Role of the Resolution Professional: Unveiling the Covert Practices

[By Umang Pathak]

The author is a student at the Jindal Global Law School.

On 18th December 2020, the National Company Law Appellate Tribunal (“NCLAT”) in Rajnish Jain v. Anupam Tiwari & Anr., held that, neither the Resolution Professional (“RP”) nor the Committee of Creditors (“COC”) have the sufficient vires to determine disputed claims of creditors. Only the National Company Law Tribunal (“NCLT”) has the judicial authority to adjudicate upon the claim of a creditor – whether the debt falls under s. 5(8) as financial or s. 5(21) as operational debt under the Insolvency and Bankruptcy Code, 2016 (“I&B Code”). Ex Facie, the decision seems to simply clarify the roles of an RP and COC, but on a deeper scrutiny, it also reveals how a legal lacuna can be misused to strip off legitimate rights of a creditor and ultimately, “game” the system.

Thus, the article attempts to first, present the law with respect to the role of RP and COC. Second, the article shall expound upon the facts of Rajnish Jain case which shows how the legal lacuna was being exploited by the RP and the promotor of the corporate debtor. Finally, the article shall conclude with few remarks by the author and a possible suggestion that can be implemented to tackle the issue.

Introduction – Role of RP

S.25(2)(e) of the I&B Code read with Regulations 13 and 14 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations 2016 (“CIRP Regulations”) entrusts the duty of maintaining an updated list of claims that includes verification and determination upon the RP. Furthermore, the above-mentioned regulations also limit the role of RP to that of an administrative authority, to verify and collate claims. Under s. 18(1)(b) of the I&B Code, the interim RP is to receive and collate all the claims submitted by the creditors pursuant to the public announcement regarding insolvency of the corporate debtor. The interim RP is also entrusted to constitute the COC after receiving these claims under s 21(1) of the I&B Code. S. 28 enumerates the occasion when the RP requires approval of the COC for certain matters, mentioned under sub-sections (1) clauses (a) to (m). Also, 66% of voting share is required in the COC meetings to pass a proposed resolution plan.

Thus, on perusal of the aforementioned statutory provisions under the Code, the role and responsibilities of RP is non-judicial and limited to administrative functions essential to the insolvency resolution procedure. This has been reiterated in the landmark decision of Swiss Ribbons Pvt. Ltd. v. Union of India, where the court whilst upholding the constitutionality of the provisions, held that the RP is really a facilitator of the resolution process, whose administrative functions are overseen by the COC and by the adjudicatory authority. However, the complications arose on the interpretation of “collating” and maintaining an “updated” list of claims, and in Dipco Pvt. Ltd. v. Jayesh Sanghrajaka, where the appellate tribunal held that the decision of RP for collating claims of creditors is of quasi-judicial nature, and therefore, the adjudicatory authority lacks jurisdiction to re-determine the claims. Thus, the legal issue is with respect to the vires of the RP – whether an agitated creditor is supposed to file his claim before the adjudicatory authority, the COC or the RP.

Case Review – Facts

This lacuna has left the essential catalysts of the resolution process i.e., the creditors in utter dismay. However, it has also provided an opportunity for the RP to manipulate the system in their favor that has been demonstrated in the Rajnish Jain case. The facts are fairly simple – before constituting the COC inter alia the interim RP within 7 days of the public announcement has to verify and collate the claims of the creditors. One of the creditors named M/s BVN Traders filed its claim as ‘financial creditor’ (“FC”) which was duly admitted by the interim RP. After appointment of the RP by the NCLT, Rajnish Jain who is the suspended promotor of the corporate debtor, filed an application under s. 60(5) of the I&B Code stating that M/s BVN Traders is not a FC. The RP was then directed to re-verify the claim to which he submitted that BVN Traders debt falls under operational debt. Before the order of the adjudicatory authority, the matter was placed before the COC which then voted for BVN Traders as a FC. Pursuant to this meeting, the adjudicatory authority also rejected the application filed by the promotor and held BVN Traders to be FC. Again, a resolution was passed to reverse the decision of the adjudicatory authority, which was successfully passed thereby declaring BVN Traders as an operational creditor (“OC”). Another agenda in that meeting was to withdraw the insolvency application under s. 12A that required approval of ninety percent voting, which was vehemently opposed by BVN Traders having 30% voting share. In the final COC meeting, two agendas were proposed – first was to eliminate BVN traders as a creditor and second, to again pursue withdrawal of application under s. 12A. Both of them were approved which led to the present suit by the creditor, as he was stripped off his rights even after the order by the adjudicatory authorities.

Case Review – Analysis

The facts of the case clearly indicate conspiracy against BVN Traders by the RP and the suspended promotor of the corporate debtor, as also emphasised by the NCLAT. The whole scheme’s objective was to withdraw the insolvency application by the operational creditor, to which BVN Traders was opposing. Therefore, even before the order by the adjudicatory authority regarding the claim, the RP took the route of COC’s approval, which ultimately led to first, stripping off BVN Trader’s position as financial creditor, and second, to completely take away his rightful claim as any creditor during the insolvency procedure. This was caused by the lacuna regarding the vires of the RP – whether maintaining an “updated” list of the claims includes re-determining and re-verifying the claims, even after the COC has been constituted. The NCLAT’s decision has cleared the air by establishing that the powers of the RP are purely administrative, which means that the legal question of determining disputed claims of creditor after the COC has been constituted, can only be adjudicated by the NCLT since it’s a quasi-judicial body. It is similar to the decision in Swiss Ribbons, but only with respect to the role of RP. Regarding the role of COC, this judgment has held that not even the COC can vote for determining the claims of creditors as it will become a serious conflict of interest. The matter of determination of claim is purely a legal question, and the person agitated by such should present their matters before the adjudicatory authority. Therefore, in order to prevent such collusive practices, it’s needed that the RP should not be entrusted with the powers to determine claim of creditor after COC has been constituted.

Conclusion – Possible Way Forward

Considering that these collusive practices are the result of varying and contradictory judgments which have differently inferred  the duty of the RP to determine claim of creditor, the onus of clarification falls upon the legislature. For instance, in this case, the RP submitted that under Rules 13 and 14 of the CIRP Regulations, it was the duty of interim RP/RP to maintain an “updated” list of claims including its verification and determination. This meant that RP could reclassify the claims, even after constituting the COC and despite the adjudicatory authority’s contradictory decision. Thus, the legislature can further clarify the interpretation of these words, so it is clear and decisions like Dipco Pvt. Ltd. do not occur.

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