Authored by Abhirup Dasgupta, Partner and Ishaan Duggal, Associate
The framework for bankruptcy and insolvency resolution in India is guided by the Insolvency and Bankruptcy Code, 2016 (IBC), which governs the provisions pertaining to the re-organization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner.
As per the provisions of the IBC, if a company commits a default of a minimum value of INR 1 crore, then its financial creditor, operational creditor or such company itself may initiate the Corporate Insolvency Resolution Process (CIRP) under Chapter II of Part II (Insolvency Resolution and Liquidation for Corporate Persons) of the IBC.
In simple terms, the IBC regime propounds a shift from the ‘debtor in control’ regime to a ‘creditor in control’ regime and provides a mechanism wherein a neutral person is appointed by the Hon’ble National Company Law Tribunal (NCLT) known as the Interim Resolution Professional (IRP), who may be later confirmed as Resolution Professional (RP), to manage the corporate debtor as a going concern along with the committee of creditors for a period of 180 days (which may be extended to maximum 330 days and in exceptional cases, even beyond the said period). During this period, the RP and the committee of creditors attempt to resolve the insolvency of the corporate debtor by handing over the corporate debtor to a buyer entity known as the resolution applicant for a consideration from which the committee of creditors and other creditors recover their dues. In case the RP and the committee of creditors fail to do so, then the corporate debtor is destined to undergo liquidation.
Role of the Resolution Professional
In terms of the definition under the IBC, the RP is an insolvency professional appointed to conduct the CIRP of the corporate debtor and plays an instrumental role by wearing many hats while conducting the CIRP.
In the matter of Committee of Creditors of Essar Steel India Limited vs. Satish Kumar Gupta & Ors. the Hon’ble Supreme Court of India elucidated upon the role of the RP and observed that it is the responsibility of the RP to manage the affairs of the corporate debtor as a going concern, appoint and convene meetings of the committee of creditors to decide upon resolution plans, and collect, collate and finally admit claims of all creditors, which must be examined for payment by the RP and be finally negotiated by the committee of creditors.
In furtherance of Section 7(3)(b) of the IBC, when a financial creditor files an application for initiation of CIRP against a corporate debtor, then along with such application, the financial creditor has to provide the name of the insolvency professional proposed to act as an IRP of the corporate debtor. Section 9(4) of the IBC relaxes this requirement in case of applications for initiation of CIRP by operational creditors.
IBC Regime: Resolution Professional should be unbiased
With the undeniable significance of the role played by the RP, comes the necessity of the RP being unbiased and fair while conducting the CIRP in a transparent manner. This was also recognized by the Bankruptcy Law Reforms Committee wherein the Committee observed that “As the RP plays a key role in the life-cycle of the insolvency resolution process – from the time of the acceptance of the application, the design and agreement of the repayment plan, to the final execution of the plan – it is possible that unfair conduct of the RP jeopardises the interests of either party”.
The IBC regime attempts to thwart any such element of bias on the part of the RP to seep into the CIRP by articulating clear eligibility criteria to be fulfilled by an insolvency professional for appointment as the RP of a corporate debtor. These eligibility criteria are mentioned under Regulation 3 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations). An insolvency professional is considered to be independent if he is eligible to be appointed as an independent director on the board of the corporate debtor under Section 149 of the Companies Act, 2013.
In addition to the above, a RP must make disclosures at the time of his appointment in accordance with the code of conduct which lists down various requirements such as demanding an insolvency professional to necessarily act with objectivity in his professional dealings, ensuring that his decisions are made without the presence of any bias, conflict of interest, coercion, or undue influence of any party, whether directly connected to the insolvency proceedings or not. This code of conduct has been provided under the First Schedule to the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016 (IP Regulations).
Further, in terms of Sections 7(5), 8(5), 10(4) and 16(2) of the IBC, it is imperative that no disciplinary proceedings are pending against the proposed RP. These requirements are sacrosanct to ensure fairness by the RP in spearheading the CIRP.
