An Inevitable Collision Under The Insolvency Code

BY PALAK AGRAWAL AND VISHESH JAIN, third-year students at nluo, odisha

Introduction

The National Company Law Appellate Tribunal [‘NCLAT’] in its recent decision of SBI v. Metenere held the substitution of Insolvency Resolution Professional [‘IRP’] under the Insolvency Bankruptcy Code 2016 [‘Code’] to be valid. The question dealt with the possibility of unfair and biased Corporate Insolvency Resolution Process [‘CIRP’] since IRP appointed was an ex-employee of the creditor. The author attempts to test the NCLAT judgement against the various provisions of the Code, which is identified as creditor centric, therefore leading to inevitable collision.

Background of the Case

In the case of SBI v. Metenere, the Resolution Professional [‘RP’] appointed by the Committee of Creditors [‘CoC’] was an ex-employee of one of the financial creditors i.e., State Bank of India and was also drawing pension from it. M/s Metenere Ltd., the corporate debtor objected to such appointment based on apprehension of bias. The point of deliberation before NCLAT was whether the appointment of an ex-employee of a creditor as RP would render the CIRP process unfair and biased? The NCLAT held that substitution of RP is valid on the basis of apprehended bias. The Adjudicating Authority while dealing with the aforementioned issue acted beyond its jurisdiction and certainly overlooked the literal rule of interpretation.

Analysis

  • Overstepping of Jurisdiction by the NCLAT

Entry 8A of the First Schedule of the IBBI Regulation 2016 mandates RP to disclose any association with the financial creditors to the CoC, thereby leaving his appointment on the discretion of the CoC. However, any party to the CIRP aggrieved by the compliance of this provision can approach the Insolvency and Bankruptcy Board of India [‘IBBI’] under Section 217 of the Code. The IBBI is the appropriate authority to take any disciplinary action against the irregular conduct of the RP. A reading of Section 217 elucidates that IBBI shall be the proper authority deciding irregular conduct of the RP, instead of Adjudicating Authority. Therefore, a decision by the Adjudicating Authority on apprehended biasness of the RP, lacks  jurisdiction.

  • Apprehension of Bias

NCLAT while formulating its decision relied on ‘real danger’ test of apparent bias. The real danger test traces back its origin in the English case of Regina v. Gough, wherein the House of Lords laid the test in term of real danger than likelihood. The court opined that the merits of the case should lead to possibility rather than probability. In the Indian context, the Supreme Court in Kumaon Mandal Vikas Nigam Ltd. v. Girja Shankar Pant also opined, that the surrounding circumstances must be collated and then a conclusion must be drawn, to ascertain that whether there is a mere apprehension of bias or real danger of bias. In the instant case, IRP appointed was merely a pension drawee from the creditor and was not on a panel vested with any decision-making power. Even at a later stage, if the IRP is appointed as the RP, there are certain limitation on the power of RP which require prior approval of the CoC. Therefore, the Adjudicating Authority did not examine the charges of biasness based on any evidence and adopted a lower threshold for determination of biasness.  

  • Disregard to Literal Rule of Interpretation

Under Regulation 3(1) of IBBI (Insolvency regulation for corporate person) 2016, the IRP shall be eligible to be appointed as RP, if he is independent of the corporate debtor. A bare perusal of Regulation 3(1) shows that it does not prohibit the appointment of RP if related to any party other than the corporate debtor. However, in the present case, NCLAT held the appointment of the RP to be wrong, due to his relationship as ex-employee with the financial creditor. The said finding appears to be inconsistent with the literal rule of interpretation as reiterated by the apex court in Kanai Lal Sur case. In this case, it was held that if the words used were capable of one construction only then it would not be open to the court to adopt any hypothetical construction that is more consistent with the present act. The NCLAT, therefore, on the apprehension of bias took the path inconsistent with the established principle of law and propounded a new judicial principle.

