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NCLAT: Former employee of a Financial Creditor cannot be appointed as an Interim Resolution professional

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A petition to initiate Corporate Insolvency Resolution Process (CIRP) against M/S Metenere Limited (Corporate Debtor) was made before the National Company Law Tribunal (NCLT) Delhi. Post issuance of the order, the State Bank of India (Financial Creditor) proposed to appoint Mr. Shailesh Verma, its former employee as the interim resolution professional (IRP). In this regard, the NCLT passed an impugned order, asking the Financial Creditor to substitute the proposed person, as he had worked with the Financial Creditor for 39 years, before his retirement in 2016.

Facts of the Case

Against the order passed by the NCLT, an appeal was filed by the financial creditor, before the National Company Law Appellate Tribunal (NCLAT). The appeal challenged the validity of the order demanding the substitution of the proposed interim professional.

Arguments before the NCLAT

The appellants made the following assertions before the NCLAT:

Proposed IRP was not related to the Financial Creditor

The appellants contended that the fact of the proposed IRP, drawing a pension from his former employer for the services rendered in past neither clothe him with the status of an ‘interested person’, nor does it give him the status of an employee on the payroll of the Financial Creditor.

Precedent of State Bank of. India v. Ram Dev International Ltd. Was cited by the appellants. The NCLAT in this case ruled that in order to be established as a person ‘interested’ or related with a financial creditor, one needs to be an employee, or should be o the payroll of the Financial creditor. Since in the case beforehand, the IRP was neither an employee, nor on the payroll of the Financial Creditor, he should not be treated as an ‘interested person’.

Role of an IRP is not of an adjudicating authority

The appellants contended that possibilities of bias on the part of the IRP would have no hinderance on performing his/her statutory duties. It was claimed that the Insolvency and Bankruptcy Code prescribes no adjudicatory powers to the IRPs, and its role in the CIRP is as merely a facilitator, who ensures smooth performance of actions, and effective implementation of all the major decisions taken by the Committee of Creditors (COC). It was submitted that unlike an adjudicating authority, the IRP is not supposed to act as an ‘independent Umpire’ between the Financial Creditor and the former management of the CD, or to decide any conflicting issues between them.

It was further asserted by the appellants that neither the IBC, nor any Regulations framed thereunder, attach any disqualification to an ex-employee of a Financial Creditor from being appointed as an IRP. In this regard, reference was made to Regulation 3 (1) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution of Corporate Persons) Regulations, which provides for eligibility criteria for IRPs. The referred regulation provides no disqualification of the IRP on the ground of his/her current or former employment or any monitory or personal relationship with the Financial Creditor.

Against the averments raised by the appellant, the respondents contended that the IRP appointed by the Financial Creditor was an ‘interested person’. To prove the contention, a reference was made to Section 17 (1) of the Income Tax Act, 1961, which brings the income drawn as pension from an Organization under the ambit of ‘salary’. On this ground, the respondents claimed that the fact of drawing salary from the Financial Creditor proves the fact the IRP is an interested person to the Financial Creditor.

Court’s Analysis

Hearing the claims made by the appellants and the contentions submitted by the respondents, the NCLAT, while declaring the IRP to be an ‘interested person’, declared the fact of former employment with Financial Creditor to be a valid ground for his/her disqualification of an IRP. These points constitute the reasoning adopted by the Hon’ble NCLAT:

Treatment of proposed IRP as an ‘interested person’

The NCLAT rejected the test used by the respondents in determining the status of an appointed IRP with the Financial creditor. It was observed by the tribunal that the provisions of Income Tax Act, are designed with a sole purpose of computing income to determine tax liability of an assessee. Thus its provisions treating pension under the ambit of ‘salary’, cannot be interpreted to render a pensioner of a ‘Financial Creditor’ under the Statutory framework as an ‘interested person’, and rendering him ineligible to be appointed as an IRP.

Contrary to the claims analogy deployed by the respondents, the NCLAT put reliance on the test of ‘reasonableness of apprehension’, enacted by the Indian Supreme court in its judgment of Ranjit Thakur v. Union of India. The test propounds that a question about likelihood of bias should be answered through the reasonableness of the apprehension in that regard in the mind of the parties. In adherence to this test, the NCLAT concluded that the fact about the Financial creditor stressing about the appointment of the proposed IRP, and the 39 years work tenure of the IRP with the Financial Creditor raise a fair apprehension of influence of the Financial Creditor over the proposed IRP.

The role of an IRP

The NCLAT, in regard to this issue, concluded that the IRP, though not entrusted with adjudicatory powers under the IBC, plays a paramount role in a smooth completion of the CIRP in an unbiased fashion. It was observed by the court that certain statutory functions of an IRP, pertaining to acceptance of claims from various creditors, and constitution of Committee of Creditors, require the appointed person to act diligently, and free from any fear and pressure. Thus, any apprehension of influence of any one financial creditor over the appointed IRP, would constitute a valid ground for his/her disqualification. is now on Telegram. Follow us for regular legal updates and judgements from the court. Follow us on Google News, InstagramLinkedInFacebook & Twitter. You can also subscribe for our Weekly Email Updates. You can also contribute stories like this and help us spread awareness for a better society. Submit Your Post Now.

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