Independence of IRP/ RP – law specifically provides for independence from Corporate Debtor only and not from Corporate Creditor. NCLAT/ NCLT ask for substitution of IRP / RP - not justified and is not as per law and general practices.

				By: DEV KUMAR KOTHARI
				August 26, 2020
All Articles by: DEV KUMAR KOTHARI View Profile

Contents

2020 (8) TMI 112 - NATIONAL COMPANY LAW APPEALLATE TRIBUNAL, NEW DELHI STATE BANK OF INDIA VERSUS M/S. METENERE LTD. Company Appeal (AT) (Insolvency) No. 76 of 2020 Dated: - 22 May 2020 and other related orders / judgments.

Provisions considered by NCALT:

Sections 7, 9,10,16, 22, 27 of the Insolvency and Bankruptcy Code, 2016

Regulations 3, 31, 32 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016

Scope of this article:

This article is restricted to study about judgment of NCALT / NCLT on aspect of IRP to be independent of financial creditor.

Decision of NCALT:

NCALT affirmed view and orders of NCLT in which it has been held that an ex-employee of creditor, having long association with creditor should be substituted, because he may not be independent.

With due respect, the author disagree with that view for important reasons like:

An IRP/ RP has to be dutiful to his duties as IRP/ RP and not to any party. His functions are not such which require complete independence.
There is provision for independence of IRP/RP from any debtor but there is no provision to the effect that IRP/ RP should also be independent of creditor.
In government functions also we find that departmental authorities are appointed appellate authority. The appellate authority is also required to discharge his duties as appellate authorities, and he is supposed to discharge such functions as an independent and not expected to be influenced by fact that he is an employee of tax department.
In ITAT , many Accountant Members are appointed who worked as officers in Income-tax Department for very long period ( at least 10 years as Commissioner means, generally more than twenty years of service). These Accountant Members are expected to discharge their duties as Accountant Member, without any influence of having long served the Income-tax department. Similar will be cases in respect of other judiciary services where appointment is based on experience in similar services.
When a tax payer cannot say that his case should not be heard by an Accountant Member who act as a judge, had long employment with income-tax department, or a CIT(A) who is continuing employee of government and has to decide a matter in which government is a party, then why a corporate debtor is allowed to raise an objection for proposed appointment of an ex- officer or empanelled IBC professional of any of creditor.
An Accountant Member or a CIT(A) act as a judge and therefore independence is very important.
An IRP or RP is not acting as a judge, and his duties are mostly administrative and as facilitator. The law provide that IRP/ RP should be independent of debtors and there is no provision for independency from creditor.
An employee on payroll of creditor may be denied to be IRP / RP because he is already having full time job and will not be able to act as IRP or RP. He is not denied to be appointed as IRP or RP on ground of vested interest.
Any person getting a remuneration is to be considered interested. However, one has to see whether he will be loyal and trustworthy to his duties and not necessarily to any party.
A person who is dutiful to his duties can be independent to his duties, irrespective of fact and source from which he earns.

In the order of NCALT Regulation 3(1) as considered, has been reproduced as follows:

“(1) An insolvency professional shall be eligible to be appointed as a resolution professional for a corporate insolvency resolution process of a corporate debtor if he, and all partners and directors of the insolvency professional entity of which he is a partner or director, are independent of the corporate debtor.”

In the order following observations and order are also made which are reproduced with highlights added for analysis:

4. The sole question arising for determination in this appeal is whether an ex-employee of the ‘Financial Creditor’ having rendered services in the past, should not be permitted to act as ‘Interim Resolution Professional’ at the instance of such ‘Financial Creditor’, regard being had to the nature of duties to be performed by the ‘Interim Resolution Professional’ and the ‘Resolution Professional’.

5. It is not in controversy that Mr. Shailesh Verma proposed as ‘Interim Resolution Professional’ by the ‘State Bank of India’ is an ex-employee of the ‘Financial Creditor’ having served the organisation for 39 years in the past and retired as the Chief General Manager in 2016. Merely, because Mr. Shailesh Verma continues to draw pension for services rendered in past does not clothe him with the status of an ‘interested person’. The fact that Mr. Shailesh Verma is drawing pension from ‘Financial Creditor’s organisation does not clothe him with the status of an employee on the payroll of ‘Financial Creditor’. Pension is paid for the services rendered to the employer in the past and it is a benefit earned for such past services under the relevant Service Rules. The pensioner is entitled to such benefit as a privilege under the Service Rules and not as a boon from the ex-employer. It is significant to refer to Regulation 3 (1) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, which reads as under:

6. The Regulation clearly provides that an Insolvency Professional shall be eligible for appointment as a ‘Resolution Professional’ for the ‘Corporate Insolvency Resolution Process’ of a ‘Corporate Debtor’ if he or his partners and directors of the Insolvency Professional Entity are independent of the ‘Corporate Debtor’. Admittedly, Mr. Shailesh Verma is a qualified Insolvency Professional and neither he nor any of his associates is alleged to be connected with the ‘Corporate Debtor’ in a manner rendering him ineligible to act as a ‘Resolution Professional’. Provision engrafted in Section 17(1) of the Income Tax Act, 1961 bringing pension within the ambit of ‘salary’ cannot be interpreted to render a pensioner of a ‘Financial Creditor’ under the statutory framework ineligible as an ‘interested person’ being in employment of the ‘Financial Creditor’ as the definition of ‘salary’ under the Income Tax Act, 1961 is designed only for the purposes of computing of income to determine tax liability. The argument advanced on behalf of the ‘Corporate Debtor’ in this Court to portray Mr. Shailesh Verma as an ‘interested person’ drawing salary within the meaning of Income Tax Act, 1961 defies logic and same has to be repelled.

