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Insolvency

Independence of Resolution Professional: Confounding the Aspect of Bias Under the Code Through SBI V. Metenere Ltd.

Saumya Agarwal and Sakshi Ajmera

The National Company Law Appellate Tribunal (NCLAT) on 22 May 2020, in the case of State Bank of India v. M/s. Metenere Limited  adjudicated upon the issue of independence of an interim resolution professional (IRP)/ resolution professional (IRP) during a corporate insolvency resolution process (CIRP). Though in the instant case, the appellate tribunal found substitution ordered by the NCLT of Financial Creditors (FC) appointed IRP as justified on the grounds of it being capable of causing apprehension of bias towards the Corporate Debtor (CD). The question which however demands discussion is whether the Insolvency and Bankruptcy Code, 2016 (Code), has anywhere enumerated upon such disqualification of an IRP/RP or has the court used its judicial activism.

State Bank of India v. M/s Metenere Limited:

Facts:

In the present case, the applicant FC had filed for an appeal against the order of NCLT, which directed substitution noting that the proposed IRP having been previously employed with the FC- a conflict of interest and apprehension of bias exists making it unlikely for him to act fairly and as an independent umpire. The FC, aggrieved by this order filed for an appeal on grounds that the Code did not explicitly recognise conflict of interests as grounds for disqualification. Moreover, the FC submitted that a RP is not required to act as an independent umpire but as a mere facilitator with no role in accepting or rejecting claims. Furthermore, in the present case, he is not part of any panel, decision making committee or in-charge of any portfolios of the appellant. Lastly, it was claimed that IRP has no adjudicatory powers vested in him and the major decisions are taken only on approval by the Committee of Creditors (CoC) with each FC playing a role to the extent of its voting share.

Decision and Reasoning:

The tribunal analysed the factual situation and held the appointment as valid further stating that just because the IRP is drawing pension from the appellant, it does not make him an interested person and remains independent for the purposes of Regulation 3(1) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 Corporate Persons Regulations) (discussed below) which requires complete independence of the IRP/RP only from the CD. Referring to State Bank of India v. Ram Dev International Limited, the tribunal held that a proposed IRP/RP is not disqualified from appointment merely on the grounds that such a RP/IRP is employed as an Advocate or CS or CA with FC. Unless there was a pending disciplinary proceeding against the RP/IRP, there was no ground to disqualify him from appointment.

However, the Tribunal understood the need for a test of apprehension of bias. The tribunal relied upon the observation of Hon’ble Supreme Court in Ranjit Thakur v. Union of India and Ors, wherein it was observed that in order to test likelihood of bias it is relevant to see whether there is a reasonable apprehension in the mind of the party. Following this reasoning, the tribunal decided that the apprehension so expressed by CD cannot be disregarded and the duty of IRP should rather be seen as that of fairly discharging statutory duties irrespective of whether he is competent of rejecting or admitting claims. Thus, upholding the substitution allowed by NCLT as a measure to conduct a fair and unbiased CIRP; while also stating that the IRP in the present case, is not disqualified or ineligible to act as an IRP.

Analysis:

The NCLAT in the decision has applied the ‘real danger’ test of ‘apparent bias.’ The landmark judgement on this test is the English case of Regina v. Gough wherein the House of Lords stated the test in terms of real danger rather than likelihood. The courts should think in terms of ‘possibility’ rather than ‘probability’ of bias. In the case of Shri S.C. Kainthla v. State Of H.P. & Ors., the High Court laid down that, through the test, one has to enquire as to whether there is real danger of bias on the part of the person against whom such apprehension is expressed in the sense that he might favour or disfavour a party. The Apex Court in the case of Kumaon Mandal Vikas Nigam Ltd v. Girja Shankar Pant & Ors, held that

“The test, therefore, is as to whether a mere apprehension of bias or there being a real danger of bias and it is on this score that the surrounding circumstances must and ought to be collated and necessary conclusion drawn therefrom “- In the event however the conclusion is otherwise inescapable that there is existing a real danger of bias, the administrative action cannot be sustained”

Kumaon Mandal Vikas Nigam Ltd v. Girja Shankar Pant & Ors

The test however, has not been applied appropriately. The test calls for analysing instances of bias on the part of the RP to determine his independence. For instance, in the case of Milind Dixit & Anr v. Elecon Engineering Company Ltd., it was held that the specific instances of irregularity or bias on the part of the RP need to be pointed out to vitiate the entire CIRP. In the instant case, the NCLAT did not call for the applicant to cite specific instances of biased conduct by the RP. Thus the NCLAT contradicted one of its own earlier decisions and lowered the threshold.

