Insolvency professional attempts to siphon off crores from Mehul Choksi cos  

There is more controversy around absconder Mehul Choksi's companies Gitanjali Gems Limited (GGL), Nakshatra World Limited (NWL) and Nakshatra Brands Limited (NBL), as now the insolvency professional (IP), Vijay Kumar Garg, has been penalised for "attempt to siphon off crores" from the ailing companies.

The Insolvency and Bankruptcy Board of India (IBBI) passed an order on June 8 penalising Garg, a Gurgaon-based IP.

"Vijay Kumar Garg converted the noble insolvency profession to a business, converted professional client relationship to that of money lending and borrowing, manipulated the market for insolvency professional services, attempted to siphon off crores of rupees from the ailing corporate debtor to its partner in crime, acted under the influence of one creditor, and contravened every provision of the Code, Regulations and the Code of Conduct for ulterior purposes," the order passed by Navrang Saini, whole-time member, IBBI, said.

The controversy relates to the appointment of Duff & Phelps India Private Limited (D&P) by Garg to provide support services during the corporate insolvency resolution process (CIRP) of GGL, NWL and NBL.

The findings in the order are: "Mr. Garg and D&P never had a professional-client relationship. The relationship between them is mysterious. It is observed that D&P has funded about Rs 1.62 crore to meet the various expenses of Mr Garg/CD. No professional-client relationship enables money lending, that too, of this order, to a client.

"The RP buys an insurance policy to cover himself and employees of D&P. The terms of appointment of D&P in GGL indicate that it would be paid Rs 23.75 lakh per month. The fee of Rs.1.6 crore for the CIRP period was prima facie considered exorbitant by the AA and the Expert Committee constituted by the IBBI."

The order said that "engagement of D&P is only a facade to siphon off funds of the ailing CD".

The disciplinary committee of the IBBI has allowed payment of fee to Duff & Phelps for Gitanjali Gems, although it said in the order that "the engagement of D&P is illegal".

"Such conduct does not call for any leniency. However, in view of the directions of the AA and the recommendations of the IBBI Expert Committee about reasonableness of fee, the DC is inclined to allow payment of fee, as determined by the Expert Committee to D&P in the matter of GGL, even though the engagement of D&P is illegal", the order said.

Garg has been asked to pay a penalty equal to 25 per cent of fee payable to him as per agreed terms and conditions in CIRP of GGL, NBL and NWL where he has acted as an IRP/RP.

The order said that Garg shall ensure that no amount beyond the reasonable fee, as determined by the Expert Committee, is paid to D&P. If any amount beyond this has been paid, Garg shall make it good to the CD within 45 days of this order and confirm the same to the Board.

He has also been asked to go back to school and build expertise as an IP. "Mr. Vijay Kumar Garg shall undergo pre-registration educational course from the IPA of which he is a member and pass the Limited Insolvency Examination again to build his capacity to take up assignments on his own," the order said.

Garg may take any new assignment process under the Code, only after compliance with the three conditions.

The findings of the disciplinary committee said the fee payable to Garg is a handsome amount. He is expected to serve as IRP/RP and use his employees, if required, to assist him. The law enables him to use the services of an IPE of which he is a partner or director.

"It is not permissible for an IP to tie-up with a third party and bid for a work jointly, whereby the IP and the third party are collectively appointed on their collective strength. This amounts to converting a noble profession to a business and manipulating the market for insolvency professional services through anti-competitive, tie-in arrangement. An IP, who wishes to compete on his own merit and does not indulge in nefarious tie-in arrangements, would never get any assignment," the order said.

"Policy in the nature of 'Professional Indemnity for IP during the CIRPs' was available from SBI General Insurance on the date of purchase of policy (i.e. February 8, 2019). Mr. Garg had no business to buy policy in the name of D&P and unnecessarily extend benefits to a third party i.e. D&P. This establishes the meeting of mind of RP and D&P." the order said.

The law envisages appointment of an IRP by the adjudicating authority, which appointed Garg as IRP. It does not envisage a collective appointment, either by the adjudicating authority or the CoC; it empowers the IP to appoint a professional.

"If a particular creditor wanted the services of D&P, that creditor may engage him and bear the fee of D&P. That cannot be a part of the insolvency resolution process cost. In order to get the assignment, Mr. Garg mortgaged the interests of the CD to the creditor, by committing to engage D&P and transfer crore of rupees to D&P in the guise of fee," the order found.

As claimed by Garg, the appointment of the IRP (Garg) and D&P was always envisaged collectively, and they were appointed on their collective strength and credentials of the RP and D&P.

"It makes it clear that he has been appointed not on his own strength or merit, but on the strength of D&P. This makes him beholden to D&P and explains his undue favour to D&P. This makes clear that Garg alone is not capable of discharging the responsibilities as an IP," said the order.

Section 20(1) of the Code provides that the interim resolution professional shall make every endeavour to protect and preserve the value of the property of the corporate debtor and manage the operations of the corporate debtor as a going concern. Section 23(2) reasserts this responsibility.

"Instead of preserving and protecting the value of the CD, Garg frittered away the resources of the ailing CD for unlawful purposes," the order said.

Garg has claimed that he engaged D&P as a professional under Section 20(2) read with Section 25(2) of the Code. However, as per the scope of work (as indicated in the joint proposal dated September 6, 2018, submitted by Garg, an IP assisted by D&P, to ICICI Bank), its mandate was initial analysis and strategy, taking control of business, monitoring business and cash, assisting in development of business resolution plan, finalising the resolution plan, and approval of resolution plan.

None of these services is a service of a professional. The first three are responsibilities of the RP himself and for this, he may need support services, for which he has the option to either use his employees or take assistance of an IPE, if he is a member of that IPE. Other services are the responsibilities of a resolution applicant. None of these services fall within the ambit of services of a professional. Procurement of services, other than services of a professional, is not permissible under Section 20(2), the order said.

Garg claimed that he appointed D&P for professional services. "Since D&P is not a professional, having authorisation of a regulator of any profession to render any professional service, and its conduct and performance is not subject to oversight of any regulator of any profession, appointment of D&P is in contravention of section 20(2) of the Code. Further, by not appointing a professional and by appointing a person who is not professional, Garg deprived the CD of professional services," the findings of the disciplinary committee said.