IBBI penalised Insolvency Professional for raising bill in the name of Ernst & Young LLP. Fees of the lRP/RP should be raised only by him and should only be received by him
ABCAUS Case Law Citation:
ABCAUS 2493 (2018) 08 IBBI
In the said matter, the replaced Resolution Professional (RP) complained to the IBBI (the Board) that the professional fee of former Insolvency Professional (IP) was illegally paid to Earnest & Young LLP thereby escaping his personal income tax liability by making the payment of hi s professional fee in the name of third party and requested the Board for taking necessary disciplinary action against him.
The Board appointed an internal auditor to conduct an enquiry to for vetting of CIRP cost of the Corporate Debtor.
The said Internal Auditor made the following observations:
(a) EY (Ernst and Young LLP) was neither appointed by the CoC nor the NCLT to carry the IRP/RP nor any professional actiivity. Further. EY LLP was nm eligible to be appointed as IRP/RP under IBC, 2016.
(b) One of the creditors has stated in its email that the payment were released to the EY LLP based on the instruction of the accused UP.
(c) The amount paid to EY appeared to be contradictory to the approval of CoC which was contradictory to section 28 (e) of the Code.
(d) The approval of payments by a third person was also contrary to the documents available on record.
The Board formed a prima facie opinion that the accused IP had violated provisions of the Code pertaining to insolvency resolution process costs and accordingly issued the Show Cause Notice (SCN).
The Disciplinary Committee (DC) noted that during his tenure as an IRP, the accused IP entered into a “Fee Acknowledgement Letterwith Ernst & Young LLP to “perform certain services to assist him in connection with CIRP of the Payer”. Further, under clause 4 of the said agreement, the accused IP had authorised Ernst & Young LLP to raise invoices on payer for his fees and other out of pocket expenses for work undertaken by him in connection with Corporate Insolvency Resolution Process (CIRP).
The DC examined the submissions made and material available on record and gave the following findings:
(a) The IP, either as an interim resolution professional or as resolution professional, exercises powers of the Board of Directors of the corporate debtor undergoing CIRP. The specific duties and responsibilities of an IP during CIRP are detailed under sections 25 and 28 of the Code and regulations made thereunder. Sections 206 and 207 of the Code read with the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016 provides that an individual can only act as IRP/RP. The accused was appointed as IRP/RP in his individual capacity not as partner of LLP. Section 3(19) of the Code further defines an insolvency professional as, “a person enrolled under section 206 with an insolvency professional agency as its member and registered witlh the Board as an insolvency professional under section 207 “.
(b) The Bills towards the fees of the IRP/RP for the services rendered by accused as an IRP/RP have been raised by Ernst & Young LLP and payments towards settlement of said bills have also been made to Ernst & Young LLP. This is in clear violation of the provisions of the Code and the regulations framed thereunder.
(c) As per section 22 of the Code, it is the Committee of Creditors which resolves to continue IRP as RP or replaces him by another IP.
(d) The accused himself directed for the settlement of the bills so raised by Ernst and Young LLP as being the IRP/RP of. Corporate Debtor and thus influenced the decision or the work of the committee of creditors and the debtor.
(e) Limited Liability Partnerships stands as a separate and independent legal entity as to the professionals who are its partners. Raising fee invoices by LLPs on behalf of Insolvency Professional who has been appointed as IRP/RP and for the services rendered by such professional is the violation of the very basic notion of the ‘fee’ as it is ‘charging some against services rendered’. It is professional not the LLP who renders services under the Code. An LLP cannot enrol as Insolvency Professional.
(f) Section 5(13) of the IBC, 2016 defines the expression “insolvency resolution process costs”, which includes under its clause (b) “the fees payable to any person acting as a resolution professional.” Therefore, only an IRP/RP is entitled to directly receive the fees payable along with the out-of-pocket expenses in relation to a resolution process for which he has been appointed as the IRP/RP. The explanation to regulation 33 and 34 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 provides that “expenses” mean the “fees to be paid to the Resolution Professional” and other expenses, including the cost of engaging professional advisors, to be incurred by the IRP/RP as the case may be. Thus, the intention of the legislation is clear that the fees of the lRP/RP should be raised only by him and should only be received by him.