On a positive front, this decision can be seen as a breath of fresh air in the creditor friendly regime of the Code. Given that all the major decisions fall back on approval from the CoC, it is needed that a certain level of check is maintained to ensure independence from FC as is given for CD.

Looking into the Legal Framework

On a combined reading of Section 7,9 and 10 of the Code, an inference can be made that the Code disqualifies an IRP from appointment on only one ground: pending disciplinary proceedings. Furthermore, under section 22 of the Code, the CoC in its first meeting by 75% votes has to resolve either to appoint the IRP as the RP or replace the IRP by another RP.

Apart from the Code, the procedure regarding disqualification of RP is governed by two regulations- Corporate Persons Regulations and Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016 (IP Regulations).

Under Regulation 3 of Corporate Persons Regulations, titled as “Eligibility for resolution professional”, it is provided that an IP is eligible to be appointed as an RP for CIRP, when such professional and all the partners and directors of the IP entity of which he is a partner or director are independent of the CD. The term independent is further explained to mean that when the IP is-

  1. Eligible to be appointed as the independent director of the CD where CD is the company under section 149 of the Companies Act, 2013;
  2. Is not a related party of the CD;
  3. Is not an employee or partner or proprietor of a firm of auditors or secretarial auditors in practice or cost auditors of the CD, or that of a legal or consulting firm that has or had any transaction with the CD amounting to five per cent or more of the gross turnover of such firm, in the last three financial years.

Therefore, it is noteworthy that the Regulation concerns itself only with the CD and does not apply to the FC or OC. Additionally, the regulation states that RP, who is a director or partner of an IP entity, is disallowed to continue as the RP of a CIRP, if the other partners or directors of such IP entity are representing any other stakeholder of the CIRP.

Under Regulation 7(2)(h) of the IP Regulations, Code of Conduct for IP has been given; under which Independence and Impartiality is one of the requirements. The IP must conduct the resolution, liquidation or bankruptcy process independent of any external influences. While dealing with the assets of a debtor, during liquidation or bankruptcy, the IP must ensure that his or her relatives do not knowingly acquire those assets. According to the regulations, the IP should also not take up an assignment under the Code, if he or his relatives or partners or directors of the insolvent entity of which he is a partner or director. Moreover, according to Sections 53 and 178 of the Code, the IP is required to disclose any relationship with any stakeholder. He/She should also not make any undue or unlawful gain for himself or his related parties or achieve any mala fide objectives.

Regulation 8A elucidates the importance of disclosure of the fact that the IP has been an ex-employee of or has been in the panel of any FC of the CD, to the CoC and the IP agency. The agency shall publish this disclosure on its website.

Lastly, according to the UNCITRAL Legislative Guide, an insolvency representative is a person or body, authorized in insolvency proceedings to administer the reorganization or the liquidation of the insolvency estate. It states that around the world, liquidation proceedings call for the appointment of an independent person to conduct and administer the liquidation.

Thus, under the IP Regulations, the Code does provide for disclosure of the fact that an IP has been an ex-employee or on panel of any FC of the CD. However, it does not disqualify such an appointment on the face of it, in contrast with what Corporate Persons Regulations lays down for CD.

Conclusion

Through the ruling, the NCLAT by lowering the threshold of determining the real danger test of apparent basis put forth an often overlooked issue of the independence of an RP from the FC and has tried to rectify it. However, this can further bring up the issue of added litigation if the Adjudicating Authority is approached by other parties challenging appointment on this ground, further delaying and defeating the time bound process. The attempt is thus needed in bringing a change in the body of law. Currently, Regulation 3, under Corporate Persons Regulation, only provides for independence of the RP from the CD and the authors are of the view that the same provision should be expanded to include independence from the FCs within its ambit. Further, the IP Regulations, under Regulation 8A provides for disclosure of the fact that the IP has been an ex-employee of the FC but does not shroud it as a disqualification. Since it may affect independence of an RP, an amendment should be made declaring this as a disqualification. Moreover, in line with the detailed disqualifications mentioned under Schedule V of the Arbitration and Conciliation Act, 1996, in order to maintain independence, the Code under its regulations should attempt to lay down detailed instances which can affect independence for FCs as has been done for CDs.

Saumya Agarwal is a fourth year student, and Sakshi Ajmera is a third year student, both enrolled in the B.A.LLB (Hons.) at the National Law Institute University, Bhopal.

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