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IBBI imposes a penalty on IP for contraventions in terms of wrongful payment of pre-CIRP dues

In the present case, the Corporate Insolvency Resolution Process (CIRP) of the Corporate Debtor (CD) was initiated vide order dated 05.07.2019 by the Hon’ble NCLT, Chennai Bench (AA) on an application filed by IDBI Bank Limited under section 7 of the Code and Mr. Savan Godiawala was appointed as an Interim Resolution Professional who was later replaced by Mr. Abhijit Guhathakurta as the Resolution Professional vide order of AA dated 10.09.2019. The AA passed an order for liquidation vide order dated 12.08.2021 and Mr. Ayyamplalayam Venkatesan Arun was appointed as the Liquidator. The Liquidation order was passed in continuation of the dismissal order dated 12.08.2021 passed in an application which was filed under section 12A of the Code seeking withdrawal of CIRP of the CD. Being dissatisfied with the common order dated 12.08.2021 passed by the AA, the promoter of the CD preferred the two Appeals before the NCLAT which in turn dismissed the same vide common judgment dated 28.01.2022. Being aggrieved by the order of NCLAT, the promoter of CD filed an appeal before the Supreme Court. Thereafter, the Supreme Court vide judgment dated 03.06.2022, quashed and set aside the judgment delivered by the learned NCLAT; and allowed the application filed by the RP before the AA for withdrawal of CIRP of the CD under section 12A of the Code and Regulation 30A of the CIRP regulations.

In the present case, it was noted that the CIRP of the Corporate Debtor commenced on July 5, 2019. It was observed on perusal of the minutes (Agenda item no 5) of the 5th Committee of Creditors (CoC) meeting held on November 13, 2019, that the Resolution Professional (RP) updated the CoC about the key developments subsequent to the previous meetings. One of the matters on which RP updated the CoC in its 5th meeting was regarding payment of pre-CIRP dues to some CD vendors. Under Agenda item no. 5 under the heading "BEML Update", RP apprised the CoC members about the meeting which took place on October 30, 2019, between BEML, IDBI Bank and RP, wherein BEML inter-alia requested him to resolve the issue of payment to concerned vendors. The minutes' further records that RP apprised BEML that these dues were prior to the insolvency commencement date (ICD) and need to be claimed by the claimants under the provisions of the Code and Regulations made thereunder and also that payment to such operational creditors could be made only upon obtaining approval of the CoC. The minutes thereafter state that BEML further requested RP to seek approval from CoC to allow BEML to make the said payments, which were in the nature of pre-CIRP dues, directly to the vendors.

It was further observed that based on the update given under agenda item no. 5, Resolution Professional placed a separate agenda no. 9 titled "To consider, discuss and approve essential vendor payments pertaining to the period before the insolvency commencement date with respect to BEML project" for discussion and voting in the same CoC meeting, After discussion, a resolution was put for e-voting to approve essential vendor payments amounting to Rs. 463.26 lakh to six vendors pertaining to the period prior to ICD with respect to BEML project subject to due verification of the claims of these vendors.

It was also noted that e-voting on the said resolution garnered 65.29% votes supporting the resolution and the resolution was declared passed. As per Section 14(1) (b) of the Code, there is a prohibition on transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets, or any legal right or beneficial interest therein during moratorium declared by the order passed by Adjudicating Authority.

It was thus, evident that the Resolution Professional was fully aware that dues of the vendors of the CD for which BEML requested payment pertaining to the pre-CIRP period and as per Section 14(1) (b) of the Code, the same could not have been paid during the moratorium. Still, RP allowed discussion on this agenda and even put a resolution for voting by CoC members, and declared it passed as a routine matter requiring 51% votes of CoC. It is also noted from the records of discussion mentioned under agenda item no. 5 of the 5th CoC meeting that RP apprised BEML that payment to such operational creditors could be made only upon obtaining approval of the CoC. Neither the Code nor the Regulations made thereunder provide for a such provision allowing payment of pre-CIRP dues with the approval of CoC. This incorrect statement of RP attributed the CoC to agreeing to vote on the resolution for payment of pre-CIRP dues. Moreover, CoC approval cannot legitimise an action prohibited under the Code. As an RP, it is Resolution Professional's responsibility to ensure that CIRP was conducted as per the provisions of the Code and Regulations made thereunder.

Resolution Professional has, thus, failed to appreciate the essence and purpose of the declaration of moratorium under Section 14 of the Code. The payments pertaining to the pre-CIRP dues during the moratorium are in contravention of Section 14 of the Code. Therefore, approval of the CoC for such illegal payments cannot exonerate RP from his duty to abide by the provisions of the Code including maintaining the moratorium of CD.

