In the matter of Sundaresh Bhat
IBBI/IP/INSP/2021/79/3468/560
Facts:
1.CIRP of the CD (ABG Shipyard) was initiated vide order dated 01.08.2017 by the Hon’ble NCLT, Ahmedabad Bench (AA) on an application filed by ICICI Bank Limited. Mr. Sundaresh Bhat was appointed as an Interim Resolution Professional who was later confirmed as the Resolution Professional. The Committee of Creditors (CoC) passed a resolution on 20.02.2019 for liquidation of the CD which was approved by the AA vide order dated 25.04.2019 and Mr. Sundaresh Bhat was appointed as the Liquidator
2.Show Cause Notice (SCN) was issued to Mr.Bhat under section 220 of the Insolvency and Bankruptcy Code, 2016 (Code) read with regulation 13 of the Insolvency and Bankruptcy Board of India (Inspection and Investigation) Regulations, 2017 (Inspection Regulations) and regulation 11 of the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations 2016 (IP Regulations).
3.The contravention in the alleged SCN was:
a. It was alleged that Mr.Bhat violated Clause 9 of the Code of Conduct as specified in the First Schedule of IP Regulations (Code of Conduct) which states that IP shall not influence the decision or the work of the CoC or debtor, or other stakeholders under the Code, so as to make any undue or unlawful gains for himself or his related parties or cause any undue preference for any other persons for undue or unlawful gains and shall not adopt any illegal or improper means to achieve any mala fide objectives
b. As per the mail records dated February 3, 2021, March 12, 2021, April 21, 2021, April 22, 2021 and August 11, 2021 to BMCL Private Limited (valuer) indicate that Mr.Sundaresh Bhat tried to dictate the methodologies for valuation and also to influence the valuation and also intimidated the valuer that no fees will be paid if the valuation is not in accordance with his views.
c. Mr.Bhat prescribed non-refundable participation fee of Rs. 5,00,000/-, Rs. 10,00,000/-, Rs. 10,00,000/- and Rs.50,000/- respectively at the time of submission of Expression of Interests (EOI) and violated clause (d) of sub-regulation (4) of amended regulation 36A of CIRP Regulations read with clause 12, 13 and 14 of the Code of Conduct
d. He appointed two registered valuers namely Manish Kaneria and Rakesh Narula vide respective engagement letters dated 30.04.2019. However he informed SCC in its meeting held on 19.06.2019, that he appointed RBSA Valuation Advisors LLP and Rakesh Narula and Co. to conduct the valuation of the assets of the CD instead of Manish Kaneria and Rakesh Narula. Both RBSA and Rakesh Narula were not registered valuer. Board Circular IBM/RV/019/2018 dated 17.10.2018 specifically provides that with effect from 01.02.2019, no insolvency professional shall appoint a person other than a registered valuer to conduct any valuation under the Code or any of the regulations
e. Circular No. IP/003/2018 dated 03.01.2018 prohibits an IP to outsource any of his duties and responsibilities under the Code. It is noted that Mr. Sundaresh Bhat allowed Mr. Manish D Kaneria and Mr. Rakesh Naurla to outsource appointment of valuers in different assets class to others.
f. He appointed BDO Restructuring Advisory LLP (BDO), where he is a partner, for providing support services in the liquidation process. It is observed from 1st to 9th quarterly progress reports filed before AA that fee/remuneration charged by BDO varies in every quarter. Further in addition to fees, out of pocket expenses (OPE) to BDO has also been charged in every quarter. In certain quarters, no fees have been charged by BDO but OPE has still been charged. It is also observed that since fourth progress report onwards, the OPE of Liquidator and BDO has been presented together as expenses for liquidator’s team. Fixing of fee with such variation and without any basis or calculation for fixing fees is not in conformity with Regulation 7 of the liquidation Regulations.
Issue:
1.Whether he violated clause of the code of Conduct?
2.Whether he violated clause (d) of sub-regulation (4) of amended regulation 36A of CIRP Regulations read with clause 12, 13 and 14 of the Code of Conduct?
3.Whether he violated Regulation 7(1) read with Regulation 35(2) of Liquidation Regulations, Clause 1 and 14 of the Code of Conduct and IBBI Circular No. IBBI/RV/019/2018 dated 17.10.2018?
