Conflict of interest (COI) occurs when an entity is in a position to exploit its official or personal capacity in some way for personal or corporate benefit.
Few instances in which Conflict of interest arises under Insolvency and Bankruptcy Code, 2016 :
1. A prime example where conflict of interest can arise is between the creditors of the company, namely, the financial creditors, operational creditors and the employees. Since the last two categories are not part of the Committee of Creditors, it is possible that the financial creditors approve the resolution plan with the goal of maximizing their share and squeezing out the operational creditors. Ultimately, the aggrieved only have the Adjudicating Authority as a forum for grievance resolution and this would in turn hamper the efficiency of the resolution process.
2. COI can arise where bidders have veto powers to approve or reject the plan by virtue of being a member of the committee of creditors. Therefore, if a bidder holds a dominant percentage of voting power then it can push through a plan according to their convenience or they could cause hurdles in the passage of plans put forward by other bidders which would ultimately hamper the CIRP.
3. If a person provides services in the capacity of an Advocate or an accountant to a Corporate Debtor and the same person is appointed as an IRP or RP for the CD, then there is a situation of conflict of interest.
4. A person who is a liquidator or a Resolution Professional of a corporate debtor can appoint his relatives or related parties to perform work relating to such processes. Also, if the corporate debtor is a creditor in another company then, the CIRP can be triggered against the other company and appoint related persons as IRP. They may have conflict of interests with the IRP, RP or Liquidator of the CD.
5. Another area where conflict of interest might arise is where, the legal counsel being appointed for two stakeholders is same. Cyril Amarchand Mangaldas (CAM) was the legal counsel for both the resolution professional and bidder Adani Wilmar, which was eyeing the bankrupt edible oil company.
6. Conflict of interest can arise where under the Code, the suspended board of directors who can take part in the meetings of COC, though not entitled to vote in such meetings receive copy of the resolution plan and other confidential documents. This is in direct conflict of the obligation on part of the Insolvency Professional to maintain confidentiality under the regulations of the code. Also, under section 12A of the Code, in case of honest business failures and where there is no malfeasance on part of the promoters, applications can be submitted for withdrawal of insolvency proceeding. This will be directly against the participants of the meeting.
7. Relevant to note the Summary of an Important Judgment Dealing With Conflict Of Interest under the provisions of Insolvency & Bankruptcy Code, 2016:
Mr Dhinal Shah, Resolution Professional v. Bharati Defence and Infrastructure Ltd (NCLT Mumbai), MA 170/2018 – CP292/I&B/NCLT/MAH/2017 [1]
The RP admitted that E&Y provided support services to him during the corporate insolvency resolution process (CIRP). Further, RP has delegated his authority and duties under CIRP to Dinkar Venkatsubramaniam by a Power of Attorney. Dinkar Venkatsubramaniam is also a partner of E&Y Restructuring LLP.
Further, E&Y was given the mandate of investment banker for the corporate debtor (Bharati) to find investors. From the records submitted by the parties, it is noted that the disciplinary committee of the Insolvency and Bankruptcy Board of India (IBBI) after issuing show cause notice and an opportunity of hearing, imposed a penalty of ₹1 lakh on Dinkar Venkatsubramaniam on August 23, 2018, in another insolvency matter of JEKPL Pvt Ltd. In spite of disciplinary proceedings initiated by IBBI, RP has delegated his power to Dinkar Venkatsubramaniam.
The resolution plan has not given due consideration to the interest of all the stakeholders. It is noted that E&Y/E&Y LLP is providing entire service in the current CIRP like a single window system — the RP Dhinal Shah is partner of E&Y, the Power of Attorney holder Dinkar Venkatsubramaniam is also from E&Y, RP’s team members are also from E&Y, the investment banker appointed during the CIRP is also from E&Y.
This creates a conflict of interest. We believe that the RP and CoC have failed to ensure appropriate checks and balances and failed to implement ‘Chinese wall’ concept during the entire CIRP. Further, this will also act as a monopoly in the entire CIRP, which needs to be examined by IBBI. Therefore, we direct IBBI to examine this issue and to frame suitable guidelines.
Facts:
Mr Dhinal Shah was appointed as Interim Resolution Professional. The Interim Resolution Professional was later resolved by the Committee of Creditors to be appointed as Resolution Professional (“RP”). The CIRP period was extended vide an order of this Tribunal dated 15.11.2017 by 90 days from 06.12.2017.
The resolution applicant, Edelweiss Asset Reconstruction Company Limited (“EARC”) was incorporated in September 2009 as an asset reconstruction company by Edelweiss group along with a group of high net worth individual investors. The resolution applicant is not an undischarged insolvent neither a wilful defaulter. The resolution applicant is not ineligible under any of the clauses under section 29A of the Code.
