Time taken at tribunals in insolvency cases to be excluded from statutory 270 days: SC Decided by Supreme Court in ArcelorMittal and Russia's VTB Bank-promoted NuMetal to bid for Essar Steel.

Time taken at tribunals in insolvency cases to be excluded from statutory 270 days: SC 

Decided by Supreme Court in  ArcelorMittal and Russia's VTB Bank-promoted NuMetal to bid for Essar Steel.

Supreme Court in ArcelorMittal and NuMetal vs Essar Steel.

The Supreme Court on Thursday said the time taken up by litigations during the corporate insolvency resolution process has to be excluded from the mandatory limit of 270 days in case company law tribunals uphold the plan to revive a debt-ridden company. 

TIME BOUND RESOLUTION

The top court, in an important ruling, also stressed the need of "time-bound" disposal of corporate insolvency resolution process saying it would not only support the development of "credit markets and encourage entrepreneurship, but

would also improve ease of doing business and facilitate more investment, leading to higher economic growth and development". 

TIME SPENT ON LITIGATION IS TO BE EXCLUDED IN COUNTING 270 DAYS

A reasonable and balanced construction of this statute (the Insolvency and Bankruptcy Code) would "therefore lead to the result that, where a resolution plan is upheld by the Appellate Authority, either by way of allowing or dismissing an appeal before it, the period of time taken in litigation (in NCLT and NCLAT) ought to be excluded", said a bench of Justices R F Nariman and Indu Malhotra. 

ArcelorMittal and NuMetal vs Essar Steel.

It dealt with several provisions of the Insolvency and Bankruptcy Code (IBC) and said that the timeline of 270 days to complete the resolution process of a corporate debtor firm should be ordinarily adhered to.

The observation came in a verdict in which it granted one more opportunity to steel and mining major ArcelorMittal and Russia's VTB Bank-promoted NuMetal to bid for Essar Steel, provided the two pay off the non-performing assets (NPAs) of their related corporate debtors within  two weeks. 

"The Code was passed after great deliberation and pursuant to various Committee Reports," it said, adding that "the existing framework for insolvency and bankruptcy was not only inadequate and ineffective, but resulted in undue delays in resolution". 

The bench set out as to how corporate insolvency resolution process would work from inception to the last step and dealt with IBC provisions which require that either the corporate debtor be taken over by another management and run as a going concern or, if that failed, go into liquidation. 

VERDICT BY NCLT AND NCLAT ON TIME-BOUND RESOLUTION UNDER IBC ,2016

It said the time consumed in NCLT and NCLAT should not harm the litigants, but there was a need to strike a balance.

"Given the fact that both the NCLT and NCLAT are to decide matters arising under the Code as soon as possible, we cannot shut our eyes to the fact that a large volume of litigation has now to be handled by both the aforesaid Tribunals," it said.

"What happens in a case where the NCLT or the NCLAT decide a matter arising out of Section 31 of the Code beyond the time limit of 180 days or the extended time limit of 270 days? ...the act of the Court shall harm no man...," it said. 

EMPLOYEES INTEREST SHOULD BE CONSIDERED AS SIGNIFICANT

The only reasonable construction of the Code is the balance to be maintained between timely completion of the corporate insolvency resolution process, and the corporate debtor otherwise being put into liquidation, it said.

"We must not forget that the corporate debtor consists of several employees and workmen whose daily bread is dependent on the outcome of the corporate insolvency resolution process", it said, adding that if there is a resolution applicant who can continue to run the corporate debtor as a going concern, every effort must be made to try and see that this is made possible. 

An Insolvency Professional was suspended for one year for the violation of IBC 2016 provisions.

An Insolvency Professional was suspended for one year for the violation of IBC 2016 provisions.

In the matter of Ms. Bhavna Sanjay Ruia

ROLE OF INSOLVENCY PROFESSIONAL UNDER IBC 2016

 An IP, as IRP / RP, exercises the powers of Board of Directors of a corporate debtor undergoing CIRP. He manages the affairs of the corporate debtor as a going concern. He is the custodian of the property of the corporate debtor and protects and preserves the value of such property. He conducts the entire CIRP and manages the operations of the corporate debtor during the CIRP period. His responsibilities during CIRP are detailed in the Code and relevant regulations. He has similar onerous responsibilities in liquidation of corporate debtors, and individual insolvencies and bankruptcies. These responsibilities require highest level of standing, calibre and integrity which inspire confidence and trust of the society and the stakeholders. In sync with the role of IPs under the Code, the regulations provide for their capability and conduct and requires an individual to be a fit and proper person for continuation of his registration as an IP.

