of a professional as mentioned in the Codes should only be on requirement for a task which could not be handled by the IRP himself.
• The task should also be out of the scope of duty of IRP, CoC, and the debtor. In such a scenario, the IRP can appoint a recognised professional or group from outside for support in conducting CIRP. Also, such appointments must be made on merits and not under the influence of any creditor or the third person.
• It is not permissible for an IP to tie-up with a third party and bid for a task jointly, where the IP and the third party can be appointed on their collective strength. This will convert a noble profession to a business proposition that manipulates the marketplace for insolvency services through anti-competitive, tie-up type arrangement.
• Finally the DC noted that by not appointing an eligible professional and by appointing an individual (Duff & Phelps) who is not qualified to be a professional, Mr. Garg (IP) has degraded his professional services.

Sanctions by the IBBI

The Board penalized 25% of fee payable to the IP for the offence in the CIRP as per agreed terms and conditions. Consequently, he was directed to undergo a pre-registration educational course from the IPA where he had to pass the Insolvency Examination again to create his credibility to take on such assignments in the future. It was also directed by the Board that the fee will be paid as determined by the Expert Committee to Duff & Phelps and the previously agreed terms for payment of the amount will be discarded.

To Summarize

The notable findings and observations made by the IBBI, will positively impact the predefined working domain of an Insolvency Professional and increase trust in the institution. With the decision, the Board managed to clearly define the scope of section 20(1)(a) and section 25(2)(d). These sections have the provisions for the appointment of execs. The Board also successfully categorised the importance of appointment of an Insolvency Professional Entity recognized as per the Code. However, while giving the decision it also made it clear that it is not limiting the scope of appointing a working professional to give support in CIRP. It just implied that the IPs must appoint such professionals members who have established IPEs under the Code or working under regulations of a recognised regulatory body of their working domain.

On 30th June 2020, the Board came up with another amendment within the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016 which further cemented its stance on the matter. According to the amended regulation 12 (1) (a), the only objective of an appointed IPE will be to render ‘Support Services’ to the Insolvency Professionals. The amendment has broadened the role of IPEs by empowering them to render services to all IPs. This amendment had removed all the ambiguity left regarding the role of IPEs in insolvency procedures.