Independence and Impartiality of Resolution Professional in IBC

The Indian insolvency regime, governed by the Insolvency and Bankruptcy Code, 2016 [IBC] is a shift from a debtor centric regime to one that is creditor oriented. Under this regime, a person called the resolution professional [RP] is appointed by the Committee of Creditors [CoC], who takes control of the assets of a distressed company and conducts the corporate insolvency process[1] with the creditors. Hence, the RP plays a catalytic role in the corporate insolvency process. Consequently, this post seeks to analyse the role, responsibilities and independence of the RP in the Corporate Insolvency Resolution Process [CIRP]. For the holistic understanding of the functions of the RP, the functions of both the Interim Resolution Professional [IRP] and the RP are dealt with collectively in this post.

Given the wide ranging powers vested with the RP, his/her independence and impartiality is a prerequisite for the proper functioning of the insolvency regime under the IBC. The combined effect of Section 7,9 and 10 of IBC is that an RP is disqualified from appointment on only one ground that is of pending disciplinary proceedings. As per Regulation 3 of CPR, an IP is eligible to be appointed as an RP if he/she is independent of the corporate debtor. The RP is said to be independent of the corporate debtor if he/she is eligible to be appointed as an independent director of the corporate debtor, if the IRP/RP is not a related party of the corporate debtor or if the RP is not an employee or proprietor or a partner of the corporate debtor.

Further, Regulation 7(2)(h) of IPR provides a Code of Conduct for Insolvency Professionals. Under this provision, an RP must maintain the integrity by being honest, straightforward and forthright in all professional proceedings. The RP must make all decisions without any bias, conflict of interest, coercion or undue influence. The RP must ensure that she or any of her relatives do not acquire any assets of the corporate debtor. The RP must disclose the existence of any pecuniary or personal relationship with the corporate debtor or any of the stakeholders entitled to distribution of corporate debtor’s assets under Sections 53 or 178 of IBC. The RP must also disclose as to whether she was an employee or has been in the panel of any financial creditor of the corporate debtor.

Recently, in State Bank of India v. M/s Metenere Ltd, the National Company Law Appellate Tribunal [NCLAT] was called upon to rule on the impartiality of an IRP. Here, the State Bank of India [Financial Creditor] had sought initiation of CIRP against M/s Metenere Ltd [Corporate Debtor]. However, the Corporate Debtor had raised objections regarding the impartiality of the IRP. The current framework does provide for disclosures to the stakeholders, including the CoC, regarding existence of pecuniary or personal relationship with any of the stakeholders, employment or empanelment with any Financial Creditor and disclosure of such other conflicts of interest which may impede in independent functioning of the RP. However, the Code is yet to provide for provisions for any bar on appointment or a remedy/ resolution mechanism, in case of, existence of a conflict of interest. Therefore, in absence of any provision barring the appointment of RP or IRP in case of conflict of interest vis-à-vis any stakeholder, the judgment by NCLAT in M/s. Metenere Ltd. may be a stepping in the realm of jus dare.

The Corporate Debtor argued that the IRP was an employee of the Financial Creditor for 39 years before his retirement in 2016. Hence, there existed an ‘apprehension of bias’ and the IRP was unlikely to act as an independent umpire. The Financial Creditor argued that there is no provision under IBC that disqualifies ex-employees from being appointed as IPR/RP. Further, the IRP/RP need not be an independent umpire as she does not decide any conflicting issues between the parties in the CIRP. The IRP/RP has no adjudicatory powers and only acts as a facilitator in the CIRP as all major decisions are taken by the CoC. The NCLAT, at the outset, decided that a person drawing pension cannot be treated as a related party. Further, relying on State Bank of India v. Ram Dev International Ltd,[3] it concluded that since there were no disciplinary proceedings pending against the IRP, he cannot be disqualified on these grounds. Ram Dev International Limited (Supra), prompted the legislature to amend the Regulations to introduce the requirement for disclosure as per code of conduct prescribed in the Regulations. The code of conduct provides that the IP must disclose to the applicant and the CoC, existence of any pecuniary or personal relationship, either directly or indirectly, with any stakeholders who may be entitled to distribution of proceeds of resolution plan or debtor’s estate. It also prescribes disclosure as to whether the IP has been an employee or has been in the panel of any Financial Creditor of the Corporate Debtor.However, despite necessary disclosures, the IRP or RP can only be replaced by the members of the CoC under Section 22 or Section 27 of the Code, with a resolution mandating such replacement passed with sixty six percent voting share of CoC, which renders the disclosures somewhat redundant.

