Bharati Defence insolvency: NCLT finds ‘conflict of interest’ between Edelweiss ARC and E&Y

The Mumbai bench of the National Company Law Tribunal (NCLT) has made damning observations on Edelweiss ARC and Ernst & Young while ordering the liquidation of debt-laden ship builder Bharati Defence and Infrastructure Ltd on Monday.

Citing conflict of interest, the NCLT removed Dhinal Shah, a partner at Ernst & Young and the resolution professional (RP) for Bharati, and named Vijay Kumar V Iyer from Deloitte to oversee the liquidation process.

NCLT observed that E&Y was engaged by Edelweiss ARC (whose resolution plan was thrown out by the insolvency court) through a service agreement.

The Committee of Creditors (CoC) — in which Edelweiss had a 82.7 per cent voting share — cleared the resolution plan of Edelweiss before it was brought to the NCLT for approval.

Conflict of interest

“The RP admitted that E&Y provided support services to him during the corporate insolvency resolution process (CIRP). Further, RP has delegated his authority and duties under CIRP to Dinkar Venkatsubramaniam by a Power of Attorney. Dinkar Venkatsubramaniam is also a partner of E&Y Restructuring LLP.

Further, E&Y was given the mandate of investment banker for the corporate debtor (Bharati) to find investors. From the records submitted by the parties, it is noted that the disciplinary committee of the Insolvency and Bankruptcy Board of India (IBBI) after issuing show cause notice and an opportunity of hearing, imposed a penalty of ₹1 lakh on Dinkar Venkatsubramaniam on August 23, 2018, in another insolvency matter of JEKPL Pvt Ltd. In spite of disciplinary proceedings initiated by IBBI, RP has delegated his power to Dinkar Venkatsubramaniam.

The resolution plan has not given due consideration to the interest of all the stakeholders.

It is noted that E&Y/E&Y LLP is providing entire service in the current CIRP like a single window system — the RP Dhinal Shah is partner of E&Y, the Power of Attorney holder Dinkar Venkatsubramaniam is also from E&Y, RP’s team members are also from E&Y, the investment banker appointed during the CIRP is also from E&Y.

“This creates a conflict of interest. We believe that the RP and CoC have failed to ensure appropriate checks and balances and failed to implement ‘Chinese wall’ concept during the entire CIRP. Further, this will also act as a monopoly in the entire CIRP, which needs to be examined by IBBI. Therefore, we direct IBBI to examine this issue and to frame suitable guidelines,” Ravikumar Duraisamy and V P Singh wrote in the 14 January order.

“Illegal” decision

The erstwhile promoters of Bharati, Vijay Kumar and PC Kapoor, told NCLT in an application that the decision of RP to delegate his powers to Venkatsubramaniam, was “illegal” because it infringed Regulation 3(3) of the CIRP Regulations as he is a partner of E&Y.

“The applicants (Kumar and Kapoor) believes that the resolution plan submitted by Edelweiss ARC is the plan prepared by E&Y under the service agreement. In such case, the RP and Edelweiss ARC cannot be said to have duly examined the resolution plans submitted by all resolution applicants without bias and prejudice. Further, it is evident that E&Y has been directly/indirectly managing and conducting the CIRP and has done so in a manner to favour EARC and EY itself,” the former promoters said.

Dhinal Shah, the RP, has denied all allegations made by the erstwhile promoters of Bharati. “The Power of Attorney was given to Dinkar Subramaniam after approval of the CoC. EY Restructuring LLP is the Insolvency Professional Entity and not EY LLP. EY Restructuring LLP and EY LLP are two separate entities and therefore the present scenario is not covered under Regulation 3(3) of the CIRP Regulations,” Shah contended in an application submitted to NCLT.

He also submitted that the CoC “approved resolution plan has been independently prepared by Edelweiss ARC and not by any member of RP’s team.”

Shah further said that he “verified and confirmed that out of the five resolution plans received, only the plan of Edelweiss ARC was found in compliance with the provisions of Section 30(2) of the IBC.” Besides, “E&Y was engaged by Edelweiss ARC by a service agreement to undertake a background study of the corporate debtor before the initiation of the CIRP and later RP was appointed by this Bench (of NCLT)”.

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