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Role of an Insolvency Professional in CIRP
Corporate Insolvency Resolution Process is a system incorporated in the Insolvency and Bankruptcy Code, 2016. In this process, a corporate debtor that has defaulted in making payments to its creditors undergoes an insolvency process. The main objective behind CIRP is to attempt reviving the corporate debtor instead of liquidating or winding it up to reimburse the creditors. The Insolvency and Bankruptcy Code, 2016 (IBC) was introduced to consolidate laws relating to insolvency resolution of corporate persons, firms and individuals. The framework for bankruptcy and insolvency resolution in India is guided by the Insolvency and Bankruptcy Code, 2016, which governs the provisions of the re-organization and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner.
The IBC regime propounds a shift from the ‘debtor in control' regime to a ‘creditor in control' regime and provides a mechanism wherein a neutral person is appointed by the Hon'ble National Company Law Tribunal known as the Interim Resolution Professional, who may be later confirmed as Resolution Professional, to manage the corporate debtor as a going concern along with the committee of creditors for 180 days (which may be extended to maximum 330 days and in exceptional cases, even beyond the said period). During this period, the RP and the committee of creditors attempt to resolve the insolvency of the corporate debtor by handing over the corporate debtor to a buyer entity known as the resolution applicant for a consideration from which the committee of creditors and other creditors recover their dues. In case the RP and the committee of creditors fail to do so, then the corporate debtor is destined to undergo liquidation.
Role of the Resolution Professional
The Resolution Professional plays a vital role in the Insolvency and Bankruptcy process. The Bankruptcy Law Reforms Committee (BLRC) in its final report also emphasized the role of an RP which stated that “Insolvency professionals form a crucial pillar upon which rests the effective, timely functioning as well as credibility of the entire edifice of the insolvency and bankruptcy resolution process.”
As per section 23 of IBC, the Resolution professional conducts the entire Corporate Insolvency Resolution Process and manages the operations of the corporate debtor during the period of the CIR Process. Further, even after the expiry of the period of CIR, the RP continues to manage the operation until the order of the approved resolution plan or appointment of the liquidator is passed. He is also vested with the exercise of power and to perform the duties that are vested with the Interim Resolution Professional.
In terms of the definition under the IBC, the RP is an insolvency professional appointed to conduct the CIRP of the corporate debtor and plays an instrumental role by wearing many hats while conducting the CIRP. Insolvency professionals are enrolled with an Insolvency Agency and they are involved in the dissolution process of an insolvent individual, companies, LLPs or partnerships. These professionals are authorised to act on behalf of such insolvent individuals, companies etc. The primary function of an Insolvency Professional is to assess the financial position of the company, partnership, LLPs, individuals etc and to ensure a smooth process of its dissolution. These professionals, in certain possible cases, look for opportunities to rescue businesses.
During the bankruptcy situation, the insolvency professionals play a vital role in liquidating the entity assets and other settlement processes. For the resolution, the control and custody of the assets from the corporate debtor is taken over by the resolution professional as per section 18(f). The NCLT, Mumbai Bench in the case of Goa Auto Accessories v. Suresh Saluja, REED 2019 NCLT Mum 12505, has held that to facilitate the Corporate Insolvency Resolution Process, the RP can take custody of the assets of the corporate debtor that forms the subject matter of the litigation. This process has gained momentum with the government bringing in strict norms through the Insolvency and Bankruptcy Code.
In the matter of Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and Others, REED 2019 SC 11505, the Hon'ble Supreme Court of India elucidated upon the role of the RP and observed that “the resolution professional is a person who is not only to manage the affairs of the corporate debtor as a going concern from the stage of admission of an application under sections 7, 9 or 10 of the Code till a resolution plan is approved by the Adjudicating Authority, but is also a key person who is to appoint and convene meetings of the Committee of Creditors, so that they may decide upon resolution plans that are submitted in accordance with the detailed information given to resolution applicants by the resolution professional.”