  • IRP/RP as the Custodian of the Corporate Debtor

IRP/RP acts as a custodian to the corporate persons undergoing CIRP. It has been reiterated by tribunals and courts that the role of IRP/RP is not merely supervisory but also of a negotiator between the creditors and the corporate person to assess and formulate a plan which is best suited for the corporate debtor in keeping his business as a going concern.

Section 18 of the Code provides for the statutory duties of the IRP which includes carrying every task that is crucial for bringing the insolvency process in motion and collating information on all assets, operations, finance of the corporate person and taking control over the same until the RP is appointed. IRP after assessing the financial position of the corporate person constitutes a CoC under Section 21 of the Code. Once the CoC is constituted, RP under Section 25 of the Code takes over the activities as performed by IRP and carries out further processes involved in a CIRP like preparing information utility and inviting prospective Resolution Applicants. Apart from this, Entries 5 to 9 of the IBBI Regulations provides for the Code of conduct for impartial and independent conduct of the RP.

Therefore, it is clear from the aforesaid reading, that IRP/RP plays a quintessential role in the whole process of reviving the corporate debtor through CIRP. The IBC scheme and the IBBI Regulation mandates the RP/IRP to be impartial and independent, otherwise it will defeat the very purpose of the Code, which is to balance the interest of all the stakeholders involved in the process.

  • Supervision of CoC over the duties of RP

During CIRP, the appointment of RP is put-forth before CoC which in its first meeting appoints either the IRP or any other person of their choice as RP by majority ratification of 66%. Apart from this, the CoC is also empowered to change the appointed RP at any point of time during the CIRP process by the majority of 66%. This section makes it significantly clear that the appointment or removal of the RP is directly in the hands of CoC. Putting it differently, if Adjudicating Authority does not endorse the RP as selected by the CoC, then the CoC by the majority vote of 66% can appoint the same person. Therefore, the very independence given to IRP/RP remains to be ambiguous, as its appointment, as well as its removal depends on the CoC. Therefore, the NCLAT’s judgement clearly poses a question on independence of RP.

Apart from the power of appointment and removal, the CoC oversees and ratifies all the functions undertaken by the RP. Besides, the CoC is called upon to consider the resolution plan vetted and verified by the RP and the RP is not required to express his opinion on matters within the domain of CoC to approve or reject the resolution plan. Therefore, every decision by RP regarding the selection of a resolution plan or liquidation has to be aligned with the commercial wisdom of the CoC. Furthermore, it is a settled principle that RP cannot challenge the commercial wisdom of the CoC unless it is against the very purpose of the Code i.e. it does not balance the interest of all the stakeholders concerned.

Therefore, it is no harm to mention that a biased action taken by the RP towards CoC at the stage of CIRP has a negligible scope of being checked or corrected. This leads to a bias and may prove to be detrimental towards the corporate debtor. Thus, making RP more dependent on CoC, therefore leading to loss of independence in decision making power.

Conclusion

In conclusion, the NCLAT’s decision in Metenere emphasises on the independence of the IRP/RP in order to conduct CIRP in an unbiased and fair manner. But once the Adjudicating Authority assumes the power to adjudicate upon the appointment of IRP/RP, this will open the Pandora box inviting challenges against every appointment and nomination of IRP/RP by the corporate debtor which is against one of the objectives of the Code i.e. the timely completion of the insolvency process.

Lastly, the author believes that the objective of the Code can be truly achieved when the RP/IRP performs its duties without being influenced by CoC. But it is almost impracticable for the IRP/RP to work independently in the current arrangement of the Code, as the CoC overlooks the appointment as well as functions of the IRP/RP. Therefore, a shift towards institutionalising the appointment of IRP/RP will help break the chain between CoC and IRP/RP and will enable them to work in a more fair and unbiased manner. The aforementioned case has been appealed in Supreme Court and hence, positive changes which align with the Code are awaited.

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