REPLACEMENT OF INTERIM RESOLUTION PROFESSIONAL – COMMERCIAL WISDOM OF COMMITTEE OF CREDITORS?

[Mr. M. GOVINDARAJAN]

Appointment of Interim Resolution Professional The corporate insolvency resolution process (‘CIRP’ for short) may be initiated against a corporate debtor by a financial creditor, operational creditor and even corporate applicant itself.  Section 7 of the Insolvency and Bankruptcy Code, 2016 (‘Code’ for short) provides that while filing the application by the financial creditor against a corporate debtor the financial creditor shall, along with the application, furnish the name of the resolution professional proposed to act as an interim resolution professional (‘IRP’ for short). The operational creditor may initiate CIRP against a corporate debtor under section 9 of the Code.  Section 9(4) provides that an operational creditor initiating a corporate insolvency resolution process under this section may propose a resolution professional to act as an interim resolution professional. The corporate applicant may initiate CIRP under section 10 of the Code. Section 10(3)(b) provides that the corporate applicant shall, along with the application furnish the information relating to the resolution professional proposed to be appointed as an IRP. From the above said provisions it is clear that the financial creditor as well the corporate applicant is compulsorily propose the name of resolution proposed to be appointed as an interim resolution professional proposed to be appointed as an IRP.  But the said condition is not applicable to the operational creditor.  It is at the option of the operational creditor to appoint IRP or not. The Adjudicating Authority shall admit the application within 14 days of the application.  The Adjudicating Authority appointed the IRP at the time of commencement of corporate insolvency resolution proceedings. If the operational creditor proposed an IRP in its application, the Adjudicating Authority shall appoint the said person as IRP.  If no proposal is made by the operational creditor for the appointment of an IRP, then the Adjudicating Authority shall make a reference to the   Insolvency and Bankruptcy Board of India (‘Board’ for short) for the recommendation of an insolvency professional who may act as an interim resolution professional.   The Board shall, within 10 days of the receipt of a reference from the Adjudicating Authority, recommend the name of an insolvency professional to the Adjudicating Authority against whom no disciplinary proceedings are pending. Tenure of IRP The Adjudicating Authority shall appoint an IRP on the insolvency commencement date.  Before 06.06.2018 the tenure of IRP shall not exceed 30 days.  Now the term of the IRP shall continue till the date of appointment of the resolution professional under section 22. Committee of Creditors An IRP shall make a public announcement not later than 3 days from the date of his appointment as an IRP inviting claims from the creditors against the corporate debtor.  The last date for the receipt of claim will be intimated in the said public announcement.  The claim from the creditors shall be made in the prescribed form prescribed for their class.  The interim resolution professional shall after collation of all claims received against the corporate debtor and determination of the financial position of the corporate debtor, constitute a committee of creditors.  The committee of creditors shall comprise all financial creditors of the corporate debtor.  The IRP shall file a report certifying constitution of the committee to the Adjudicating Authority within 2 days of the verification of claims received. Replacement of IRP The IRP shall hold the first meeting of the committee within 7 days of filing the report under this regulation.    The committee of creditors, may, in the first meeting, by a majority vote of not less than    66% of the voting share of the financial creditors, either resolve to appoint the IRP as a resolution professional or to replace the interim resolution professional by another resolution professional.   Where the committee of creditors resolves to replace the interim resolution professional, it shall file an application before the Adjudicating Authority for the appointment of the proposed resolution professional along with a written consent from the proposed resolution professional in the specified form.    The Adjudicating Authority shall forward the name of the resolution professional proposed to the Board for its confirmation and shall make such appointment after confirmation by the Board. Where the Board does not confirm the name of the proposed resolution professional within 10 days of the receipt of the name of the proposed resolution professional, the Adjudicating Authority shall, by order, direct the interim resolution professional to continue to function as the resolution professional until such time as the Board confirms the appointment of the proposed resolution professional. Where the appointment of resolution professional is delayed, the IRP shall perform the functions of the resolution professional from the fortieth day of the insolvency commencement date till a resolution professional is appointed. In most of the cases the IRP continues to resolution professional.  The provisions clearly show that the IRP is to be replaced by a resolution professional only by Committee of Creditors with 66% majority of voting in Committee of Creditors.  Whether an IRP can file appeal before the Adjudicating Authority for not considering his request to continue as Resolution Professional by the Committee of Creditors? Commercial wisdom of Committee of Creditors While prescribing parameters for determining viability, the Code also recognizes the supremacy of the Committee’s commercial wisdom. The expression ‘commercial wisdom’ has not been defined under the Code or under the regulations framed there under.  The commercial wisdom of Committee of Creditors has been given paramount status without any judicial intervention for ensuring completion of the stated processes within the timelines prescribed by the Code. The opinion expressed by Committee of Creditors after due deliberations in the meetings through voting, as per voting shares, is a collective business decision.  The decisions of Committee of Creditors by 66% majority vote will not be interfered by the Tribunal.  The same is position in case the IRP assailed his replacement by a Resolution Professional by the Committee of Creditors with 66% vote. In COMMITTEE OF CREDITORS OF LEEL ELECTRICALS LTD. THROUGH STATE BANK OF INDIA VERSUS LEEL ELECTRICALS LTD. THROUGH ITS INTERIM RESOLUTION PROFESSIONAL, ARVIND MITTAL - 2020 (12) TMI 1132 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI  Order dated 14th December, 2020 passed by the Adjudicating Authority Allahabad Bench, adjourning the matter to 20th January, 2021 while granting an opportunity to the IRP to file an affidavit in regard to passing of resolution by the Committee of Creditors for its replacement by Resolution Professional under Section 22 of the Code, has been assailed in this appeal on the ground that there was no occasion for the Adjudicating Authority to have granted time to Interim Resolution Professional to file any objection/ reply to the resolution of Committee of Creditors. It was argued on behalf of the Committee of Creditors that it is settled law that the decision to substitute Interim Resolution Professional by Resolution Professional is a commercial decision, not required to be supported by any reasons. Once the Committee of Creditors has passed a resolution to substitute the Interim Resolution Professional by Resolution Professional, the Interim Resolution Professional has no role to play.  IRP had offered himself to be the Resolution Professional of the Corporate Debtor.  It is further submitted that in the first Committee of Creditors Meeting of ‘LEEL Electricals Ltd.’ resolution to confirm IRP as a Resolution Professional failed as the total votes cast in favor of the resolution were 0%.  In the second meeting of Committee of Creditors the resolution to confirm IRP as RP failed as slightly over 8% voted in its favor.  The resolution to substitute IRP by Resolution Professional Mr. Gangaram Agarwal was voted by Committee of Creditors with more than 78% vote share. The Appellate Tribunal held that the decision in regard to appointment of IRP as RP or replacement of IRP by another Resolution Professional falling within the ambit of Section 22 of the Code is a decision based on commercial wisdom of Committee of Creditors which is not amenable to judicial review.   It would have been wise on his part to bow to the commercial wisdom of the Committee of Creditors and quit gracefully. The Appellate Tribunal set aside the order of Adjudicating Authority and directed the Adjudicating Authority to carry forward the Resolution Process in regard to the Corporate Debtor with Resolution Professional – Mr. Gangaram Agarwal discharging functions as the Resolution Professional in terms of resolution passed by the Committee of Creditor.