Deemed Resolution Professionals: A Judicial Step-Back?

[By Kanha Shrivastava]

The author is a student of University of Petroleum and Energy Studies.

 

Introduction 

The NCLT in SBI v. Teena Saraswat Pandey, IRP of Indison Agro Foods Ltd. effectively appointed the Interim Resolution Professional (hereinafter “IRP”) as the Deemed Resolution Professional by directing the IRP to continue performing the functions of a Resolution Professional (hereinafter “RP”) as a “Deemed RP” and barring any further applications for replacement. This has come against a backdrop of precedents by the NCLAT that provide for directly appointing the IRP as the RP. This case comment aims to critique the aforementioned judgment regarding its legislative backing, the applicability of judicial precedents, and its procedural irregularities, analyzing its applicability as a precedent. This also attempts to answer the question, “Whether deemed RPs can end prolonged corporate insolvency resolution processes due to the non-appointment of Resolution Professionals?” 

Judicial Pronouncement 

Since the enforcement of the Insolvency and Bankruptcy Code, in 2016, several cases have arisen where the financial creditors in a Committee of Creditors (hereinafter “CoC”) have been unable to reach a consensus in multiple meetings and achieve the required majority. A primary reason for such a deadlock is that66% of the voting shares are required to either appoint the IRP as the RP or replace the IRP with another RP under Section 22 of the IBC. Another reason behind this deadlock is that the IBC does not envision replacement of an IRP with another IRP.replacement. 

In SBI v. Teena Saraswat Pandey, SBI had 61.87% of the voting shares in the first meeting of the CoC and proposed the replacement of the IRP, to which the rest of the two creditors objected. In the revised list of claims submitted in the second meeting, the voting shares of SBI were brought down to 51.43%. Therefore, SBI again proposed the replacement, which failed, resulting in a situation of deadlock. Consequently, an application was moved before the NCLT, whose judgment effectively appointed the IRP as the deemed RP by directing the IRP to continue as deemed RP and stating that it shall not entertain any application for replacement. 

Background 

There are a few precedents of the NCLAT which seem to not have been followed in the instant case, making its validity questionable. Specifically,Indiabulls Housing Finance Ltd. v. Sandeep Chandna (hereinafter “Sandeep Chandna”), wherein the NCLAT held that if a proposal has been rejected by a majority of members of the CoC, no member is empowered to approach the tribunal for replacement of the IRP under Section 22, imposing an additional condition apart from the voting share requirement, i.e., the consent of the financial creditors in the CoC. Accordingly, the application should have been outrightly rejected for lack of locus standi. It also did not utiliseAnil Kumar v. Allahabad Bank (hereinafter “Anil Kumar) wherein the NCLAT held that in case of a deadlock between the financial creditors, the appointment of an RP to break the stalemate is expedient. Therefore, under Rule 11 of the NCLT Rules (inherent powers), the RP was appointed, who was different from the IRP. Thus, in the instant case, even if the application was not rejected, a different person, ought to have been appointed as the RP. 

Analysis  

While the instant case did not follow the aforementioned judgments, it cannot be declared bad in law due to the principle of per incuriam which provides exceptions to the binding nature of judgments passed by superior authorities. Specifically, when a judgment provides a mere direction without laying down any principle of law, it is not a precedent as per the case of State of U.P. & Ors v Jeet S. Bisht & Anr. The Anil Kumar casemerely stated the appointing of an RP as expedient, thereby making expediency the basis for passing the judgment. This reasoning was followed in the instant case as well because the IRP had acted in a bona fide manner and had already made the resolution plan.  

It is also not against the principle laid down in the Sandeep Chandna case because of dual reasons. Firstly, the facts of the case are different, as SBI did not propose any name when it submitted the application and simply prayed for the NCLT to appoint any other person as the RP, rather than a specific person. Hence, a distinguishing interpretation of the Sandeep Chandna case can be seen here, such that it now disempowers only those applications which seek replacement with a specific person whose name has been rejected. Secondly, multiple provisions of the NCLT Rules, 2016 and the Companies Act, 2013 have stated that the NCLT shall be bound by the principles of natural justice, which includes Audi Alteram Partem. Hence, merely hearing and deciding a case on merits and then dismissing the application in any way does not go against the essence laid therein. 

This case has also interpreted various provisions, namely, Regulations 17(3) and 16(3) of the CIRP Regulations, along with Section 16(3) of the IBC which state that the IRP shall perform the functions of the RP from the 40th day of the commencement of insolvency until an RP is appointed, tacitly providing for the existence of a deemed RP.  

Regarding these provisions, on the one hand, it can be argued that the existence of the deemed RP  is conditional on the ultimate appointment of the RP. On the other hand, it can be argued that a mandate has been placed on the IRP to perform the functions of the RP after 40 days of non-appointment of the RP. Thus, the provision itself contemplates a situation where the RP may never be appointed and reiterates the importance of the underlying principle of the IBC i.e., completing the CIRP within a time-bound manner under 180 days. Following the latter interpretation, the judgment noted that discretion had been provided to it regarding the replacement of the IRP by appointing any other insolvency professional through precedents, but it was not expedient to do so as the IRP had already placed the resolution plan for the consideration of the CoC, and doing so at that stage would have no rational foundation. 

In answering whether the appointment of a deemed RP can assist in resolving prolonged CIRPs due to the non-appointment of an RP, one only needs to look at the time it took cases prior to the addition of the aforementioned provisions. In the instant case, more than 6 months passed between the first hearing and the passing of the judgment during which time the IRP continued to act in furtherance of the CIRP. While the CIRP was not completed within a prescribed limit, a stark contrast can be seen from previous cases like Nikhil Mehta & Sons v. AMR Infrastructure, where such disputes, including their appeals, went on for much longer, staggering the CIRP. Appointing the deemed RP also seems to curb grounds of appeal like those present in the Sandeep Chandna case and ensure a much speedier resolution. With this case acting as a precedent, the appointment of a deemed RP when the IRP has been acting in a bona fide manner is bound to assist in preventing the stoppage of the CIRP before it essentially starts. 

Conclusion  

Though the foundation of one of the applications on which this judgment is based is questionable, nevertheless, it serves as an interpretation of several provisions and judgments, paving the way for effectively appointing the IRP as the deemed RP if the IRP acts in a bona fide manner. This further solidifies such an appointment with the direction that no further applications shall be entertained for a replacement. Since the essence of precedents has been taken into account, the judgment cannot be called “bad in law” or a judicial step-back and has become a precedent for resolving the lacunae regarding situations of deadlock under Section 22 and for completing CIRP in a time-bound manner when the main impediment is the non-appointment of a RP. 

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