Alerts & Updates

IBC | Case Law Alert | Whether being empanelled with a financial creditor debars to act as insolvency professional? | Whether COC needs to give reasons for replacement of RP

Banking & Finance | Jul 27, 2018

The National Company Law Appellate Tribunal (“NCLAT”) in the matter of State Bank of India vs. Ram Dev International Limited, vide its order dated July 16, 2018 (available here), has dealt with the question if an individual who is empanelled with a financial creditor, is eligible to act as an insolvency professional as per the provisions of the Insolvency and Bankruptcy Code, 2016 (“Code”), rules and regulations made thereunder.

As per the facts of the case, the NCLAT held that a resolution professional (“RP”) 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 for his appointment as RP, if otherwise there is no disciplinary proceeding pending or it is shown that the person is an interested person being employee or in the payroll of the financial creditor.

Interestingly, the NCLAT also ruled that it is not desirable for a committee of creditors (“COC”) to record its opinion in case if it chooses to replace an already appointed RP.

Factual Matrix:

1. Mr. Rakesh Kumar Jain, who was earlier functioning as RP of Ram Dev International Limited was replaced by Mr. K. G. Somani by majority decision of the COC and an application to National Company Law Tribunal, Principal Bench, New Delhi (“NCLT”) was made for confirmation of the appointment of new RP viz. Mr. K. G. Somani.

2. The NCLT, vide its order dated May 15, 2018 ruled the appointment of Mr. K. G. Somani as invalid, who was proposed to act as RP by majority voting share of the COC, on the ground that he was in the panel of erstwhile ‘State Bank of Hyderabad’, which is now merged with the ‘State Bank of India’, which is one of the members of the COC.

3. The State Bank of India, being one of the members of COC preferred this appeal before the NCLAT against the aforesaid NCLT order.

4. It was submitted by the Counsel appearing for Mr. Rakesh Kumar Jain that for removing him, the COC have not shown any reason and no adverse comments have been recorded by them.

Observations of NCLAT:

The NCLAT held that:

1. Only bar for appointment of a RP is that if any disciplinary proceeding is pending against such proposed RP, he cannot be appointed. There is no other ineligibility prescribed for appointment of interim RP or RP, either under the Code or the regulations made thereunder.

2. In a particular case, the NCLT for one or other good reason can remove a RP for his act of omission or commission. Similarly, for the ground(s) to be recorded in writing, the name of the proposed RP can be rejected by the NCLT.

3. As per Section 27 of the Code, it is clear that during the corporate insolvency resolution process, at any time, if the COC is of the opinion that the RP appointed under Section 22 of the Code is required to be replaced, it may replace him with another RP in the manner provided under the said section.

4. As against the submissions made by the Counsel on behalf of Mr. Rakesh Kumar Jain, the NCLAT observed that it is not desirable for a COC to record its opinion in view of the following reasons:

(a) If the COC records any adverse opinion for replacement of RP, it will not only harm him for the present but will also affect him in future during appointment as RP in another proceedings. In such case, the COC will have to refer the matter to the Insolvency and Bankruptcy Board of India for commencement of departmental proceeding, which is also not desirable in all the cases;

(b) If the COC forms opinion on the basis of performance of the RP and not because of allegation, it will also go against the RP in interest of the resolution process.

5. Except for pendency of a disciplinary proceedings or ineligibility in terms of the provisions of the Code, there is no bar for appointment of a person as RP.

6. Further, since there is no allegation against Mr. K. G. Somani and no disciplinary proceeding is pending against him and he is not on the payroll of one or other member of the COC, the NCLT was required to approve the same.

For the aforementioned reasons, the NCLAT set aside the impugned order dated May 15, 2018 passed by the NCLT and replaced Mr. Rakesh Kumar Jain by appointing Mr. K. G. Somani as RP.

ELP Comment:

One of the duties imposed on insolvency professionals under the Code of Conduct prescribed under the IBBI (Insolvency Professionals) Regulations, 2016, is that every insolvency professional registered with the IBBI is required to ensure 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.

In the instant case, it seems that the NCLT rejected the proposed appointment of Mr. K. G. Somani to avoid the conflict of interest situation under all circumstances. However, the NCLAT in the instant case has laid the principles when the appointment of a RP could be rejected.

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