Independent Resolution Professional: A mythological being under the IBC?

[By Arshit Kapoor and Kartikey Bhalotia]

The authors are students at National Law University, Odisha.

Introduction

This article enumerates the role of a Resolution Professional (“RP”) in carrying out the Corporate Insolvency Resolution Process (“CIRP”) as an independent umpire, as provided by the scheme of the Insolvency and Bankruptcy Code, 2016 (“IBC”). This is done in the context of the National Company Law Appellate Tribunal (“NCLAT”) recent decision the case of State Bank of India v. M/S Metenere Ltd. (“Metenere”) which directed substitution of the Interim Resolution Professional (“IRP”) stating that he is an ex-employee of the Financial Creditor and thus creating an apprehension of inclination towards the financial creditor. This article analyses the said NCLAT’s decision in contrast to the various provisions of the IBC which inherently creates an inclination of the RPs towards the financial creditors and hence, makes their collusion inevitable. The article also looks into the very scope of the NCLAT’s jurisdiction in giving the said order and tries to analyse whether it was merely a desperate attempt for instilling the importance of the independence of a Resolution Professional without considering the statutory backing for the same.

Resolution Professional: Guardian of the Bankrupt

The Bankruptcy Law Reforms Committee in its Report of 2015 (pg. 86) stated that an RP/IRP is the caretaker of the corporate person undergoing the CIRP. It has been stated in the Report that he is not only a supervisor of the bankrupt entity but also a negotiator between its creditors and the debtors in order to assess the prospective scope of keeping the said entity as a going concern. Taking these observations into account the legislature passed the IBC which explicitly provided for the duties and responsibilities of an RP/IRP.

For instance, sections 18 and 25 of the IBC provide for the duties of the IRP and the RP respectively. As per these provisions, an IRP has the duty to carry out all the key tasks essential in setting the insolvency process into motion, which primarily includes inter alia collation of claims and formation of the Committee of Creditors (“CoC”). Once, this is done the RP appointed by the CoC (section 22 IBC) takes over and carries out further processes involved in a CIRP like preparing of information memorandum and inviting prospective Resolution Applicants.

Apart from the IBC, the Insolvency and Bankruptcy Board of India (Resolution Professionals) Regulations, 2016 (“IBBI Regulations”) under the First Schedule explicitly provides for the ‘Code of Conduct for Insolvency Professionals’. Entries 5 to 9 to the First Schedule lays down certain code of conducts which are pre-requisites for ensuring the impartiality and independence of an RP.

Therefore, it can be observed that an RP/IRP is at the centre stage of the CIRP. Moreover, the scheme of the IBC and the IBBI Regulations bring to the forefront the importance of their independence and impartiality. This is essential because a biased RP/IRP would defeat one of the primary objects of the IBC, i.e., “balancing the interest of all the stakeholders”. However, the question that arises is whether the provisions of the IBC read in entirety allow for such unaffected and independent conduct by an RP/IRP during the course of the CIRP.

Independent Umpire or A Marionette?

An IRP is appointed by the Adjudicating Authority on the recommendation of the financial creditor who files the application under section 7 of IBC. Further, it becomes pertinent to note that the IBC does not provide for any disqualification or eligibility criteria for the Adjudicating Authority to consider while appointing the recommended IRP. This essentially leads to making the Adjudicating Authority a mere rubber stamp in the appointment of IRP.

This appointment of the IRP then at a later stage is put before the CoC which in its first meeting either appoints the IRP or any other competent person as the RP of the Corporate Debtor by a majority vote of 66% (section 22). Moreover, the CoC under section 27 has been empowered to resolve to change the RP by a majority vote of 66% at any time before the completion of the CIRP. Therefore, the above provisions make it apparent that the appointment and removal of the IRP/RP directly or indirectly vests with the CoC, leaving very negligible scope for interference by the Adjudicating Authority in this context.

In other words, even if the Adjudicating Authority declines to appoint the recommended IRP under the section 7 application, the CoC can sub-silento go against the Adjudicating Authority’s decision by appointing an RP of their choice by a majority vote of 66%. Therefore, the very basis of the independence of an RP/IRP is shadowed because of the fact that their appointment, as well as removal, completely vests with the CoC. This fact clearly acts as a hurdle in giving effect to the NCLAT’s ruling in Metenere in terms of the necessity of an independent RP.

