Criminal Charges against Insolvency Professionals- the Next Big Impediment under IBC? – By CA Roustam Sanyal and Advocate Vineeth Vakiti Reddy

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Criminal Charges Against Insolvency Professionalsthe Next Big Impediment under IBC?

The Insolvency and Bankruptcy Code, 2016 (IBC) has often been hailed as one of the biggest economic reforms of the recent times. This fairly new piece of legislation has brought about a drastic change in the behavioural pattern of the debtors in India. As per the latest Economic Survey for the year 2020-21, a staggering 83% of the corporate debtors got resolved even before the official commencement of the corporate insolvency resolution process (CIRP) under the Code[1]. Behind the success of the IBC, stands the Insolvency Professional (IP) – a key pillar of the entire framework. The Bankruptcy Law Reform Committee (BLRC) Report states that “Insolvency professionals form a crucial pillar upon which rests the effective, timely functioning as well as credibility of the entire edifice of the insolvency and bankruptcy resolution process.”[2]

To keep a check on their authority, the Code has bestowed upon the IP, the responsibility to conduct the entire process under the CIRP or liquidation, with the highest level of professional excellence. The framework has been designed to provide a two-tiered regulatory structure comprising of the Insolvency and Bankruptcy Board of India (IBBI) and the Insolvency Professional Agencies (IPAs). Since its inception, the IBBI has been proactive in taking disciplinary action against IPs who have violated the Professional Code of Conduct in any manner whatsoever. The same can also be said about the IPAs.

Background

Recently, two disciplinary orders were passed by the Disciplinary Committee (DC) against Insolvency Professionals who were arrested by the Central Bureau of Investigation (CBI) – Anti-Corruption Bureau (ACB), on charges of corruption[3]. In both the above cases, a complaint was filed against the IPs for allegedly demanding illegal favours during the course of the discharge of their duties under the CIRP. Based on the First Information Report (FIRs) filed by the complainants with the CBI and order of the Special Judge granting judicial custody of IPs for investigation, the DC passed orders prohibiting the IPs from undertaking any assignment in any capacity under the Code until they were “exonerated of the charges”[4].

Without going into the merits of the individual cases (since the matter is sub-judice and pending before Hon’ble High Court of Delhi[5]), in this article the authors make an attempt to examine the jurisdiction of the CBI to make arrests in matters related to the IBC. The authors also go on to provide the way forward to tackle such issues in the future.

Analysis

A perusal of the orders passed by the DC reveals that the cases against the Insolvency Professionals were registered by the CBI under Section 7 and 7A of the Prevention of Corruption Act, 1988 (PC Act).

Section 7 and 7A of the Prevention of Corruption Act read as follows:

Section 7: Public servant taking gratification other than legal remuneration in respect of an official act.—Whoever, being, or expecting to be a public servant, accepts or obtains or agrees to accept or attempts to obtain from any person, for himself or for any other person, any gratification whatever, other than legal remuneration, as a motive or reward for doing or forbearing to do any official act or for showing or forbearing to show, … shall be punishable with imprisonment which shall be not less than six months but which may extend to five years and shall also be liable to fine.”

Section 7A: “Whoever accepts or obtains or attempts to obtain from another person for himself or for any other person any undue advantage as a motive or reward to induce a public servant, by corrupt or illegal means or by exercise of his personal influence to perform or to cause performance of a public duty improperly or dishonestly or to forbear or to cause to forbear such public duty by such public servant or by another public servant, shall be punishable with imprisonment for a term which shall not be less than three years but which may extend to seven years and shall also be liable to fine.”.

It is pertinent to note that the term “public servant” is the keyword in both sections 7 and 7A of the PC Act. It therefore becomes important to look at section 2(c) of the Act which defines the term ‘public servant’. Clause (v) of section 2(c) states

any person authorised by a court of justice to perform any duty, in connection with the administration of justice, including a liquidator, receiver or commissioner appointed by such court”

Although the above definition includes “liquidator” within its ambit, there is a difference between a Liquidator appointed under Section 34 of the IBC and the Official Liquidator under Section 502 of the Companies Act, 1956 attached to the High Court of the respective States. While the former works for the benefit of stakeholders of the Corporate Debtor (CD), the latter is appointed by the Court for the purpose of winding up. Also, the rationale behind considering the Official Liquidators under the Companies Act as public authority is that the liquidator under Companies Act derives his salary and other allowances from the government. On the contrary, the fees of the liquidator appointed under IBC, depends on the value of assets realised or is decided by the Committee of Creditors (CoC). Thus there is an intelligible differentia between the liquidators appointed under IBC and the liquidators appointed under the Companies Act.

Secondly, a resolution professional is appointed by the Committee of Creditors (CoC) under section 22 of the IBC. The CoC appoints the RP by a vote of not less than sixty-six per cent and the same is then “communicated” to the Adjudicating Authority for their final approval. Therefore, the RP is primarily appointed by the CoC and the AA passes the order based on such resolution. Lastly, he cannot be said to be appointed in “connection with the administration of justice”. Although a liquidator under IBC has certain quasi-judicial powers as laid down by the Apex Court in the case of Swiss Ribbons Private Limited & Another Vs. Union of India & Others[6], such powers are restricted only to extent of claim verification and determination and do not expand beyond that.

