The recent ordinance “The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020” promulgated by the Hon’ble President of India on 05th June 2020 has resulted in the suspension of provisions of Sections 7, 9 and 10 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) in relation to defaults arising on or after 25th March 2020 for a period of six months, extendable up to one year. Effectively, the applications to be filed before the Adjudicating Authority seeking initiation of the Corporate Insolvency Resolution Process (“CIRP”) shall be limited.

Leaving aside the questions surrounding the Ordinance, this suspension provides abundant time for the Adjudicating Authority to focus on adjudication of the pending matters, reduce their backlog and efficiently address the existing issues surrounding IBC.

One of the recent decisions of the National Company Law Appellate Tribunal (“NCLAT”) in State Bank of India vs. Metenere Limited highlights one such issue relating to Resolution Professionals (“RP”) operating within the IBC space. This was an Appeal preferred by the State Bank of India being aggrieved by an order passed by the Adjudicating Authority directing substitution of the Interim Resolution Professional (“IRP”) originally proposed in their Application under Section 7 of IBC.

At the outset, a ‘Resolution Professional’ is an insolvency professional appointed to conduct the CIRP and includes an IRP. In general, an IRP is appointed by the Adjudicating Authority upon admission of an application under Section 7 or Section 9 of the IBC. These Sections also empower the Adjudicating Authority to reject the application of any IRP in event that, “any disciplinary proceeding is pending against the proposed resolution professional”.

Further, Regulation 3(1) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”) stipulate that, “An insolvency professional shall be eligible to be appointed as a resolution professional for a corporate insolvency resolution process of a corporate debtor if he, and all partners and directors of the insolvency professional entity of which he is a partner or director, are independent of the corporate debtor.” (emphasis supplied)

In view of the foregoing, it was argued by the State Bank before NCLAT that Mr. Shailesh Verma, being an ex-employee of State Bank, is not disqualified to act as an IRP of the Corporate Debtor and that an IRP is not required to act as an ‘Independent Umpire’ between the financial creditors and the ex-management of the Corporate Debtor. Rather, an RP/IRP only acts as a facilitator in the CIRP as all major decisions are taken only with approval of the Committee of Creditors (“COC”). On the other hand, the Corporate Debtor apprehended bias in the CIRP since the proposed RP was an employee with the State Bank for over 39 years.

While the NCLAT upheld the order passed by the Adjudicating Authority rejecting appointment of Mr. Shailesh Verma as an IRP, it made some unique observations as follows:

1. Mr. Shailesh Verma was not disqualified or ineligible to act as an IRP; and
2. Despite drawing pension as a benefit earned for the past services, Mr. Shailesh Verma was not an ‘interested person’.

Sans any legal reasoning, it becomes difficult to understand the above observations of the NCLAT.

First and foremost, the Appeal preferred by the State Bank against the order of the Adjudicating Authority, seeking substitution of the proposed IRP, emphasised that the proposed IRP was an ‘interested person’ sought to be appointed. Rather, the Adjudicating Authority gave an option to the State Bank to substitute the proposed IRP despite having the power to reject the application.

Secondly, an IRP/RP remains obliged to act independently of any external influences and impartially during the CIRP or liquidation process. Regulation 3(2) of the CIRP Regulations also require an IRP/RP to make disclosures in accordance with the Code of Conduct for Insolvency Professionals . Where the proposed IRP by the State Bank was its employee for over 39 years and was still drawing pension, it clouded that Mr. Shailesh Verma would have acted independently and impartially during the CIRP in terms of the Code of Conduct.

It can be (and has been) argued that the NCLAT did not follow the settled principles for evaluation of bias and rather based its decision on some subjective apprehension. The Hon’ble Supreme Court has observed that in order to establish biasness, “the requirement is availability of positive and cogent evidence” and that there must be “existing a real danger of bias” to hold an administrative action unsustainable. Apparently, these standards have been duly met in the facts of the said matter, though the implications thereof were somewhat diluted by the observations of the NCLAT.

Moreover, both Adjudicating Authority and the NCLAT have inherent powers to make such orders or give such directions as may be necessary for meeting the ends of justice or to prevent abuse of their process.

Another aspect in this regard is that while the Code of Conduct for Insolvency Professionals requires independence and impartial functioning of an IRP/RP, the eligibility criteria laid under the provisions of the IBC and the CIRP Regulations do not provide for independence of the IRP/RP vis-à-vis financial/operational creditor. Per contra, Regulation 3(1) only prescribes independence of the insolvency professional vis-à-vis the corporate debtor. Presumably, for this reason that the NCLAT observed that Mr. Shailesh Verma was not disqualified to act as an IRP, even though there were a reasonable likelihood of him acting in violation of the Code of Conduct. This highlights an apparent conflict between different Regulations under the IBC.

