30 July, 2018
INTRODUCTION
This newsletter covers the developments with respect to the Insolvency and Bankruptcy Code, 2016 (“Code”) during the month of June 2018. We have covered orders passed by the National Company Law Appellate Tribunal (“NCLAT”) and various benches of the National Company Law Tribunal (“NCLT”), circular issued by the Insolvency and Bankruptcy Board of India (“IBBI”) on 12 June 2018, with respect to fees of insolvency professionals and other expenses incurred during Corporate Insolvency Resolution Process (“CIRP”). Please see below the summary of the relevant orders and the said circular.
1. KAMAL KUMAR KANDPAL, EX-DIRECTOR, LEPTON PROJECTS PRIVATE LIMITED & ANOTHER VS. SANGHVI MOVERS LIMITED & ANOTHER (OPERATIONAL CREDITOR)- NCLAT, 31 MAY 2018
The Appellant filed an appeal against the order dated 09 April 2018 passed by the NCLT, Principal Bench. The issue raised by the Appellant was that no notice under section 8(1) of Insolvency and Bankruptcy Code, 2016 (“the Code”) had been served by the Respondent, despite the fact that the NCLT had admitted the application filed by the Respondent under section 9 of the Code without hearing the Appellant. Further, the Appellant also stated that it had repaid the debts payable to the Respondent before initiating this appeal, which had also been confirmed by the counsel for the Respondent. Additionally, the interim resolution professional had raised a concern with respect to payment of its fees and expenses, in case the NCLAT ordered to set aside the order of the NCLT.
The NCLAT not only set aside the NCLT order and thereby maintained status quo with respect to the functioning of the Appellant's company, i.e. the corporate debtor, but also directed the Appellant to pay INR 1,87,000 towards the professional fee and expense incurred by the interim resolution professional for managing the affairs of the Appellant's company till date.
2. STATE BANK OF INDIA VS. ADHUNIK METALIKS LIMITED- NCLT KOLKATA BENCH, 15JUNE 2018
In this matter, 2 separate applications were filed before the NCLT for a common relief, wherein it was prayed that the resolution professional should be allowed to exclude 20 days from the statutory period of 270 days. The said period (prayed for exclusion) was utilized in determining the eligibility of one of the resolution applicants.
NCLT granted the relief sought by the Applicants, on the basis of the guidelines laid down by the NCLAT in Quin Logistics India Private Limited vs. Mack Soft Tech Private Limited, for excluding such period from the statutory period of 270 days. One of the guidelines stated that such relief could be granted in case of “any other circumstance which justifies the exclusion of certain period.” In view of the said guideline, NCLT found it reasonable to exclude the 20 days period for considering the resolution plan, as not only was the corporate debtor a going concern, but it also had employed 3,000 regular employees and 10,000 casual employees. If the exclusion was not granted, the corporate debtor would go into liquidation, which in turn would be prejudice the interests of the said employees
3. RAHUL GUPTA VS. MAHESH MADHAVAN & M/S. BLACK N. GREEN MOBILE SOLUTIONS PRIVATE LIMITED-NCLAT, 21 MAY 2018
The Appellant filed an appeal against the order dated 08 December 2017 passed by the NCLT, Chennai Bench. The question before the NCLAT was whether a sub-tenant can be treated to be a corporate debtor of the owner of the house (i.e. the lessor).
The NCLAT admitted the appeal and set aside the order of the NCLT, by stating that a sub- tenant has no liability to pay the rent to the original owner of the premise. In view of the same, the NCLT was wrong in admitting the application, as it not only wrongly held Mahesh Madhavan to be an 'operational creditor' but also treated M/s. Black N. Green Mobile Solutions Private Limited as a corporate debtor in relation to the said operational creditor.
4. STATE BANK OF INDIA VS. ORISSA MANGANESE & MINERALS LIMITED- NCLT KOLKATA BENCH,
The NCLT Kolkata Bench inter alia held the following:
- Though the resolution professional is obligated to conduct/chair the CoC meetings as provided under the Code, he is not mandatorily required to be physically present for the meetings, provided that he participates in / convenes the said meeting either through an audio call or any other audio-visual means. It is pertinent to note that in her / his absence, the resolution professional could still be questioned on maintaining the integrity of such meetings.
