Delhi High Court Grants Partial Stay On IBBI’s Order Against Bhushan Steel’s Resolution Professional
Delhi HC has granted a partial stay on IBBI’s order which had restrained Bhushan Steel’s RP from accepting any new assignments.
The Delhi High Court has granted a partial relief to Bhushan Steel’s resolution professional against an order passed by India’s bankruptcy regulator.
The high court stayed the operation of the order which restrained Mahender Khandelwal, the insolvency resolution professional, from pursuing new assignments. This comes after Khandelwal deposited the amount for the penalty imposed by the Insolvency and Bankruptcy Board of India.
The court also directed Bhushan Steel’s Committee of Creditors to deposit Rs 12 crore in order to secure reimbursement of the legal expenses charged to Bhushan Steel. The regulator had alleged that charging the amount to Bhushan Steel is violation of the IBBI regulations.
The Bankruptcy regulator had alleged that Khandelwal violated the rules for insolvency professionals by not disclosing existing engagements and that he was a former partner with a restructuring services provider he hired, the board said. He displayed a “negligent approach” and a misunderstanding of the insolvency code during the resolution process of Bhushan Steel, it said.
The action against him came a month after the board had issued a show-cause notice after a preliminary investigation. The regulator has been tightening the norms governing conduct of insolvency professions. It recently imposed a penalty on the resolution professional of Electrosteel Steels Ltd. for neglecting claims.
The regulator had imposed penalty on the following grounds...
Lack Of Adequate Disclosures
An insolvency professional is enrolled by an agency, which lays out the code of conduct for resolution professionals under the IBC. A resolution professional has to make periodic disclosures to such an agency under this code. The insolvency board held Khandelwal violated the code by:
- Making a delayed disclosure to the insolvency professional agency about ongoing engagements as a resolution professional. While the regulations prescribe a time limit of three days, Khandelwal made a disclosure beyond the stipulated time limit.
- Failing to disclose that he used sing services of BDO Restructuring Advisory India LLP in which he was a former partner.
Section 208 of the code requires an insolvency professional to take reasonable care and diligence while performing duties. The insolvency regulatory held that Khandelwal violated this section and said that his response and justification was not “satisfactory”.
Classifying Legal Fees As IRP Costs
The Insolvency and Bankruptcy Code limits insolvency resolution process costs to certain expenses, amounts and fees. However, it excludes fees paid to a lender’s legal counsel as these will hurt a company already in stress. A June 2018 circular by the regulator spelled out that insolvency resolution process costs must not include any expense incurred by a member of committee of creditors or a professional engaged by it. Similarly, the code prohibits an insolvency professional from encroaching or performing the role of the CoC.
IBBI alleged that Khandelwal violated the norms relating to insolvency costs by:
- Including the fee of Rs 12.09 crore payable to the lender’s legal counsel as an insolvency resolution process cost.
- Appointing legal counsel for creditors that are independent bodies.
- Acceding to the suggestions of CoC on the costs relating to the legal fees.
- Making payments for services rendered by the law firm for a period prior to commencement of insolvency process.
Calling Khandelwal’s defense not satisfactory, the insolvency regulator directed him to make good the loss.
Sharing RP Fees With A Firm
The IBC only permits an individual to be an insolvency professional. Fees payable to the professional must be approved by the CoC and should be included in the insolvency resolution process costs.
According to the regulator’s show-cause notice, Khandelwal had shared his fees for professional services with BDO Restructuring Advisory India LLP till December 2017. The IBBI held this to be in violation of the rules governing fees of resolution professionals.
Not Guilty Of One Charge
The bankruptcy board had also alleged that the process to invite an expression of interest for Bhushan Steel was not transparent as the bankruptcy professional accepted two EOIs beyond the deadline.
The regulator dropped this charge after concluding that the professional accepted the EOIs on the directions of CoC and there was no specific provision in the 2016 corporate insolvency resolution process regulations which prohibited such conduct.