In view of the above, the Insolvency and Bankruptcy Board of India (IBBI) was of the prima facie view that the Resolution Professional has inter-alia violated Section 14(1) (b), Regulation 7(2) (a) and 7(2) (h) of IBBI (Insolvency Professional) Regulations, 2017 read with Clause 1, 2, 3, 5 and 14 of the Code of Conduct as specified in the First Schedule of IP Regulations (Code of Conduct).

Disciplinary Committee (DC) found that the payment of pre-CIRP dues of one set of creditors was tantamount to preferential treatment to certain creditors. There is no evidence on record to suggest that Resolution Professional has approached Adjudication Authority on this issue to seek directions. 3.3.8. The Hon’ble National Company Law Appellate Tribunal (NCLAT) in the matter of Indian Overseas Bank v Mr. Dinkar T. Venkatsubramaniam, Resolution Professional for Amtek Auto Ltd., REED 2017 NCLAT Del 11532, observed as follows: “Having heard learned counsel for the Appellant, we do not accept the submissions made on behalf of the Appellant in view of the fact that after admission of an application under Section 7 of the ‘I&B Code’, once moratorium has been declared it is not open to any person including ‘Financial Creditors’ and the appellant bank to recover any amount from the account of the ‘Corporate Debtor’, nor it can appropriate any amount towards its own dues”. Thus, once the moratorium is in force, the financial creditor/operational creditor has to prefer its claim before IP, which is considered along with other claims as per law.

The Supreme Court in Committee of Creditors of Essar Steel India Limited v Satish Kumar Gupta, REED 2019 SC 11505, reinstated the existence of certain intrinsic assumptions relating to the CoC on which the principle of ‘commercial wisdom’ has been recognised. The assumptions were based on that the CoC has taken into account the fact that the corporate debtor needs to maintain itself as a going concern during the insolvency resolution process; that it needs to maximize the value of its assets; and that the interests of all stakeholders including operational creditors have been taken care of. Therefore, the Hon’ble Supreme Court held that when the CoC exercises its commercial wisdom to arrive at a business decision to revive the CD, it must necessarily take into account these key features of the Code before it arrives at a commercial decision to pay off the dues of financial and operational creditors.

Thus, any action approved by the CoC must strictly be in compliance with the provisions of the Code and the rules and regulations made thereunder. The CoC while exercising their commercial wisdom to arrive at a business decision must necessarily take into account the provisions of the Code and regulations made thereunder. Therefore, the decision of the CoC to ratify and approve the payment to vendors of the CD, in preference to other creditors, can by no stretch of the imagination come within the purview of the commercial wisdom of the CoC.

It is the duty of the IP to take reasonable care and diligence while performing his duties and to observe the compliance of the provisions of the Code and the regulations. There are various obligations which the IP needs to perform under the Code. Section 208(2) provides that every insolvency professional shall abide by the Code of conduct.

The DC noted that there cannot be exceptional or special treatment to any corporate entity in any CIRP. While reinforcing the rule of law, every company is to be given the same level playing field, irrespective of its size or the influence of people behind them. Under the existing laws, once CIRP is initiated against a CD and a moratorium is imposed, the provisions of IBC take precedence over all other laws of the country. In the instant case, payment of pre-CIRP dues to the vendors of the CD through BEML and that too in preference of other creditors had the effect of causing a disturbance in the moratorium as envisaged in the provisions of section 14 of the Code. The resolution process will be rendered meaningless if the assets of the CD are allowed to be disintegrated during the process. Thus, in view of the observations made hereinabove, the DC is of the view that the Resolution Professional has acted in contravention of section 14 and section 208(2)(a) and (e) of the Code.

In view of the above, contraventions in terms of wrongful payment of pre-CIRP dues to the vendors in case of his dealings in respect of Corporate Debtor through BEML were established beyond doubt which was not consistent with section 14 of the Code.

The contravention was established beyond doubt. The central point of debate was whether such contravention can be ignored as it stems from the actions which are firstly not taken with any mala-fide intension and secondly are taken as a requirement oozing out from commercial judgement to run the Corporate Debtor as a going concern. The case for running the Corporate Debtor (CD) as a going concern was strong, and evidence suggests that settlement of pre-CIRP dues became of crucial importance for the CD to survive the initial period. However, procedural lapses about not informing the CoC about the requirement of the code and not approaching AA to seek direction point towards dereliction of duty by the Resolution professional.

In view of the above, the Disciplinary Committee, in the exercise of the powers conferred under section 220 (2) of the Code read with Regulation 11 of the IBBI (Insolvency Professionals) Regulations, 2016 and Regulation 13 of the IBBI (Inspection and Investigation) Regulations, 2017 imposed a penalty on Resolution Professional of Rs Five lakhs and directed him to deposit the penalty amount directly to the Consolidated Fund of India (CFI).

Read Order

IBBI (DC) Order No. IBBI-DC-135-2022 Dt. 20-10-2022
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