Time and again, the judiciary has been called upon to interfere in the CIRP and adjudicate upon the eligibility of insolvency professionals to be appointed as RPs.
One such instance is the judgment dated July 16, 2018 in the matter of State Bank of India vs. Ram Dev International Ltd wherein the Hon’ble National Company Law Appellate Tribunal, New Delhi (NCLAT) was called upon to decide if the proposed RP was ineligible on the ground that he was on the panel of erstwhile State Bank of Hyderabad, which merged with the State Bank of India (SBI), which is one of the members of the committee of creditors of the corporate debtor. The NCLT opined that the aforesaid made the proposed RP ineligible for appointment as the RP of the corporate debtor. However, SBI contended before the NCLAT that the proposed RP was not on the payroll of the bank and is not an employee – he is a on the panel of lawyers which is generally maintained by the banks, Public Sector Undertakings and Governments, who cannot be treated to be employee of the bank. After hearing the parties, the NCLAT observed that if a RP is empanelled as an advocate/company secretary/chartered accountant with one or other financial creditor, then that cannot be a ground to reject the proposal, if otherwise there is no pending disciplinary proceeding or it is shown that the person is an interested person being employee or on the payroll of the financial creditor. In the present case, the NCLAT held that as the NCLT had failed to take into consideration the aforesaid fact and was required to approve his name as the RP of the corporate debtor.
In this context, a recent judgment dated May 22, 2020 passed by the NCLAT in the matter of State Bank of India vs. M/s Metenere Ltd is quite relevant albeit laying down a contrary ratio to the previous judgment. In this matter, the question for consideration before the NCLAT was whether an ex-employee of a financial creditor can be appointed as the RP of a corporate debtor. The corporate debtor contended that the proposed IRP worked with SBI, the financial creditor which initiated the CIRP, for 39 years before his retirement in 2016. Hence, there was an apprehension of bias and the proposed IRP was unlikely to act fairly. The corporate debtor submitted that the proposed IRP was still taking pension from SBI which falls within the definition of ‘salary’ under the Income Tax Act, 1961 and is an interested person being an ex-employee and on the payroll, thus rendered ineligible under the IBC to act as an IRP. SBI, being a Financial Creditor, contended that the IBC does not prescribe any disqualification for an ex-employee of a financial creditor from being appointed as an IRP. It was further submitted by SBI that the RP has no adjudicatory powers and only acts as a facilitator in the CIRP. Lastly, it was contended that the proposed IRP is not on any panel of SBI or handling any portfolios and has no role in decision making committee of the bank. After hearing the submissions, the Appellate Tribunal was of the considered opinion that the apprehension of bias expressed by the corporate debtor qua the appointment of the proposed IRP could not be dismissed offhand and the NCLT was justified in seeking substitution of the proposed IRP to ensure that the CIRP was conducted in a fair and unbiased manner.
The role of IRP/RP is critical to the entire CIRP process and the IBC regime has laid down comprehensive safeguards to ensure that the CIRP is conducted by a fair and unbiased IRP/RP. However, the Metenere judgment sets a dangerous precedent and warrants a revisit. The NCLAT has proceeded to uphold an apprehension of bias without thoroughly clarifying the underlying rationale. A one size fits all approach – wherein there could be an inherent apprehension of bias just because the proposed IRP/RP was once working with a financial creditor or the corporate debtor – nullifies the relevance of the disclosures given by the IRP/RP and undermines the oversight role of the Insolvency and Bankruptcy Board of India (IBBI). Additionally, such inherent presumption of bias would open the floodgates for similar litigations wherein the corporate debtor (erstwhile directors, promoters) would impugn the appointment of RPs on similarly presumptuous grounds, which could impact ongoing as well as concluded CIRPs adversely. Hence, it is imperative that a cautious case to case approach is adopted, without any inherent presumption of bias.