Written by Mayur Kulkarni
Research Associate at Law & Order (Aug-Oct 2020)
Third Year, B.Com LLB. Gujarat National Law University
Disclaimer: Please note that the views expressed below represent the opinions of the article's author. The following does not necessarily represent the views of Law & Order.
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 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.
Role and Responsibilities of the Resolution Professional
The CIRP envisioned under the IBC, is a process whereby the decision regarding the corporate restructuring or liquidation of the debtor is taken by the CoC. RP, being an appointee of CoC, takes over the custody, management and supervision of the debtor’s assets during the CIRP.
Given the importance of the RP in the CIRP, various responsibilities are vested in him/her.
Firstly, as per Section 23 of IBC, the RP conducts the entire CIRP and manages the affairs of the corporate debtor during this process. Even after the CIRP, the RP continues to manage the operations until the order of the approved resolution plan or appointment of a liquidator is passed.
Secondly, as per Section 17 of IBC, the Interim Resolution Profession [IRP] is vested with the management of affairs of the corporate debtor. Subsequently, this responsibility is transferred to the RP. Further, the powers of the board of the directors of the corporate debtor shall be suspended and the same shall be exercised by the RP. The RP gets access to all the books of accounts and other relevant documents of the corporate debtor. This provision also makes it obligatory for the managers and officers of the corporate debtor to report to the RP. The RP executes all deeds and documents in the name and on behalf of the corporate debtor during the CIRP.
Thirdly, the IRP constitutes the CoC and the RP convenes and conducts all the meetings of the CoC as per Section 24(2) of IBC. Further, the RP is required to make and submit an information memorandum to the CoC, which would help the resolution applicants to formulate the resolution plan. As per Section 29 of IBC, the information memorandum includes information relating to the financial position, disputes and all other matters in relation to the corporate debtor.
Fourthly, one of the most important functions of the RP is inviting prospective resolution applicants. The RP provides these applicants the information memorandum based on which they formulate the resolution plans for the corporate debtor. The RP also issues a ‘process memorandum’ to the resolution applicants, which contains the entire process and timelines for the submission of the resolution plan.
Fifthly, once the resolution plants are received, the RP reviews these plans. The major aspect of this review is to see whether the resolution plans are submitted by eligible applicants as required under Section 29A of IBC. The RP also examines the resolution plans to ensure that each plan has provided for the priority of payment of CIRP costs and payment of debts of financial and operational creditors as per the priority rule under Section 53 of IBC.
Further, once the RP is satisfied with the eligibility of the resolution applicants and the resolution plan, the resolution plans are presented to the CoC for approval. If the CoC approves the resolution plan the RP further submits the same to the Adjudicating Authority. On the satisfaction of the Adjudicating Authority, an order approving the resolution plan will be passed which is binding on the corporate debtor.
Lastly, other responsibilities of the RP provided under Section 18 and Section 25 of IBC include raising interim finances, disclosure of CIRP cost, appointment of accountants and legal professionals for the corporate debtor.
Independence and Impartiality of the Resolution Professional
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.
Along with the IBC, the procedure of disqualification of RP is governed by the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 [CPR] and Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016 [IPR].
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 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.
In view of the same, the Corporate Debtor also submitted that since the IRP draws a pension from the Financial Creditor, he becomes an ‘interested party’ and hence cannot be appointed as IRP/RP.
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, it concluded that since there were no disciplinary proceedings pending against the IRP, he cannot be disqualified on these grounds.
However, NCLAT viewed the dispute in the context 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 Creditor, 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 in order to disqualify the RP.
As discussed above, the RP plays a vital 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.
 Section 5(27) of the Insolvency and Bankruptcy Code, 2016.  State Bank of India v. M/s Metenere Ltd., NCLAT New Delhi, Company Appeal (AT) (Insolvency) No. 76 of 2020, decided on 22 May 2020.  State Bank of India v. Ram Dev International Ltd., NCLAT New Delhi, Company Appeal (AT)(Insolvency) No. 302 of 2018, decided on 16 July 2018.  Ranjit Thakur v. Union of India, 1987 AIR 2386.  Milind Dixit v. Elecon Engineering Co. Ltd., NCLAT New Delhi, Company Appeal (AT)(Insolvency) No. 500 of 2019, decided on 03 July 2019.
State Bank of India v. M/s Metenere Ltd., NCLAT New Delhi, Company Appeal (AT) (Insolvency) No. 76 of 2020, decided on 22 May 2020.
State Bank of India v. Ram Dev International Ltd., NCLAT New Delhi, Company Appeal (AT)(Insolvency) No. 302 of 2018, decided on 16 July 2018.
Ranjit Thakur v. Union of India, 1987 AIR 2386.
Milind Dixit v. Elecon Engineering Co. Ltd., NCLAT New Delhi, Company Appeal (AT)(Insolvency) No. 500 of 2019, decided on 03 July 2019.
Statutes and Regulations
Insolvency and Bankruptcy Code, 2016.
Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.
Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016.
Bankruptcy Law Reforms Committee, Final Report (2015).