(g) Section 238 of the Code provides that the provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law. Further, generalia specialibus non derogant- ‘the provisions of a general statute must yield to those of a special one’ and the raising of such fee by the LLP for the services rendered by IRP/RP can’t be sheltered under m1y provisions of the LLP Act, 2008, when the Insolvency and Bankruptcy Code, 2016 read with Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 expressly provide for such IRP/RP fee to be part of the Insolvency Resolution Process Cost under section 5 (13) (b) of the Code.
(h) The accused stated that the LLP Agreement of Ernst & Young LLP does not permit partners to earn fee outside of Ernst & Young LLP Agreement, but an LLP agreement is not supposed to circumvent and bypass the express provision of the Code.
(i) The accused averred that he was expected to use the expertise, skills and time of the employees of EY in discharging my functions and duties as Interim Resolution Profession, these employees required to be compensated. But such expertise, skills and time of the employees cannot replace the role assigned to lRP/RP.
(j) The Board issued a circular dated 16th January, 2018 regarding lees payable to an insolvency professional and to other professionals appointed by an insolvency professional which, inter alia, provides that:
(i) the fees payable to any person acting as a resolution professional’ is included in ‘insolvency resolution process cost’ as defined in section 5(13) of the Code, which needs to be paid in priority.
(ii) an insolvency professional must provide services for remuneration which is charged in a transparent manner, and is a reasonable reflection of the work necessarily and properly undertaken. He shall not accept my fees or charges other than those which are disclosed to and approved by the persons fixing his remuneration.
(iii) Any payment of fees for the services of an insolvency professional to any person other than the insolvency professional shall not form part of the insolvency resolution process cost.
(iv) any other professional appointed by an insolvency professional shall raise bills /invoices in his I its (such as registered valuer) name towards such fees, and such fees shall be paid to his / its bank account.
The DC found that the accused IP had committed the following violations:
(i) Authorising Ernst & Young LLP to raise invoices for his “fees and other out of pocket expenses for work undertaken by him in connection with Corporate Insolvency Resolution Process (CIRP)”. Hence, he violated section 5(13) of the Code read with regulation 33 and 34 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 along with the items 1 and 5 of the Code of Conduct specified in the First Schedule to the Insolvency and Bankruptcy Board of lndia (Insolvency Professionals) Regulations, 2016.
(ii) Himself directing for the settlement of the bills so raised by Ernst and Young LLP as being the IRP/RP of the Corporate Debtor thus contravened item 9 and 25 of the Code of Conduct for Insolvency Professionals.
(iii) He allowed Ernst and Young LLP to raise invoices for his professional fee, thereby, treating the profession of Insolvency Professionals as employment under an entity. He contravened section 208 of the Code
Accordingly it was held that the accused IP violated sections 5(13) and 208 of the Code read with regulations 33 and 34 of the Insolvency and 13rulkruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 along with the items 1, 5, 9 and 25 of the Code of Conduct for Insolvency Professionals specified in the First Schedule to the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016.
For raising of Bills and and payments towards settlement of said bills to Ernst & Young LLP was held to be in violation to express provisions of the Code and regulations made thereunder.
However, the accused IP submitted that there was no clarity as to bow and to whom fee is to be paid for his professional services as an IRP/RP and the Board has recently clarified this issue vide circular dated 16th January, 2018, regarding fees payable to an insolvency professional and to other professionals appointed by an insolvency professional. Given that the Code is a new Law and the accused had undertaken CIRP for the first time and he was was following circular dated 16th January, 2018 in letter and spirit, effective date of which is 24th April, 2018, the DC was inclined to take lenient view
Accordingly, the Disciplinary Committee, imposed a monetary penalty of one lakh rupees on the accised Insolvency Professional