To bring the Creditor together is one of the important tasks of the insolvency professional. After the collation of claims and determination of the position of the corporate debtor, the interim resolution professional constitutes the committee of creditors. The committee of creditors then decides whether to resolve the insolvency of the entity or to liquidate it. In its first meeting of the CoC appoints the resolution professional who then convenes and conducts the meetings of the committee. Further, as per Section 24(2), the resolution professional conducts all the meetings of the Committee of Creditors.
In furtherance of section 7(3)(b) of the IBC, when a financial creditor files an application for initiation of CIRP against a corporate debtor, then along with such application, the financial creditor has to provide the name of the insolvency professional proposed to act as an IRP of the corporate debtor. section 9(4) of the IBC relaxes this requirement in case of applications for initiation of CIRP by operational creditors.
The IBC regime attempts to thwart any such element of bias on the part of the RP to seep into the CIRP by articulating clear eligibility criteria to be fulfilled by an insolvency professional for appointment as the RP of a corporate debtor. These eligibility criteria are mentioned under Regulation 3 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. An insolvency professional is considered to be independent if he is eligible to be appointed as an independent director on the board of the corporate debtor under section 149 of the Companies Act, 2013.
In addition to the above, an RP must make disclosures at the time of his appointment under the code of conduct which lists down various requirements such as demanding an insolvency professional to necessarily act with objectivity in his professional dealings, ensuring that his decisions are made without the presence of any bias, conflict of interest, coercion, or undue influence of any party, whether directly connected to the insolvency proceedings or not. This code of conduct has been provided under the First Schedule to the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016.
Further, in terms of sections 7(5), 8(5), 10(4) and 16(2) of the IBC, no disciplinary proceedings must be pending against the proposed RP. These requirements are sacrosanct to ensure fairness by the RP in spearheading the CIRP.
The function of Insolvency Professional
An IP plays a key role in resolution, liquidation and bankruptcy processes as may apply to companies, limited liability partnerships (LLPs), partnership firms, proprietorship firms and individuals. In conducting CIRP of a CD, an IP may act as an IRP or RP. As IRP/ RP, a whole array of statutory and legal duties/powers is vested with him. He manages the affairs of CD, exercises the powers of its Board of Directors and complies with applicable laws on behalf of CD. He is entrusted to protect and preserve the value of assets of CD, manage its operations as a going concern and facilitate the committee of creditors (CoC) in taking prudent decisions for resolution of insolvency. For efficient conduct of the process, IP is entrusted to perform other key activities including making a public announcement, verification of claims, preparation of information memorandum which means that the Resolution Professional is required to make and submit the information memorandum to formulate a resolution plan. He is also required to provide all relevant information to the resolution applicant. Regulation 36(2) provides for the details to be contained in the information memorandum. Explanation to Section 29 mentions the meaning of the term ‘information memorandum’ to mean information that is required by the resolution applicant to make a resolution plan for a corporate debtor. It includes information relating to the financial position, disputes and any other matter about a corporate debtor. Raising interim finance, the appointment of valuers, inviting prospective resolution applicants to put forth their resolution plan, etc. The Code empowers him to appoint professionals, seek cooperation from personnel of CD and seek orders from the AA in case of any preferential, undervalued, extortionate, or fraudulent transaction. He acts as a link between the AA and CoC as also other stakeholders. Thus, as IRP/ RP, he is tasked with conducting and facilitating the CIRP while attempting to address and balance the interests of all stakeholders. During a CIRP, an IP may also be appointed as an authorised representative (AR) for any class.
Time and again, the judiciary has been called upon to interfere in the CIRP and adjudicate upon the eligibility of insolvency professionals to be appointed as RPs.
In the case of Swiss Ribbon Private Limited and Another v. Union of India, REED 2019 SC 01504, the Supreme Court observed that “the resolution professional is a facilitator of the resolution process, whose administrative functions are overseen by the committee of creditors and by the Adjudicating Authority.”
In the case of ArcelorMittal India Private Limited v. Satish Kumar Gupta and Others, REED 2018 SC 10541, the court observed that “The Hon’ble National Company Law Appellate Tribunal has held that the COC has the discretion to approve any resolution plan and its decision to approve the same cannot be interfered with by the Adjudicating Authority or the Appellate Authority, except for in terms of section 31(1) to examine the compliance of section 30(2) read with relevant regulations.(See Kannan Tiruvengandram v. M.K. Shah Exports Ltd., & Others, Company Appeal (AT) (Insolvency) No 203 of 2018 and in Darshak Enterprise Pvt. Ltd. and Ors. v. Chhaparia Industries Pvt. Ltd. and Others, Company Appeal (AT) (Insolvency) No. 327 of 2017.”
