CREDITORS MUST PLAY CATALYTIC ROLE IN CIRP

[Mr. M. GOVINDARAJAN]

In Corporate Insolvency resolution process (‘CIRP’ for short) the Interim Resolution Professional (‘IRP’ for short)/Resolution Professional (‘RP’ for short) play a vital role.  They are responsible to complete the CIRP of the Corporate Debtor with the aid of the applicants, corporate debtor.  The Code also prescribes that the Directors and officials of the corporate debtor are to extend their co-operation to the IRP/RP in performing their duties, for the revival of corporate debtor.  If they do not co-operate with IRP/RP then he is having power to file an application before Adjudicating Authority for directions to supply the documents/information required to the IRP/IP.  Though IRP/RP is responsible for the conduct of CIRP, equal responsibilities are there on the creditors who file applications to play a catalytic role in CIRP.

In SHRI GURU CONTAINERS THROUGH ITS SOLE PROPRIETOR, MR. SOM PRAKASH JHUNJHUNWALA VERSUS JITENDRA PALANDE - 2023 (2) TMI 900 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL , PRINCIPAL BENCH , NEW DELHI, the appellant filed an application for initiation of CIRP against the Corporate Debtor,   Tarang Exports Private Limited under section 9 of the Insolvency and Bankruptcy Code, 2016 (‘Code’ for short) before the Adjudicating Authority.  The Adjudicating Authority admitted the application on 17.02.2020.  Since the appellant did not propose the Interim Resolution Professional (‘IRP’ for short) , the Adjudicating Authority appointed IRP.  The appellant intimated the IRP of his appointment through his legal Counsel. 

The IRP had issued a public announcement on 11.03.2020.  There was no claim, including from the Operational Creditor, the appellant, who filed the application for CIRP.  Therefore the IRP could not able to constitute the Committee of Creditors (‘CoC’ for short).  The IRP informed the publication of the Public Announcement to the appellant.  Due to the COVID - 19 the appellant could not pursue the case with the IRP till September 2020.  Thereafter the appellant through his legal counsel approached the IRP seeking the status of CIRP.  The IRP sought for the contact details of operational creditor though the same has already been furnished to him.  The legal counsel of the appellant resubmitted the same to the IRP on 30.09.2020.  There was no response from IRP. On 09.10.2020 the legal counsel of the appellant sought the status of CIRP.  The IRP replied to the legal Counsel requesting him to refrain from entering into further correspondence with him in the absence of any authorization to represent the Appellant, though previously the IRP had been communicating with the legal counsel.

In the meanwhile the IRP filed an application before the Adjudicating Authority under Section 19 of the Code for issue of directions to the suspended directors of the Corporate Debtor and the Appellant to furnish requisite information for proceeding with the CIRP of the Corporate Debtor and reimbursement of the CIRP costs.  On 21.03.2022, the IRP filed an application under Section 60 of the IBC before the Adjudicating Authority, inter-alia, seeking the termination of the CIRP initiated against the Corporate Debtor; seeking his discharge from duties as IRP and reimbursement of costs amounting Rs.5,62,000/- for duties performed.   The Adjudicating Authority allowed the application filed by IRP in which it directed the appellant to pay the cost of Rs.5,62,000/-.  Against this order the appellant filed the present appeal before the National Company Law Appellate Tribunal.

The appellant contended that the order of Adjudicating Authority suffered from the following three irregularities-

• The order was passed without considering the submissions of the Appellant.
• The order was passed in violation of Rule 150 of NCLT Rules as it was not pronounced in the open court. 
•  The impugned order does not contain reasons for allowing the fees and expenses claimed by the IRP. 

The appellant further contended that-

• There was a dereliction of duty on the part of IRP and the not obligated to reimburse the IRP for his fees/expenses.
• The IRP had failed to disclose the detailed item wise break-up of the fees and expenses claimed by him which is required in terms of the Code of Conduct in terms of the IBBI (Insolvency Professionals) Regulations, 2016 and Regulation 34-A of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations 2016. It has also been pointed out that the fees charged by the IRP are exorbitant.

The respondent IRP submitted the following before NCLAT-

• On receipt of communication from the Operational Creditor regarding his appointment as IRP, he sought the contact details of the Operational Creditor and sought information from the suspended management for conduct of CIRP. 
• No response had been received from the suspended management.
•  The public announcement was published by him on 11.03.2020. However, no claims were received pursuant to the publication of the public announcement.
• In the absence of books of accounts, financial statement and other relevant records of the Corporate Debtor and in the absence of any claim having been received by the IRP from either financial creditors or operational creditors he was not able to constitute a CoC.
• The Operational Creditor had neither submitted claim nor paid IRP fees and other CIRP costs. 
• The operational creditor and corporate debtor did not co-operate in CIRP and also showed dis-interest in this regard.
• Therefore he filed an application before Adjudicating Authority under Section 19 seeking directions from the Adjudicating Authority to the suspended management to extend assistance and cooperation besides reimbursement of expenditure incurred on CIRP.
• In the absence of CoC, the appellant, operational creditor was to meet the CIRP costs.
• The counsel of the Operational Creditor had promised to pay the cost of CIRP to the IRP in their email dated 09.03.2020 but not do so.
• Therefore he had filed a Section 60 application before the Adjudicating Authority seeking reimbursement of his fees and termination of CIRP.

