Mohan Lavi

Bankrupt ethics

Mohan Lavi | Updated on May 13, 2018

The shenanigans of insolvency professionals

Horace is quoted as saying, “What’s well begun is half-done”. This is a quote that would appear to suit the Insolvency and Bankruptcy Board of India (IBBI) – the body that oversees the implementation of the Insolvency and Bankruptcy Code.

The National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) are full of complicated cases such as Binani Cements where there is a development every alternate day. In this situation, the IBBI has had to decide on information that can be shared on right to information (RTI) applications and more importantly, the competence and ethical standards of Insolvency Professionals (IPs).

Low dues, high fees

The IBBI has heard and passed orders against at least four IPs; one was barred from continuing as IP for non-provision of information, one proposal was rejected for not following the principles enunciated in the Code.

In a recent decision, the disciplinary board of the IBBI had to pass an order on the exorbitant fees charged by an IP in her very first case as an IP.

A company that was due ₹ 4.16 crore from Madhucon Projects Ltd filed an insolvency petition under the Code and appointed an IP. While filling in the Term Sheet for the assignment, the IP quoted a fee of ₹5 crore till the first meeting of the Committee of Creditors and an amount of ₹1.5 crore every month thereafter.

Since the insolvency process under the Code is time-bound, a mathematical addition concluded that the total fees of the IP would be ₹14 crore, far more than the amount due from Madhucon!

Since the job of an IP is to run the company till a resolution is decided, a comparison was made with the amounts paid to all the Directors of the Company, which was ₹1.10 crore per annum. The IP attempted to justify the high fees stating that it was necessary to appoint experts and place them appropriately, the turnover of the company was ₹Rs 693 crore and its assets were worth ₹2,761 crore and it had many subsidaries.

None of this impressed the disciplinary committee of the IBBI. In a scathing order, they terminated the registration of the IP for a period of one year stating that “she 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. The Committee 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”. The Committee ended the order with the hope that the IP will use this time to strengthen her competency and ethical standards.

Decisions such as these offer hope that unethical practices in the matter of Insolvency Professionals will be dealt with an iron hand.

RTI applications

However, when it comes to responding to RTI applications, the IBBI appears to have a developed a formula — not provide specific information using the decisions in Thalappalam Ser. Coop. Bank Ltd. & Ors, v. State of Kerala & Ors, Central Board of Secondary Education & Anr. vs. Aditya Bandopadhyay & Ors and Sh. Alok Shukla vs. CPIO, SEBI.

This was the logic used in an RTI application asking whether preference was being given to certain consulting firms for appointment as IPs.

Having made a good start, one expects the IBBI to first maintain, and then improve their present quality levels.

The writer is a chartered accountant

Published on May 13, 2018

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