Delhi High Court Reduces Insolvency Professional’s Suspension: No Gross Misconduct Found

In a significant ruling, the Delhi High Court has modified the suspension period of Sundares Bhat, an Insolvency Professional (IP), from two years to the period already served. The court's decision comes after Bhat challenged the order of the Insolvency and Bankruptcy Board of India (IBBI), which had initially suspended him for various alleged infractions during the liquidation process of ABG Shipyard Limited. The judgment delivered by Justice Subramonium Prasad highlights the nuances of regulatory compliance and the responsibilities of insolvency professionals under the Insolvency and Bankruptcy Code (IBC).

The case revolves around ABG Shipyard Limited, a shipbuilding company undergoing Corporate Insolvency Resolution Process (CIRP) initiated by ICICI Bank. Sundares Bhat was appointed as the Interim Resolution Professional and subsequently as the Liquidator by the National Company Law Tribunal (NCLT), Ahmedabad. During the liquidation process, several allegations were made against Bhat, leading to an inspection and a disciplinary action by the IBBI.

One of the key allegations against Bhat was the imposition of non-refundable participation fees on prospective bidders during the auction process. The IBBI contended that this practice was against the spirit of the IBC, aimed at maximizing asset value. However, the court noted that the relevant regulations prohibiting such fees came into effect only in 2021, while the auctions in question occurred in 2019. Consequently, Bhat could not be held guilty of violating non-existent regulations at the time. "The Petitioner has not acted in violation of any express contravention of any Regulations or Clauses," the court observed.
Bhat faced charges for appointing unregistered valuers and for the manner in which valuation reports were handled. The court found that while the appointment of valuers in the name of their firms rather than in their individual capacities was irregular, it did not amount to gross misconduct. "Though what the Petitioner has done is not in strict confirmation of the regulations, the valuation reports have been signed by the registered valuers," the judgment noted.

The most serious charge involved Bhat’s engagement of BDO Restructuring Advisory LLP (BRAL), where he was a partner, and paying more fees to this entity than to himself as the Liquidator. The court upheld the IBBI’s finding of misconduct, stating that the arrangement was a calculated attempt to increase his own remuneration. "The act of the Petitioner is not in conformity with the purport and purpose of the liquidation process," the court stated, emphasizing the ethical responsibilities of insolvency professionals.

Justice Prasad’s judgment underscored the balance between regulatory compliance and the practicalities of insolvency proceedings. It emphasized that while certain actions by Bhat were irregular, they did not constitute gross misconduct warranting a full two-year suspension. The court took a nuanced view, reducing the suspension period to the time already served, highlighting the need for proportionality in disciplinary actions.

Justice Subramonium Prasad remarked, "The fact that fees of BRAL, which was appointed by the Petitioner to provide support services to the Liquidator, exceeds the fees of the Liquidator is sufficient to show misconduct on the part of the Petitioner." However, the court also noted, "This Court does not find any serious infirmity in the decision taken by the Petitioner which would amount to gross misconduct."

The Delhi High Court’s ruling modifies the disciplinary action against Sundares Bhat, reflecting a balanced approach to regulatory enforcement in the insolvency profession. By reducing the suspension period, the judgment acknowledges the complexities faced by insolvency professionals while reiterating the importance of ethical conduct. This decision is expected to influence future disciplinary proceedings and the interpretation of regulations under the IBC.

Date of Decision: May 27, 2024
Sundares Bhat v. Insolvency and Bankruptcy Board of India