The NCLAT heard the submissions made both by the appellant and the IRP, the respondent. 

The short question before NCLAT to be answered is whether in the given facts of the present case, the IRP is entitled to claim fees and expenses incurred in the CIRP proceedings and, if so, whether it is incumbent upon the Operational Creditor/Respondent to bear such fees/expenses subject to their being reasonable.

The NCLAT analyzed the following provisions-

• Section 5(13) of the Code - definition of Insolvency Resolution Process Costs;
• Code of Conduct for Insolvency Professionals;
• Regulation 31 of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 dealing with Insolvency Resolution Process Costs;
• Regulation 33 dealing with the costs of Interim Resolution Professional;
• Regulation 34 dealing with Resolution Professional Costs;
• Regulation 34A dealing with disclosure of costs.

The NCLAT then considered the question as to whether the IRP had discharged his duties as IRP with due diligence in furthering the CIRP and therefore entitled to CIRP fees/expenses or not. The NCLAT observed that-

• On receipt of email dated 09.03.2020 from the Operational Creditor regarding his appointment as IRP, on the same date he sought the contact details of the Operational Creditor and also sent a communication to suspended management requesting other related particulars, documents and books of accounts of the Corporate Debtor so as to effectively conduct the CIRP and manage the affairs of the Corporate Debtor. 
• Neither the Operational Creditor nor the suspended management had provided access to the books of accounts, financial statement, bank account details or any other related information to the IRP. 
•  The Operational Creditor was not in contact directly with the IRP. Instead, an advocate Mr. Saurabh Pandya was seeking status of CIRP from IRP without any authorization from the Operational Creditor. 
• The IRP issued public announcement, the details of which were communicated to the Operational Creditor by emails.
•  The IRP had visited the office of the Corporate Debtor on 17.03.2020. However, the suspended directors were not available at the office during the visit and were not traceable.
• The office of corporate debtor was in the custody and possession of the Court Receiver appointed by the High Court of Bombay.
• In the absence of financial records, the IRP was hamstrung in determining the financial position of the Corporate Debtor and hence his inability to constitute the CoC for no fault on his part.

The NCLAT further observed that shifting the entire blame on the IRP on grounds of non-performance of duty and making him the scapegoat does not appear to be justified. It is equally important for the creditors to play a catalytic role in the insolvency resolution process given the present regime of creditor-driven Code.  The rigors of similar standards of discipline should also apply on the creditors.   The conduct of the Operational Creditor in the present case is deprecatory in that once the CIRP process had commenced, the Operational Creditor went into a sleeping mode. The Operational Creditor did not seem interested in resolution of the Corporate Debtor is evident from the fact that till date no claim has been filed with the IRP.

The Operational Creditor was at liberty to report any dereliction of duty on the part of the IRP and that not having been done, the denial to pay fees and expenses is not acceptable.   The Appellant has at any stage made no complaint that the IRP had contravened the provisions of the IBC or the Rules framed there under or complained about the errant conduct of the IRP.   The Operational Creditor has failed to substantiate any lapses or deficiency in the performance of duties by the IRP. The NCLAT, therefore, held that the IRP was entitled in this case to claim his fees/expenses incurred on CIRP and needs to be compensated for his professional services.

The NCLAT then considered the next question as to who will bear the CIRP expenses in the present case.  It is incumbent upon the Operational Creditor to pay for the CIRP expenses.  Since no CoC has been constituted it is the Operational Creditor who is liable to bear the expense/fees of IRP in the present case.  Then the NCLAT analyzed the claims of the IRP.  He claimed-

• IRP fees - Rs.4,00,000/-;
• Fee for Public announcement - Rs.12,000/-
• Legal Expenses - Rs.50,000/-
• Company Secretary - Rs.50,000/-
• Out of pocket expenses - Rs.50,000/-

The said amount has been approved by the Adjudicating Authority.  The NCLAT observed that a substantial portion of this period was hit by the lockdown arising out of the Covid outbreak.  The CIRP proceedings were stymied on account of the fact that the IRP could not lay hand on the information required to undertake various steps of CIRP like preparation of Information Memorandum, Expression of Interest etc.   The IRP had also not succeeded in constituting the CoC and therefore no possibility to collate claims.  Since CIRP had not made much progress beyond its preliminary phase and there was no occasion to carry out any exceptional responsibility. On this basis, NCLAT decided   suffice to restrict the expenditure to Rs.2,00,000/- only on account of fees.   The expenditure incurred on public announcement amounting to Rs. 12,000/- deserves to be reimbursed fully since this work was completed.   The NCLAT wanted to rationalize the fees on Advocate, Company Secretary and out of pocket expenses, by reducing it by one half.  The NCLAT held that the payment of a consolidated amount of Rs.2,87,000/- plus GST to the IRP would suffice towards payment of fees/expenses.

NCLAT thus modified the order of Adjudicating Authority and directed the appellant to pay Rs.2,87,000/- to the IRP within one week from the date of uploading the order.