7. This Appellate Tribunal had an occasion to consider ineligibility or disqualification for appointment as ‘Interim Resolution Professional’ or ‘Resolution Professional’. Taking note of the relevant provisions of law in “State Bank of India Versus Ram Dev International Ltd. (Through Resolution Professional) - 2018 (7) TMI 2126 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI − Company Appeal (AT) (Insolvency) No. 302 of 2018” decided on 16th July, 2018, this Appellate Tribunal observed that merely because a ‘Resolution Professional’ is empanelled as an Advocate or Company Secretary or Chartered Accountant with the ‘Financial Creditor’ cannot be a ground to reject the proposal of his appointment unless there is any disciplinary proceeding pending against him or it is shown that the person is an interested person being an employee or on the payroll of the ‘Financial Creditor’. Admittedly, no disciplinary proceedings are pending against Mr. Shailesh Verma and he is not on aforestated panel or engaged as a retainer by the ‘Financial Creditor’. He had a long relationship with the ‘Financial Creditor’, spanning around four decades, before demitting office as the Chief General Manger in 2016 but currently he is merely a pensioner drawing pension as a benefit earned for the past services in terms of the relevant Service Rules which he is getting independent of the benevolence of the ex-employer i.e. the Appellant- ‘Financial Creditor’. But it cannot be denied that the Appellant restricted its choice to propose Mr. Shailesh Verma as ‘Interim Resolution Professional’ obviously having regard to past loyalty and the long services rendered by the later. This conclusion is further reinforced by filing of instant appeal by the ‘Financial Creditor’ who is upset with the impugned order directing the Appellant- ‘Financial Creditor’ to substitute the name of ‘Interim Resolution Professional’ in place of Mr. Shailesh Verma. This has to be viewed in the context of apprehension of bias raised by the Respondent-‘Corporate Debtor’ for the apprehension of bias necessarily rests on the perception of Respondent- ‘Corporate Debtor’. It is profitable to refer to the following observations of the Hon’ble Apex Court in “Ranjit Thakur Versus Union Of India And Ors - 1987 (10) TMI 374 - Supreme Court”:

“17. As to the tests of the likelihood of bias what is relevant is the reasonableness of the apprehension in that regard in the mind of the party. The proper approach for the judge is not to look at his own mind and ask himself, however, honestly, “Am I Biased?”; but to look at the mind of the party before him”

8. The fact that the proposed ‘Resolution Professional’ Mr. Shailesh Verma had a long association of around four decades with the ‘Financial Creditor’ serving under it and currently drawing pension coupled with the fact that the ‘Interim Resolution Professional’ is supposed to collate all the claims submitted by Creditors, though not empowered to determine the claims besides other duties as embedded in Section 18 of the ‘I&B Code’ raised an apprehension in the mind of Respondent- ‘Corporate Debtor’ that Mr. Shailesh Verma as the proposed ‘Interim Resolution Professional’ was unlikely to act fairly justifying the action of the Adjudicating Authority in passing the impugned order to substitute him by another Insolvency Professional. Observations of the Adjudicating Authority in the impugned order with regard to ‘Interim Resolution Professional’ to act as an Independent Umpire must be understood in the context of the ‘Interim Resolution Professional’ acting fairly qua the discharge of his statutory duties irrespective of the fact that he is not competent to admit or reject a claim.

9. In the given set of circumstances, we are of the considered opinion that the apprehension of bias expressed by the ‘Corporate Debtor’ qua the appointment of Mr. Shailesh Verma as proposed ‘Interim Resolution Professional’ at the instance of the Appellant- ‘Financial Creditor’ cannot be dismissed offhand and the Adjudicating Authority was perfectly justified in seeking substitution of Mr. Shailesh Verma to ensure that the ‘Corporate Insolvency Resolution Process’ was conducted in a fair and unbiased manner. This is notwithstanding the fact that Mr. Shailesh Verma was not disqualified or ineligible to act as an ‘Interim Resolution Professional’. Viewed thus, we find no legal flaw in the impugned order which is free from any legal infirmity and has to be upheld. It goes without saying that the Appellant- ‘Financial Creditor’ should not have been aggrieved of the impugned order as the same did not cause any prejudice to it.

10. There being no merit in the appeal, the same is dismissed. No costs.”

Unquote:

With due respect and in view of reasons given by author earlier, author feels that the judgments of NCLT and NCALT on this issue are wrong for the following more reasons in addition to ten reasons discussed earlier:

Reliance on apprehension of corporate debtor is not proper. Mere apprehension of corporate debtor, without any thing further, cannot cast any question on independence of IRP/ RP.
NCALT and NCLT have taken such view based on presumption and conjecture. The observation to the effect that appellant / Corporate Creditor has carried matter in appeal and was upset with order of NCLT clearly shows presumption and bias of learned members.
The use of expression ‘ was unlikely to act fairly… ‘ clearly shows presumption in mind of members.
NCLT/ NCALT have no power to read such words or provisions which are not found in related laws. On reading of entire judgment and the related judgment of NCLT author could not find any direct, explicit or implied provision or wordings which require an IRP/ RP to be independent of the creditor. The NCLT/ NCLAT have in a way re-written law and prescribed that IRP/ RP should also be independent of Creditor.
By raising objections and very strongly contesting on this issue, corporate debtor with help of large team of senior advocates, has successfully adopted delaying tactics before NCLT and NCALT.
An IRP or RP is a facilitator, a compiler of information and data and making out a report or analysis for consideration by COC and NCLT. His role cannot be compared with a judge or even an Umpire. An Umpire has to conduct the game as well as decide on certain issues and outcome of game. Whereas, IRP or RP is not empowered to do so in any manner.

By: DEV KUMAR KOTHARI - August 26, 2020