Apart from the power of appointment and removal, the CoC also has leverage over an RP on the aspect of decision making. Every vital decision regarding the working of the Corporate Debtor needs to be ratified by the CoC, under section 28 of the IBC. Also, every decision concerning the selection of Resolution Plans or opting for liquidation, in which the RP participates, is protected by the doctrine of ‘Commercial Wisdom’. The Hon’ble Supreme Court in the case of Committee of Creditors of Essar Steel v. Satish Kumar Gupta has made it very clear that the commercial decision of the CoC cannot be challenged as it is protected by the doctrine of Commercial Wisdom. The only exception to the doctrine is that the impugned decision of the CoC should not have the effect of violating the very objectives of the IBC. Therefore, it would not be out of place to state that at the vital stage of CIRP, the bias of an RP towards the financial creditors can have a negligible scope of being checked or challenged. Thus, making an RP/IRP more of a marionette of the CoC than an independent umpire.

Metenere: A Desperate Attempt for Independence of Resolution Professionals?

In the instant case, the NCLAT held that there is an “apprehension of bias” as the proposed Resolution Professional is the ex-employee of the Financial Creditor and hence, his appointment would impair a fair and unbiased CIRP. The test of “apprehension of bias” applied by the NCLAT did not require the applicant to cite specific instances of biased conduct by the RP. This, therefore, leads the NCLAT to severely contradict its earlier decision in Milind Dixit v. Elecon Engineering Co. Ltd. wherein it was held that the specific instance of irregularity or bias on the part of the RP needs to be pointed out to vitiate the entire CIRP.

Further, under the IBBI Regulation entry 8A to the First Schedule provides for disclosure by the RP to the CoC about his association with any of the financial creditors as an ex-employee, thereby leaving it to the discretion of the CoC to appoint even such RP, as what is required is mere disclosure. Moreover, even if the RP fails to comply with these requirements or indulges in any sort of biased and unfair activities, the remedy for the aggrieved party has been provided under section 217 of the IBC which requires the aggrieved party to approach the IBBI, and it will be the IBBI which will initiate disciplinary proceedings against the Resolution Professional and not the Adjudicating Authority.

A bare perusal of the above observations makes it evident that the NCLAT has not been empowered to decide matters regarding the conduct of an RP under the IBC. Therefore, it can be argued that the decision of the NCLAT in Metenere lacks proper jurisdiction and thus, is a desperate attempt to satisfy the long-standing need for the independence of RPs/IRPs under the IBC. Moreover, this becomes problematic also because if Adjudicating Authorities are given a leeway to decide the on the issue of independence and impartiality of the RPs, it may lead to the opening of floodgates for challenges to every nomination/appointment of the RPs, leading to an adverse effect on the timely completion of the CIRP.

Conclusion

In conclusion, it is argued that the decision of the NCLAT in Metenere was a definite attempt at stressing the importance of an independent RP/IRP under the scheme of IBC. However, the tribunal failed to consider some of the very important considerations raised by the authors in this article. The decision though can be said to be in the direction which goes in consonance with one the primary objectives of the IBC, i.e., “balancing the interests of all the stakeholders”, it at the same time raises the risk of the opening of floodgates for such challenges.

One of the most important features of the IBC has been the completion of the CIRP in a time-bound manner which is very fundamental to the fulfilment of the objectives of the IBC. However, the decision in Metenere can lead to seriously hampering the timely completion of the CIRP. This is primarily because, once the adjudicating authorities under the IBC are allowed to adjudicate upon the challenges to the appointment of RPs/IRPs, such an assumed power can be used by the erstwhile management of the corporate debtors to delay the proceedings.

Lastly, the authors believe that though the objectives of the IBC can be truly achieved only when the RPs/IRPs act without any fear or favour of the CoC, the current scheme of the IBC vests all the powers of appointment and removal of the RPs/IRPs directly or indirectly with the CoC which makes unaffected conduct of the RPs/IRPs almost impracticable. Therefore, it is argued that a shift towards institutionalizing the appoints of RPs/IRPs can be a major step towards ensuring the independent and impartial conduct of the RPs/IRPs. This is because, in an institutionalized system of appointment of RPs/IRPs, the CoC essentially appoints an institution which then appoints the RPs/IRPs. This breaks the direct link between the ultimately appointed RP/IRP and the CoC.

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