HEAVY FEES BY AN IRP IS NOT ACCEPTABLE

In this background, the DC finds that the conduct of Ms. Ruia is unacceptable as explained hereunder: i) The fee (Rs.13.75 crore comprising IRP fee of Rs.5 crore for the first one month and RP fee @ Rs.1.75 crore for five subsequent months) contracted by Ms. Ruia is exorbitant and not reasonable reflection of work to be done by her. It is unreasonable by any standard - in relation to the compensation of the MD & CEO of the same corporate debtor, fee of an IP for a similar CIRP, fee earned by Ms. Ruia as IRP / RP in a similar CIRP, opportunity cost of time of Ms. Ruia, fee payable to a liquidator of a similar corporate debtor, outstanding debt of Rs.4.16 crore of the corporate debtor, etc. 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. The DC finds that Ms. Ruia has violated the provisions of clauses 10, 24, 25 and 27 of the Code of Conduct for Insolvency Professionals under the First Schedule of the Regulations and section 20 of the Code.

NOT UNDERSTANDING THE CODE

ii) Ms. Ruia has demonstrated her inadequate understanding of the law to the effect that

(a) the Code prescribes the fee of a liquidator;

(b) the fee of a liquidator is linked to book value of assets,

(c) the operational creditor appoints RP for CIRP and fixes his fee;

(d) an IRP / RP meets the expenses of running the corporate debtor as a going concern from his professional fee;

(e) an IRP / RP meets the expenses of CIRP from his professional fee; (f) an IRP / RP needs to deploy additional staff as the existing personnel of the corporate debtor do not cooperate and the Hon’ble Adjudicating Authority does not hear matters for months,

 (g) an IRP / RP engages hundreds of personnel to run a corporate debtor; etc.

VIOLATION OF CLAUSE 10 OF THE IBC 2016

This poorly reflects on her competence as IP and lack of understanding of the Code and the Rules and Regulations made thereunder. It is doubtful if she can be entrusted with a CIRP given her level of knowledge and understanding. The DC finds that Ms. Ruia has violated the provisions of clause 10 of the Code of Conduct for Insolvency Professionals under the First Schedule of the Regulations.

ATTEMPT TO MISLEAD THE STAKEHOLDERS

 iii) She has attempted to mislead the stakeholders, the Board and the DC by a series of misrepresentation of facts. A few examples are: a) She misled an operational creditor to sign term sheet engaging her as RP and fixing her fees even before commencement of the CIRP. b) According to the term sheet, her fee does not include the cost of public announcement. She has now misrepresented that her fee includes the cost of public announcement. c) According to the term sheet, her fee as IRP / RP is exclusive of (a) professional fee for Valuers, Advocates, Solicitors, Forensic Auditors, Consultants and Advisers, and (b) fee for representation before the Hon’ble NCLT.

She has now misrepresented that her fee as IRP / RP includes

 (a) fee for CA / CS professional firms,

(b) fee for services of professional firms,

(c) fee for CA / professional representative for representation before various tax authorities,

(d) fee for lawyers,

(e) fee for professionals,

(f) fee for project valuers, etc.

 d) She has misrepresented that she would meet all running expenses of the corporate debtor and all cost of running the IRP from her fees.

e) Vide her submission dated 22nd March, 2018, Ms. Ruia stated that professionals hired for specialised and critical operations shall be paid by the corporate debtor as part of CIRP and routine staff, assistants and supervisors appointed for the purpose of monitoring within the scope of her duties shall be paid by her from her fees.

Vide her submission dated 21st April, 2018, she has misrepresented that her fee as IRP / RP includes

(a) fee for CA / CS professional firms,

(b) fee for services of professional firms,

(c) fee for CA / professional representative for representation,

 (d) fee for lawyers, (e) fee for professionals,

(f) fee for project valuers, etc.

f) She computed the fee of a liquidator based on total assets of Rs.6,861 crore while total assets of the corporate debtor is only Rs.2,761 crore. She computed fee of a liquidator based on book value while the law required it to be computed on realised value.

g) Ms. Ruia misrepresented the facts and situations and has not been honest and straightforward in her professional dealings.

She has damaged the reputation of a fledging profession beyond repair. Her conduct does not inspire confidence and trust of the stakeholders.

FINDINGS

The DC finds that she has violated the provisions of clauses 1, 2, 10, 12 and 24 of the Code of Conduct for Insolvency Professionals under the First Schedule of the Regulations. iv) Ms. Ruia has admitted that she planned for 6 or 9 months of CIRP. The term sheet provides for professional fee of Ms. Ruia as RP. She took away the rights of the CoC to appoint an IP of its choice as RP and fix his fees.

 By misguiding an operational to sign a term sheet, she compromised her independence and attempted to jeopardise the interests of the CoC. The DC finds that Ms. Ruia has violated the provisions of clauses 1, 2, 5, 10, 12, 24 of and 27 the Code of Conduct for Insolvency Professionals under the First Schedule of the Regulations. 5.3

 Ms. Ruia has engaged in acts that have brought disrepute to the noble profession of IP and severely compromised her status as a fit and proper person. The overall conduct of Ms. Ruia, as detailed above, is not unbecoming of an IP. 

