NCLAT refuses to appoint retired employee of financial creditor as interim resolution professional

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State Bank of India (the Appellant) had filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) (Application) against M/s Metenere Limited (Corporate Debtor) before the NCLT.

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In the Application, the Appellant had nominated one Mr Shailesh Verma (the said IRP) to act as the interim resolution professional (IRP) in the prospective corporate insolvency resolution process (CIRP) against the Corporate Debtor. The said IRP had been an employee of the Appellant for 39 years and retired in 2016 as Chief General Manager (CGM). The Corporate Debtor objected to his appointment as IRP.

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Vide order dated 4 January 2020 (impugned order), the NCLT refused to appoint the said IRP, holding that in view of his past employment with the Appellant, there was apprehension of bias and  he was unlikely to act fairly or as an independent umpire. In these circumstances, the Appellant was directed to nominate a substitute in place of the said IRP.

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Aggrieved by the impugned order, the Appellant preferred the instant appeal before the NCLAT.

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There is no bar under the IBC to the appointment of an ex-employee of a financial creditor as an interim resolution professional (IRP). In any event, neither was the said IRP on any panel of the Appellant nor did he play any role in the decision making committee of the Appellant bank.

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An IRP does not perform the functions of an “independent umpire” between a financial creditor and corporate debtor.

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The functions of an IRP/ Resolution Professional (RP) are not adjudicatory but merely facilitatory. The will of the Committee of Creditors (COC) reigns supreme in the CIRP and the RP only plays the role of a facilitator in the decision making process.

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The said IRP, who was employed with the Appellant for 39 years and retired as a CGM in 2016, was drawing a pension from the Appellant. This would fall within the definition of “salary” defined under the Income Tax Act, 1961 (IT Act). As such, Mr Verma was an ‘interested person’ and ineligible to act as IRP under the IBC.

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Mere apprehension of bias was sufficient to render the proposed IRP ineligible to be appointed.

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The said IRP was held not to be an “interested person” merely because he was drawing pension from the Appellant, which was his entitlement under the relevant service rules for services rendered by him to the appellant in the past and not a favour  extracted by him. Further, the inclusion of pension within the definition of “salary” under the IT Act was not relevant for present purposes and did not make the said IRP an “interested person” and ineligible to be appointed as IRP

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It was recognised that Regulation 3(1) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations) merely required the insolvency professional to be “independent of the corporate debtor”.

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The decision of the NCLAT in State Bank of India v Ram Dev International Limited (Through The Resolution Professional) [Company Appeal (AT) (Insolvency) No 302 of 2018] (Ram Dev) was considered. In Ram Dev, the NCLAT had held that the empanelment of a Resolution Professional as an Advocate or Company Secretary or Chartered Accountant with the financial creditor was not, by itself, a ground to reject his appointment as IRP or RP unless it was demonstrated that there were disciplinary proceedings pending against him or he was an interested person on the pay roll of the financial creditor. Applying the ratio of Ram Dev to the facts of the instant case, the said IRP was not found ineligible to be appointed IRP.

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However, despite arriving at the aforesaid findings, the Bench took cognisance of the fact that the Appellant, and not Mr Verma, had filed the instant appeal and went on to hold that it was obvious that the said IRP had been nominated by the Appellant owing to his past service and loyalty.

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The Bench held that the aforesaid facts were to be considered in light of the apprehension of bias perceived by the corporate debtor. The Bench also held that the decision of the NCLT regarding the IRP acting as an “independent umpire” had to be viewed in the context of the IRP being required to discharge his statutory duties in a fair manner, including collating claims (despite not having the power to admit or reject them) . This bundle of facts justified the decision of the NCLT in directing the said IRP to be substituted.

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In view of the aforesaid, the Bench held that the apprehension of bias perceived by the Corporate Debtor regarding the appointment of the said IRP had to be considered. The NCLT was justified in seeking substitution of the said IRP so that “the CIRP could be conducted in a fair and unbiased manner”, despite the said IRP “not being disqualified or ineligible to act as IRP”. The Bench also observed that the Appellant was not prejudiced by the impugned order and ought not to have preferred the instant appeal. In such circumstances, the Bench declined to interfere with the impugned order and dismissed the appeal.