- As far as the resolution plan provides for the mandatory contents as stipulated under regulation 38 of the CIRP Regulations and intends to reorganize the business of the corporate debtor in order for it continue running as a going concern, the transfer of 1 unit of the corporate debtor will come under the purview of reorganization of business and cannot be styled as closure of the said unit.
- An uninvoked corporate guarantee cannot be considered as a matured claim under the Code, in view of the moratorium. Hence, the interim resolution professional / resolution professional can very well refuse to admit such a claim.
5. SUMMARY OF CIRCULAR DATED 12 JUNE 2018 ISSUED BY IBBI
There have been instances where an Insolvency Professional (“IP”) has quoted fees that is highly unreasonable, such as in the order pronounced by the Insolvency and Bankruptcy Board of India (“IBBI”) on 03 May 2018 in the case of Ms. Bhawna Ruia. In light of such cases, IBBI vide its circular dated 12 June 2018 (“Circular”) has clarified norms with respect to fees of IPs and other expenses incurred during Corporate Insolvency Resolution Process (“CIRP”). This Circular is pursuant to a discussion paper titled 'Regulation of fee payable to insolvency professionals and other process costs under CIRP' (“Discussion Paper”), released by the IBBI on 01 April 2018 for seeking comments. In view of the comments received from stakeholders with respect to the Discussion Paper and in consultation with the Insolvency Professional Agency, the Circular has been released.
The Circular sets out relevant provisions of the Code read with the regulations relating to fee and other CIRP expenses in Annexure A. It also lays special emphasis on the Code of Conduct given in the Code. In view of the Discussion Paper and the Code read with the relevant regulations, the Circular has prescribed certain norms that IPs are required to adhere to.
Following are the norms to be followed by an IP:
I) the fee payable to him and other expenses incurred by him during the CIRP are reasonable, directly related to and necessary for the CIRP; and that no fee or expense other than what is permitted under the Code and the regulations made thereunder, is to be included as CIRP cost;
ii) the fees payable to an IP entity, registered valuers and other professionals is reasonable;
iii) the fee or other expenses are determined by him on an arm's length basis, in
iv) written contemporaneous records are maintained for incurring or agreeing to incur any fee or other expense;
v) supporting records of fee and other expenses incurred are maintained at least for 3 years from the date of completion of the CIRP;
vi) approval of the Committee of Creditors (“CoC”) is obtained, wherever necessary, for fees or other expenses;
vii) all CIRP related fees and other expenses are paid through a banking channel;
viii) the corporate debtor should not bear any fee or expense other than the CIRP cost;
ix) only the CIRP cost, to the extent not paid during the CIRP from the internal sources of the corporate debtor, shall be met in the manner provided in the Code for submission of resolution plan and distribution of assets.
An illustrative list of factors of what is to be considered as reasonable cost or reasonable fee is provided in Annexure B of the Circular.
Further, the Circular also specifically sets out what is not included as CIRP cost, such as, inter alia, any fee or other expense that is not directly related to the CIRP; fee or other expense that is beyond the amount approved by CoC (where such approval is required); fee or other expense incurred before the commencement or after the completion of the CIRP; expenses incurred by a creditor, claimant, resolution applicant, promoter or member of the Board of Directors of the corporate debtor in relation to the CIRP; and penalties imposed on the corporate debtor for not complying with applicable laws during the CIRP.
The Circular states that the fee and other expenses incurred by the IPs for all concluded, ongoing and subsequent CIRPs are to be disclosed to the IP Agency of which he is a member in the Form as prescribed in Annexure C of the Circular. The disclosures for concluded CIRPs are to be made by 15 July 2018. On receipt of such disclosures, the IP agency is required to disseminate the same within 3 working days on an appropriate electronic platform, monitor the disclosures and submit a monthly summary of any non- compliance by its IPs with this circular to the IBBI by 7th day of the succeeding month; and take appropriate measures to ensure compliance by its IPs.
For further information, please contact:
Souvik Ganguly, Partner, Acuity Law
al@acuitylaw.co.in