It is a well-established fact that IPs are considered as ‘officers of the court’. In Asset Reconstruction (India) Pvt. Ltd Vs. Shivam Water Treaters Pvt. Ltd[7], the NCLT held that

“..RP (Resolution Professional) is acting as an officer of the Court and any hindrance in the working of the CIRP will amount to contempt of court.”

One may argue based on the above judgment, that an IP should be considered as a public servant. For this, it is essential to understand the context of the judgment. The NCLT passed this order to ensure that the erstwhile directors of the Corporate Debtor (CD) cooperate with the resolution professional and do not create any hindrance in the discharge of the duties by the IP. Therefore, the order of the AA was in relation to contempt of court proceedings, the purpose of which is to ensure that the orders of the AA are diligently followed. This does not make IPs public servants under the PC Act.   

At this stage, let us take a look at section 232 under the miscellaneous provisions of the IBC. It enlists all the people who are to be considered as ‘public servants’ under the Code.

Section 232: “The Chairperson, Members, officers and other employees of the Board shall be deemed, when acting or purporting to act in pursuance of any of the provisions of this Code, to be public servants within the meaning of section 21 of the Indian Penal Code (45 of 1860).”

 The exclusion of ‘insolvency professionals’ from the abovementioned provision seems to be the deliberate intention of the lawmakers. The same is further reiterated by the fact that section 233, which talks about protection for action taken in good faith, includes insolvency professionals/liquidators within its ambit.

A joint reading of all the above provisions draws us towards the conclusion that insolvency professionals are not public servants and hence, it is beyond the jurisdiction of the CBI to make arrests under the provisions of PC Act. Surprisingly, in both the cases where arrests were made under the PC Act, the CBI was unable to file a charge sheet even after investigating the IPs under judicial custody. This prima facie indicates that there was no substantial evidence at hand which could be used to implicate the accused IPs. The intention of highlighting this fact is not to absolve the IPs of their wrongdoings, if any, but to indicate how such arrests hamper the CIRP process. Incidents like these cause unnecessary delays in the resolution process thereby causing a dent to the goal of “value maximisation” of the corporate debtor.

Nevertheless, the matter is highly contentious and there could be equally strong arguments supporting either side of the debate. Section 2(c) of the PC Act, which defines the term “public servant”, needs to be revisited as these provisions were drafted keeping only the Companies Act in mind. This dispute will achieve finality only when it is decided by a Constitutional Court. However, there is a larger issue that arises out of this discussion. As discussed earlier, in both the orders passed by the disciplinary committee, the Insolvency Professionals were directed to not take up any assignment in any capacity under the Code, until they were exonerated of the charges. These orders were based on the FIR filed with the CBI. Let us delve into this particular aspect further.

FIR isn’t an encyclopaedia

It is an undeniable fact that prompt action must be taken on the basis of a First Information Report (FIR). However, a mere FIR against a person is not enough to take punitive action against them. It is only after a proper investigation of evidence that appropriate actions should be taken. Even the courts are of the same view. The Hon’ble Supreme Court in the case of Pandurang Chandrakant Mhatre v. State of Maharashtra[8] held that, 

it is fairly well settled that FIR is not a substantive piece of evidence and it can only be used to impeach the creditworthiness of the testimony recorded by the maker and it cannot be used for contradicting the testimony of other witnesses”

Thus, an FIR is not an encyclopaedia. It only sets the law in motion. The statements in an FIR are not made under oath and they are not made during any proceedings or trial. In such a case, suspension of a Resolution Professional (RP) by considering the FIR as a material on record is not appropriate.

In the case of Subrata Rabindra Nath Maity (Bhatia coke and energy limited) v. Surendra Singh Bhatia & Ors[9], the CIRP was res sub judice with the NCLT Chennai Bench while an FIR was filed with a police station located in Madhya Pradesh. This indicates how an IP can be subject to multiple litigations and police investigations. The misuse of the criminal law by the erstwhile promoters of the Corporate Debtors is the new elephant in the room.

Innocent Until Proven Guilty 

The Apex Court, in P. Satyanarayana Murthy v. State of AP[10] held that, without the proof of demand and acceptance of illegal gratification against the accused charged u/s 7 and 13 of the Prevention of Corruption Act, conviction cannot be sustained. Even in a case where a public servant is suspended due to a pending court proceeding, he is entitled to be reinstated with back wages post his acquittal. However, the same cannot be said for an IP, as there is no equivalent factor/component that would compensate the accused in the event of honourable acquittal.

 It was also advised by the Hon’ble High Court of Karnataka in B. Balaiah vs. D.T.O Karnataka[11] that.