The Supreme Court in the case of Committee of Creditors of Essar Steel India Limited Through Authorised Signatory v. Satish Kumar Gupta & Ors. observed that, “the importance of the Resolution Professional is to ensure that a resolution plan is complete in all respects, and to conduct due diligence to report to the Committee of Creditors whether or not it is in order. Even though the Resolution Professional doesn't need to give reasons while submitting a resolution plan to the Committee of Creditors, it would be in the fitness of things if he appends the due diligence report carried out by him for each of the resolution plans under consideration, and to state briefly as to why it does or does not conform to the law”
One such instance is the judgment dated July 16, 2018, in the matter of State Bank of India v. Ram Dev International Limited, Company Appeal (AT) (Insolvency) No. 302 of 2018, wherein the Hon'ble National Company Law Appellate Tribunal, New Delhi was called upon to decide if the proposed RP was ineligible on the ground that he was on the panel of erstwhile State Bank of Hyderabad, which merged with the State Bank of India, which is one of the members of the committee of creditors of the corporate debtor.
The NCLT opined that the aforesaid made the proposed RP ineligible for appointment as the RP of the corporate debtor. However, SBI contended before the NCLAT that the proposed RP was not on the payroll of the bank and is not an employee – he is an on the panel of lawyers which is generally maintained by the banks, Public Sector Undertakings and Governments, who cannot be treated to be an employee of the bank. After hearing the parties, the NCLAT observed “we find that the Adjudicating Authority has failed to take into consideration the aforesaid fact and as there is no allegation against Mr. K. G. Somani and no disciplinary proceeding is pending against him and he is not in the payroll of one or other member of the Committee of Creditors, we are of the view that the Adjudicating Authority was required to approve his name.” & Held, “A Resolution Professional if empanelled as an Advocate or Company Secretary or Chartered Accountant with one or other ‘Financial Creditor’ that cannot be a ground to reject the proposal, if otherwise there is no disciplinary proceeding is pending or it is shown that a person is an interested person being an employee or in the payroll of the ‘Financial Creditor.”
In this context, a recent judgment dated May 22, 2020, passed by the NCLAT in the matter of State Bank of India v. Metenere Limited, Company Appeal (AT) (Insolvency) No. 76 of 2020 held, “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 even though 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. The Appellant- ‘Financial Creditor’ should not have been aggrieved of the impugned order as the same did not cause any prejudice to it.”
The role of IRP/RP is critical to the entire CIRP process and the IBC regime has laid down comprehensive safeguards to ensure that the CIRP is conducted by a fair and unbiased IRP/RP. However, the Metenere judgment sets a dangerous precedent and warrants a revisit. The NCLAT has proceeded to uphold an apprehension of bias without thoroughly clarifying the underlying rationale. A one size fits all approach – wherein there could be an inherent apprehension of bias just because the proposed IRP/RP was once working with a financial creditor or the corporate debtor – nullifies the relevance of the disclosures given by the IRP/RP and undermines the oversight role of the Insolvency and Bankruptcy Board of India (IBBI). Additionally, such inherent presumption of bias would open the floodgates for similar litigations wherein the corporate debtor (erstwhile directors, promoters) would impugn the appointment of RPs on similarly presumptuous grounds, which could impact ongoing as well as concluded CIRPs adversely. Hence, it is imperative that a cautious case to case approach is adopted, without any inherent presumption of bias.
The Resolution professional plays a very significant role in the efficient operations of the insolvency process. He has to perform a whole range of functions and duties that are vested in him. The primary responsibility of a resolution professional is to conduct the Corporate Insolvency Resolution Process with transparency. Besides, the Insolvency Professional is also required to possess the appropriate skills, knowledge, expertise to ensure that the proceedings are conducted effectively and carry out the duties and responsibilities vested in him.