The DC concludes that Ms. Ruia has contravened the provisions of clauses 1, 2, 5, 10, 12, 24, 25 and 27 of the Code of Conduct for Insolvency Professionals under the Insolvency and Bankruptcy Board of India (Insolvency Page 9 of 9 Professionals) Regulations, 2016 read with regulation 7(2)(b) of the said Regulations and section 20 of the Code. 6. Order 6.1

Ms. Ruia has repeatedly misled the stakeholders, the Board and the DC. She has compromised her status as a fit and proper person and damaged the reputation of the profession. Her conduct, which is violation of various provisions of the law, as explained above, cannot be ignored. 

The DC, however, notes that Ms. Ruia is new to the insolvency profession and she has stated that till date she has not undertaken any process under the Code. 6.2 Section 220(2) and (3) of the Code read with regulation 11(8) of the Regulations empower the DC to impose penalty as specified in sub-section (3) of section 220 or suspend or cancel the registration of the IP.

Further, where any IP has contravened any provision of the Code or rules or regulations made thereunder, the DC may impose a penalty which shall be

(i)         three times the amount of the loss caused, or likely to have been caused, to persons concerned on account of such contravention; or

(ii)       (ii) three times the amount of the unlawful gain made on account of such contravention, whichever is higher and that where such loss or unlawful gain is not quantifiable, the total amount of the penalty imposed shall not exceed more than one crore rupees.

(iii)       In the instant case, the Hon’ble Adjudicating Authority prevented Ms. Ruia from causing loss to others or making unlawful gain. 6.3 Accordingly, the Disciplinary Committee, in exercise of powers conferred under section 220 (2) of the Code read with sub-regulation (8) of regulation 11 of the IBBI (Insolvency Professionals) Regulations, 2016, hereby suspends the registration of Ms. Bhavna Sanjay Ruia, Insolvency Professional [Registration No. IBBI/IPA-002/IP-N00371/2017-2018/11065] for a period of one year.

(iv)      It sincerely expects that Ms. Ruia will use this one year to strengthen her competency and ethical standards. 6.4 This Order shall come into force on expiry of 30 days from the date of issue of this order. 6.5 A copy of this order shall be forwarded to the ICSI Institute of Insolvency Professionals where Ms. Ruia is enrolled as a professional member.

For full order , please click the following link:

http://ibbi.gov.in/webadmin/pdf/whatsnew/2018/May/Bhawna%20Ruia%20Order%20dated%20May%203,%202018_2018-05-03%2018:27:52.pdf

IIBBI Slaps Penalty on Electro Steel’s Resolution Professional

IBBI Slaps Penalty on Electro Steel’s Resolution Professional 

The bankruptcy regulator has slapped a penalty and issued a show cause notice to the resolution professional of Electrosteel Steels, Dhaivat Anjaria, who is backed by consulting PWC for neglecting the claims made by operational creditors. 

The Insolvency and Bankruptcy Board of India has ordered a fine of one-tenth of the amount of fees that is payable to him as RP of Electrosteel Steels within 30 days of the order. 

Quantum of Penalty

IBBI stated that ideally the penalty on Anjaria for the violations would be three times the loss caused to the person concerned. However, considering that Anjaria is new to the insolvency professional IBBI said that “a penalty equal to one tenth of the total fee payable to him as IRP and RP in the CIRP of Electrosteel Steels would meet the ends of justice.”

Omitting the Claim by an Operational Creditor

Anjaria has invited claims on August 4, 2017 and an operational creditor M/s National Sales had submitted a claim on August 16 which the RP did not include in the list of claims nor did he justify the rationale to claimant. The RP neglected the claim when the claimant resubmitted the claims on October 3. On receiving complain from the operational creditors, when IBBI sough clarifications from Anjaria thrice (between November 17 to January 3) “he failed and neglected to respond to three communications of the Board and the resolution plan was to close on 16th January, 2018,” IBBI said. 

REPLY TO SHOW CAUSE NOTICE

On January 29, a show cause notice was issued seeking explanation on “why disciplinary action should not be initiated against him for failure to respond to the clarifications sought through various mails by IBBI”.

Anjaria responded saying that claim was subject of ongoing proceedings. He admitted the claim after seeking approval from Adjudicating Authority seeking guidance on admission of disputed claims which was admitted on January 25.

The claim of Rs 72 lakh would have meant a penalty of almost more than Rs 2.1 

COURTESY : THE ECONOMIC TIME S

ACcrore. However, Anjaria would only be required to pay a tenth of his fee.