TEST OF APPREHENSION OF BIAS

NCLAT viewed the dispute in the conteitor, the ‘apprehension of bias’ raised by the Corporate Debtor was reasonable and therefore the IRP must be disqualified. This test of ‘apprehension of bias’ applied by the NCLAT does not require the applicant to prove specific instances of biased conduct by the RP. This low threshold test stands in contradiction to the test laid down by the NCLAT in Milind Dixit v. Elecon Engineering Co. Ltd. wherein specific instances of irregularity or bias on part of the RP were required to be proven inxt of ‘apprehension of bias’. Here, it referred to the Supreme Court decision in Ranjit Thakur v. UOI, wherein the Court had ruled that in case of likelihood of bias the relevant consideration is the reasonableness of apprehension in the mind of the alleging party and not the apprehension in the mind of the judge. In this light, NCLAT concluded that since the IRP was associated with the Financial Creditor for four decades and also drew a pension from the Financial Cred order to disqualify the RP.

The Report of the Bankruptcy Law Reforms Committee

The BLRC Report states that the IP plays a vital role in an insolvency process. The framework provides that the entire insolvency and bankruptcy process to be managed and regulated by an IP appointed by the Adjudicating Authority and the functions include identification of the assets and liabilities of the defaulting debtor, its management during the insolvency proceedings if it is an enterprise, preparation of the resolution proposal, implementation of the solution for individual resolution, the construction, negotiation and mediation of deals as well as distribution of the realization proceeds under bankruptcy resolution.

In discharge of these functions, the IP is required to act as an agent of the Adjudicating Authority. Efficient functioning of IP will enable Adjudicating Authority to delegate more and more functions to IP and ensure efficient utilization of judicial time.The BLRC Report, therefore, mandates that the IP must act independently, objectively and with impartiality and must never commit fraud or abuse or undue influence on behalf of its clients.

CONCLUSION
An RP acts as a key to the conduct of the entire resolution process and plays a pivotal role in the insolvency process under the IBC. As a representative of the CoC, the RP manages the corporate debtor as a going concern throughout the insolvency process. In such a situation, the independence and impartiality of the RP have a direct impact on the fairness and integrity of the insolvency process. Therefore, the judicial bodies must immediately clear the air around the appropriate test for the determination of bias of the RP. Only then can the basic objective of the IBC that is to balance the interests of all the stakeholders involved in the insolvency process can be fulfilled. The Supreme Court has clarified that the role of a RP is not adjudicatory but merely administrative in Committee of Creditors of Essar Steel India Limited vs. Satish Kumar Gupta and Ors., 2019 .

The apprehension of independence of RP becomes irredeemable, in a situation where the conflict of interest pertains to the Financial Creditor having majority voting share in the CoC. In other words, despite the prescribed disclosures, a creditor having a majority voting share in CoC, may appoint a non-independent RP, rendering the disclosures meaningless. Since, the RP is a facilitator of the CIRP and is guided by the decisions of CoC, existence of any such prior relationship with the creditor with majority voting share may hinder the CIRP and turn into a mechanism to benefit such creditor. Therefore, impartiality and independence of RP forms the crux of effective and successful CIRP. Therefore, it may be necessary that a proposed IRP or RP with such conflicts of interest and apprehensions of bias be barred from appointment as the IRP or RP, at the threshold, in order to avoid potential conflicts and challenges during the course of CIRP. This can ensure smooth and speedy resolution and lessen burden on the Tribunals.

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