This conflict is further evident another decision of the NCLAT wherein it held that empanelment of the RP as an Advocate or Company Secretary or Chartered Accountant with a financial creditor “cannot be a ground to reject the proposal of his appointment unless there is any disciplinary proceeding pending against him or it is shown that the person is an interested person being an employee or on the payroll of the financial creditor.”

Practically, it has been observed that in any proceedings under IBC, the appointed IRP/RP often ‘sides’ with one of the many parties involved, either for pecuniary or other benefits, thereby acting in contravention of the Code of Conduct and impeaching the fairness and impartiality of the CIRP process. This is also evident from a recent decision of the Disciplinary Committee of the Insolvency Board of India (“IBBI”) wherein penalty equivalent to 25% of the fees received by the RP (around Rs. 34 Lakhs) was imposed on him. In the said case, the RP favoured a financial creditor of the Corporate Debtor by making payment of EMIs to the said creditor in violation of the moratorium provisions under the IBC.

While the IBC and its regulations prescribe the powers and duties of the RP/IRP and the processes to be followed for conducting the CIRP, more checks and balances are necessary to regulate the conduct and free will of the RPs/IRPs. Presently, in such circumstances, two options are available against the RPs/IRPs:

1. Complaint to IBBI under Section 217 of the IBC; and/or
2. Approaching the Adjudicating Authority under Section 60(5) of the IBC.

While the first route entails investigation of the acts of the insolvency professional leading to appointment of a disciplinary committee to look into the investigation report, it takes a long time before any action is formally taken against the RP/IRP. Furthermore, there is no provision for temporary/interim suspension or replacement of the RP/IRP while the investigation is ongoing. In the case of Mr. Mohan Lal Jain mentioned above, the RP was alleged to have contravened the provisions of the IBC during March 2018 while the final order came out only in May 2020. Thus, by the time any disciplinary proceedings are concluded, either the CIRP would have ended or the corporate debtor would have gone into liquidation through the mandatory completion of the CIRP in 330 days . On the other hand, approaching the Adjudicating Authority is equally cumbersome and dilatory in view of the huge burden and lack of infrastructure with the Adjudicating Authority and the NCLAT.

In sum, such issues and challenges arising with respect to IRPs/RPs not only delays the completion of the CIRP leading to increased chances of the corporate debtor going into liquidation, but also impedes the operations of the corporate debtor ultimately affecting the industry and economy of the country.

Hence, amendments to the CIRP Regulations requiring the RPs/IRPs to be an independent vis-à-vis corporate debtor and its financial/operational creditors; fast track procedure(s) to replace the RP by a group of financial/operational creditor(s) in certain situations without approaching the Adjudicating Authority, etc. could be a few steps to resolve such emergent issues. Interestingly, what remains open though is the interpretation and guidance that the Hon’ble Supreme Court could offer if the aforesaid contradictory decisions of the NCLAT are judicially assailed.

References

1. By: Upinder Singh, Associate, Asia Law Offices.
2. Company Appeal (AT) (Insolvency) No. 76 of 2020
3. Refer Section 5(27) of the IBC.
4. Refer Order dated 04th January 2020 passed by National Company Law Tribunal, Principal Bench, New Delhi in the matter of State Bank of India vs. M/s Metenere Limited, C.P. No. IB-639(PB)/2018.
5. Refer Code of Conduct for Insolvency Professionals, First Schedule to The Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016.
6. Ibid.
7. Refer Kumoan Mandal Vikas Nigam Ltd. vs. Girja Shankar Pant & Ors., (2001) 1 SCC 182; also refer A.K. Kraipak vs. Union of India, AIR 1970 SC 150, where it was observed that, “a mere suspicion of bias is not enough. There must be reasonable likelihood of bias.”
8. Refer Rule 11 of National Company Law Appellate Tribunal Rules, 2016 and Rule 11 of National Company Law Tribunal Rules, 2016
9. State Bank of India vs. Ram Dev International Ltd. (Through Resolution Professional), Company Appeal (AT) (Insolvency) No. 302 of 2018.
10. Order dated 30th May 2020 in the matter of Mr. Mohan Lal Jain, Insolvency Professional.
11. Refer Sections 17, 18 and 25 of the IBC.
12. Section 12 of the IBC.