“..it would be proper and reasonable for the authorities to wait for the result of the police investigation and where the investigation is followed by trail, the result of such trail before deciding to take any disciplinary action but however the court also held that there is no legal bar to the authorities taking action even in a case where FIR is lodged”.

Further, the golden thread of criminal jurisprudence, i.e. “innocent until proven guilty” must be upheld in the interest of justice, equity and good conscience.

Way forward

The authors acknowledge the fact that the IBBI has requisite powers to take disciplinary actions against the resolution professionals, based on FIRs. However, restricting IPs from undertaking fresh assignments till they are exonerated from the charges might result in the erstwhile promoters being armed with a new weapon that could be misused. There could also be a scenario where the IP is first acquitted by a lower court but is subsequently held guilty by an appellate authority. Given the pace at which judicial procedures progress in our country, it might take a substantial amount of time for the IP to get a clean chit.

Further in M/s Alchemist Asset Reconstruction Co. Ltd vs. M/s Hotel Gaudavan[12], the Principal Bench of the NCLT Delhi observed that 

“if there is any complaint against the insolvency professional then the IBBI is competent enough to constitute a disciplinary committee and have the same investigated from an investigating agency as per provisions of the code and if after that investigation, IBBI finds that criminal case has been made out against the insolvency professional then IBBI has to file the complaint with the appropriate authorities”.

In our opinion, the IBBI should come up with new regulations, similar to the existing Insolvency and Bankruptcy Board of India (Inspection and Investigation) Regulations, 2017 and these regulations should contain the standard procedures for handling criminal charges being pressed against the IPs while discharging his duties as a resolution professional/liquidator. The IBBI must empower the Investigation Authorities (appointed by the IBBI), under these regulations, to conduct a proper unbiased investigation. If they are prima facie convinced that the IP has been involved in any malpractice, the matter should be referred to the DC to take appropriate disciplinary actions. In this whole scenario, the due course of criminal law has to be adhered. Further, these observations would also help the courts during its proceedings since IBBI is a competent body to scrutinize affairs of this nature. To preserve the sanctity of the resolution process, the IP could be replaced from the particular assignment in which he has been accused. However, a blanket suspension from undertaking any assignments will act as an impediment to his career.

Also, one of the primary objectives of the IBBI is to promote the profession of IPs and such indefinite suspensions based on FIRs, would trigger fear in the minds of the professionals and hamper their decision-making capabilities.

As a matter of fact, in the case filed by the IP before the Delhi High Court (supra) there have been eleven hearings with multiple adjournments over the period of last one year. These hearings are just to determine whether IPs are to be considered as Public Servants under the PC Act. This amplifies the concern regarding the impact that such delays in court proceedings can have on the indefinite suspension of IPs. 

Conclusion

The manner, in which the IBBI has played an active role in taking appropriate action against IPs functioning with a malicious intent, is commendable. It has helped in the holistic development of the profession. A clear message has been sent to market forces that any malpractice will be tackled with an iron fist- which is both fast and effective. The role played by an IP is that of a care-giver and multiple stakeholders are affected by his every action. In such circumstances, it becomes important to ensure that an IP acts with the highest level of professional ethics. At the same time, it is also true that such vast responsibilities usually make him an easy target for all. The easiest way for promoters to derail the CIRP proceedings is to burden an IP with multiple litigations. It is therefore important to provide adequate safeguards that create an environment under which an IP can discharge his duties effectively. This will not only encourage the existing practitioners but also ensure that a fresh pool of talent is attracted towards this noble profession. 

Author’s Note

Mr. Roustam Sanyal is a qualified Chartered Accountant and a graduate from St. Xavier’s College, Kolkata. He is currently a first-year student at the Graduate Insolvency Program, IICA and can be reached at roustamsanyal@gmail.com. Mr. Vineeth Vakiti Reddy is a graduate in law and currently a first-year student at the Graduate Insolvency Program, IICA and can be reached at vineethreddy.vakiti@gmail.com. 

Reference

[1] Pg 155, Economic Survey 2020-21, https://www.indiabudget.gov.in/economicsurvey/doc/echapter_vol2.pdf

[2] Para 4.4, Bankruptcy Law Reform Committee Report

[3] IBBI/DC/47/2020- https://ibbi.gov.in//uploads/order/61a52784cae68c2c0132d5c619fa39a7.pdf and IBBI/DC/48/2020- https://ibbi.gov.in//uploads/order/2020-12-01-193525-ugoqb-906869968a68bfb433fc8d2e7d767827.pdf passed on 1st December, 2020

[4] ibid

[5] Dr. Arun Mohan Vs. Central Bureau of Investigation, W.P.(CRL) 544/2020

[6] (2019) 4 SCC 17

[7] CP (IB)-1882/MB/2018

[8] 1987 AIR 535

[9] IA/05/2021 in IBA/307/2019 at NCLT Chennai

[10] (2015) 10 SCC 152

[11] 1982 (3) SL, KAR,675

[12] CP No. (IB) -23/PB/2017

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