4.Whether he violated Regulation 7(1) of Liquidation Regulations, read with Clause 1, 2, 14 and 25A of the Code of Conduct and Board Circular dated June 12, 2018 (No. IBBI/IP/013/2018) and Board Circular No. IP/004/2018 dated 16th January 2018?
Submissions of Mr.Bhat:
1.He submitted that SCN has presupposed the valuation being discussed with registered valuers for an official valuation under the Liquidation Regulations. There is no provision under the law for a revised valuation under Regulation 35 of the Liquidation Regulations to be conducted and this market price assessment exercise undertaken by BMCL Private Limited (“BMCL”) did not seek to override or undercut the official valuation.
2.He submitted that due to change in market conditions on account of the COVID-19 pandemic between 2020 – 2021, there was a shift in the prices of metals and steels. One of the major assets of the CD, that was pending sale was the metal and steel scrap materials at the Dahej shipyard of the CD. He submitted that exercise was aimed at assessing the market realizable value of a part of the assets of the CD which was exposed to frequent fluctuation in price driven by market dynamics, and not of the CD or its entire assets.
3.Clause 9 of the Code of Conduct pertains to an IP influencing either the CoC, debtor or other stakeholders under the Code. Under Regulation (2)(1)(k) of the Liquidation Regulations, `Stakeholders’ is defined as “the stakeholders entitled to distribution of proceeds under section 53”. BMCL is not a stakeholder entitled to distribution under section 53 of the Code and accordingly, does not classify as a ‘stakeholder’ as prescribed in the Code and Liquidation Regulations.
4.He submitted that `Stakeholder’ means a debtor, a creditor, a claimant, a service provider a resolution applicant and any other person having an interest in the insolvency, liquidation, voluntary liquidation, or bankruptcy transaction under the Code”. BMCL is not a service provider either. The ‘Service Provider’ is defined under Regulation 2(1)(h) of the Grievance Regulations, ‘Service Provider’ is defined as “an insolvency professional agency, an insolvency professional, an insolvency professional entity or an information utility”. He submitted that on a co-joint reading of the above legal provisions, it was clear that BMCL does not fulfil the criteria of persons stipulated under Clause 9 of the Code of Conduct as, BMCL is not in the committee of creditors or debtor nor is a ‘stakeholder’ under the Code.
5.He submitted that when the auction process was conducted vide advertisements dated 17.09.2019, 27.09.2019, 22.10.2019 and 11.11.2019 (“EAuctions”), proviso to Schedule I (1)(3) of the Liquidation Regulations was not in force and there was no embargo in the Liquidation Regulations against prescribing non-refundable participation fee in the auction process for sale of assets under liquidation
6.He submitted that amendment is not retrospective. Therefore, when the proviso to Schedule I (1)(3) of the Liquidation Regulations was not in effect at the relevant time when E-Auctions were conducted by him and he cannot be held to be in contravention of any applicable law.
7.He submitted Mr. Manish Kaneria was appointed as registered valuer by him which was evident from (i) his Contract/ engagement letter dated 30.04.2019which was on the letter of head of Mr. Manish Kaneria wherein his registration number with the IBBI was clearly mentioned; and (ii) the said engagement letter in the first paragraph states “this letter of engagement defined the terms of engagement between Mr. Sundaresh Bhat (“Client / Liquidator)” and independent, registered valuer, Mr. Manish Kaneria (“Registered Valuer”) in connection with the valuation services to be provided by the Registered Valuer to Client..” Therefore, it is abundantly clear that the appointment of Mr. Manish Kaneria.
8.He usbmitted that Given the limited pool of the registered valuers or entities at the relevant time, he was unable to find two registered valuers having the requisite qualification/ registration to value all three asset classes (i.e. Land & Building; Plant & Machinery; and Securities & Financial Assets), for appointment. To address this issue the engagement letter was provided with a provision to obtain inputs from those who are registered and the same cannot be construed as outsourcing of the duties.
