Debtor in possession changes to creditor in control regime for CIRP under IBC

Debtor in possession changes to creditor in control regime for CIRP under IBC

The RP's conduct was in violation of the key procedural norm of keeping with himself control and custody of the assets of the corporate debtor throughout the insolvency resolution process

This matter pertained to the Show Cause Notice (SCN) issued to Mr. Ajay Gupta, who is a Professional Member of the Indian Institute of Insolvency Professionals of ICAI (IPA) and an Insolvency Professional (IP) registered with the Insolvency and Bankruptcy Board of India (IBBI). The Disciplinary Committee(DC) of the IBBI has directed that the IP shall not seek or accept any process or assignment or render any services under the Code for a period of six months from the date of coming into force of this Order.

Herein, the Hon'ble National Company Law Tribunal (NCLT), New Delhi Bench (AA) had admitted an application for the Corporate Insolvency Resolution Process (CIRP) of M/s Alisa Infratech Private Limited (CD) under section 7 of the Insolvency and Bankruptcy Code, 2016 (Code) and the Committee of Creditors (CoC) approved the appointment of Mr. Gupta as RP which was confirmed by the AA vide order dated 22 February, 2019.

The SCN alleged contraventions of sections 23(1), 25(1), 208 (2) (a) & (e) of the Insolvency and Bankruptcy Code, 2016 (Code); regulation 7(2) (h) of the IBBI (Insolvency Professionals) Regulations, 2016 (IP Regulations); and clause 14 of the Code of Conduct under Schedule 1 of the IP Regulations.

The Disciplinary Committee (DC) of the IBBI noted that in a given situation of the creditor in control premise under the Code, the custody and control are handed over to the RP whose appointment is approved by the CoC. During the whole process, there is a moratorium and calm period to facilitate a time-bound process.

The Code confers powers of management of the affairs of the corporate debtor on the IRP/RP, particularly, under sections 17, 18, 20, 23 and 25 of the Code. There are other provisions wherein he plays a key role in the CIRP. The DC further noted that as per section 23 of the Code, the RP has a dual role to play during the CIRP, viz., he has to manage the day-to-day operations of the CD and he has to conduct the time-bound CIRP.

In the present matter, once the stay order was passed and the CIRP was stayed by the Hon'ble Supreme Court, Mr. Gupta should not have handed over the control of the CD to the ex-management. At the time of stay of proceedings, the control of assets as well as the documents of the CD were with Mr. Gupta in the capacity of the RP. The stay was on further proceedings and there was no indication in the order for handing over the assets and documents of the CD.

According to the DC, it was imperative that the situation should have remained the same till the disposal of the concerned writ petition before the Hon'ble Supreme Court. However, Mr. Gupta handed back the control of the CD to the erstwhile management, which was in violation of the provisions of the Code.

The DC also observed that after a stay on further proceedings by the Hon'ble Supreme Court, Mr. Gupta handed over the control and custody of the assets to ex-management which was against the fundamental jurisprudence of the Code relating to the creditor in control mechanism.

His conduct was in violation of the key procedural norm of keeping with him the control and custody of the assets of the CD throughout the CIRP period, including the period when stay was imposed on further proceedings. Thus, Mr. Gupta failed in his duty of preserving and protecting the assets of the CD when he handed over management of the CD back to the ex-management.

As per the DC, handing over the assets to the ex-management of the CD had been done under the misconstrued pretext that the Hon'ble Supreme Court did not clarify in its stay order as to whom the management of the CD will rest during the period of the stay. The RP did not move any application either before the Hon'ble Supreme Court or before the AA to clarify with regard to retaining/giving back control of the management of the CD which he should have done instead of seeking legal opinion on the issue.

With regard to the issue of preferential transaction during the period when control was given back to the ex-management by Mr. Gupta, it was opined by the DC that filing an application before the AA against transactions which had resulted due to the conduct of handing over of the management of the CD by the RP to the ex-management did not exonerate him of his action committed in violation of the Code.

In the aforesaid backdrop, the DC found that the conduct of the RP of handing over the management of the CD back to the ex-management was in contravention of sections 23(1), 25(1), 208 (2) (a) & I of the Code; regulation 7(2) (h) of the IP Regulations; and clause 14 of the Code of Conduct under Schedule 1 of the IP Regulations.