On perusal of the Resolution Plan, it is noted that the plan has provided for the payment of ₹35 crore as Insolvency Resolution Process costs in priority to the payment of other debts of the Corporate Debtor. During the hearing, the Bench also expressed its concern over huge fee charged by IRP/RP and his team of few people even though the company has a huge workforce. It is noted that monthly fee charged by RP and his team is approx. ₹80 lakhs whereas monthly salary bill of around 850 employees is approx. ₹1.5 crores, which indicates a huge fee to RP and his team. As per the Resolution Plan submitted by EARC, the CIRP cost projected was ₹35 crores, whereas as per his submissions, the CIRP cost is approximately ₹62 crores as of August 2018. During the hearing held on 10.09.2018 on a query raised by the Bench, it was informed that CIRP cost upto August 2018 was ₹62 crores.
Observations:
It may be noted that the Resolution Professional has issued advertisement inviting Expression of Interest in Economic Times, Delhi & Mumbai editions, on 04.09.2017 and 11.01.2018. The corporate debtor is one of the largest shipbuilding companies in India which is primarily engaged in construction and repair of ships and rigs for Defence and commercial entities. It is one of the very few private sector shipyards in India to have a Defence Warship Building Licence. We think that prospective buyers of the company could be present across the world and the publication of advertisement calling for EOI should have been published internationally. On the contrary, the Resolution Professional published the advertisement calling for EOI only in Economic Times, Delhi and Mumbai editions and not even in all India edition. It is the responsibility of the Resolution Professional to safeguard the value of assets of the corporate debtor and take all steps to maximise the value of assets of the company. The wide publication of the EOI would have reached more prospective buyers of the corporate debtors, and thus the CoC would have received more resolution plans leading to maximisation of value of the assets of the corporate debtor, but for the failure of the Resolution Professional to take such appropriate action as per the requirements of this case, the CoC had only limited resolution plans to choose from virtually only one Resolution Plan.
The unsuccessful bidders/resolution applicants submitted, during various hearings, that the current resolution plan approved by the CoC is nothing but the plan submitted by EARC, which is the major financial creditor having 82.5% of vote share in the CoC/total outstanding financial debt, therefore, the plan is hit by conflict of interest and should be rejected.
The suspended directors also raised the issue of conflict of interest of the Resolution Professional with E&Y, the resolution Professional being partner of E&Y; the same E&Y provided support services. Further, the other Resolution Applicants also argued that the liquidation value and the plan submitted by EARC is substantially lower when compared to the intrinsic/market value of the company considering the projects/orders on hand, the sector to which it caters as stated above.
From the records, it is observed that RP is the partner of E&Y. E&Y was engaged by EARC, i.e. the Resolution Applicant by way of a service agreement. RP admitted that E&Y provided support services to him during the CIRP. Further RP has delegated his authority and duties to one Mr. Dinkar Venkatsubramaniam by a Power of Attorney. The said Mr. Dinkar Venkatsubramaniam was also a partner of E&Y restructuring LLP.
It is noted that E&Y/E&Y LLP is providing entire service in the current CIRP like a single window system viz. the RP, Mr Dhinal Shah is partner of E&Y, the Power of Attorney holder Mr Dinkar Venkatsubramaniam is also from E&Y, RP’s team members are also from E&Y, Investment Banker appointed during the CIRP is also from E&Y.
This creates a conflict of interest which was even highlighted by the counsel for the suspended Board of Directors for the Corporate Debtor.
We believe that the RP and CoC have failed to ensure appropriate checks and balances and failed to implement “Chinese wall” concept during the entire CIRP. Further, this will also act as a monopoly in the entire CIRP, which needs to be examined by IBBI. Therefore, we direct IBBI to examine this issue and to frame suitable guidelines.
ORDER
Given the conflict of interest of the RP as discussed in detail above, we intend to appoint a new Liquidator. We hereby appoint Mr. Vijay Kumar V Iyer having registration no. IBBI/IPA-001/IP-P00261/2017-18/10490, e-mail id. viyer@deloitte.com and Ph. No. 9821219493. The RP is directed to handover all the documents/records to the liquidator.
DISCLAIMER:
1. The article has been prepared only for the knowledge sharing purpose.
2. The views expressed in the article are based on the documents available on the public domain.
3. The views expressed in this article are based on my understanding and interpretation of the applicable Indian laws.
[1] https://ibbi.gov.in/webadmin/pdf/order/2019/Jan/14th%20Jan%202019%20in%20the%20matter%20of%20Bharati%20Defence%20and%20Infrastructure%20Ltd.%20MA%20170-2018%20In%20CP-292-I&B-NCLT-MAH-2017_2019-01-24%2013:44:00.pdf
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