9.As regards the appointment of IPE (in which the concerned IP is a partner or director) by IP in connection with any work relating to his assignment, the same is expressly permitted in terms of the explanation supporting Clauses 23A to 23C of the Code of Conduct for Insolvency Professionals under First Schedule to the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016
10.He submitted that the fee of the IPE was not variable or based on vague criteria. He appointed the IPE to provide support services for the tenure of the Corporate Debtor’s liquidation and that has been duly disclosed. Payment was made given the scope of work, complexity and reasonableness commensurate to the work and market practice, the
stakeholders provided their concurrence/ approval to payment.
11.He submitted that not only were the rates of the IPE fees fixed after due advice from the stakeholders but even the payment of the fee (which has only been partly paid till date) was made after due consultations with stakeholders. Accordingly, not only has the fees of the IPE been affixed in due consultation with the stakeholders after duly taking into account the scope of work, complexity and reasonableness commensurate to the work and market practice, the fees so fixed was in fact far lower than the work being undertaken as per market standard.
Order:
1.BMCL Private Ltd. had been engaged not for doing the valuation of the assets of CD but for doing market assessment of the assets of the CD on the advice of SCC, so taking the lenient view it dropped the proceeding under Clause 9 of the Code of Conduct.
2.IBBI accepted the submission extent of non-application of regulation 36A(4)(d) and regulation 36B (4) of CIRP Regulations but hold him guilty of violating clauses 13 and 14 of the Code of Conduct under IP Regulations.
3.IBBI held that he violated Regulation 7(1) read with Regulation 35(2) of Liquidation Regulations, Clause 1 and 14 of the Code of Conduct and IBBI Circular No. IBBI/RV/019/2018 dated 17.10.2018.
4.He violated Regulation 7 and Clause 25A of the code of conduct Regulations.
Rationale:
1.It noted that in dealing with other professionals, especially valuers, abundant caution is required so as to avoid the situation of influencing the end results; which otherwise required to be carried out independently. It noted that BMCL was appointed for market assessment but not for valuation.
2.It noted that prescription of non-refundable participation fee by Mr. Sundaresh Bhat in successive auctions, despite the failure of previous auctions, would have acted as a deterrent for prospective bidders and would have led to limited participation and resultant failure of the auctions. The prospective participants were unaware that the condition of non-refundability of participation fee shall be diluted in such scenarios where the auction fails, as such, some prospective bidders may not have even participated in the auction. Such misuse of authority on part of the liquidator defeated the very objectives of the Code to maximize value of assets of the CD and complete e process in a time-bound manner
3.It held that Mr..Bhat has not acted as per IBBI Circular No.IBBI/RV/019/2018 dated 17.10.2018 which mandates the liquidator to appoint only registered valuers with effect from 01.02.2019 to conduct valuation under the Code and Regulations made thereunder. Rule 8(2) of Valuation Rules provides for obtaining inputs for his valuation report or get a separate valuation for an asset class conducted from another registered valuer whereas Regulation 35(2) of Liquidation Regulation provides for appointment of two registered valuers for each class of asset by the liquidator
4.DC notes that Mr. Sundaresh Bhat has not stated any criterion or basis for calculating fees of BDO which is variable as can be observed from progress reports filed before AA. Fixing of fees having such wide variation without fixing any criterion or basis for calculating fees of IPE is not in conformity with the provisions of Regulation 7(1) of Liquidation Regulation. Charging of OPE incurred by him and BDO together is against the intend of Board Circular No. 1P/004/2018 dated 16th January 2018 which provides that professionals appointed by an IP shall raise bills/invoices in his /its name towards such fees, and such fees shall be paid to his /its bank account.
5.Drawing and charging unreasonable amount as fee is akin to overcharging at the expense of all the creditors of CD, whose liquidation estate Mr. Sundaresh Bhat is holding as a fiduciary. An IP has to take due diligence while deciding the fee payable to him but also other expenses incurred by him. In the present case, Mr. Sundaresh Bhat has paid BDO a fee far more than that of his own fee plus OPE. The DC observed that terms and references of the work and the renumeration were needed to be spelt out in the contract clearly to dispel any suspicion on the ground of connivance.
6.DC, in 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 hereby suspends the registration of Mr. Sundaresh Bhat for a period of two years.
Order copy: