New Standard for Independence: NCLAT Rules Ex-employee of Financial Creditor Cannot Act As Interim Resolution Professional

July 5, 2020

[Aparajita is a student at NALSAR University of Law, Hyderabad.]

 

On 22 May 2020, the National Company Law Appellate Tribunal (NCLAT), in the matter of State Bank of India v. M/s. Metenere Limited, upheld the order passed by National Company Law Tribunal, Delhi (NCLT), mandating substitution of the interim resolution professional proposed by State Bank of India, the financial creditor, in the corporate insolvency resolution process (CIRP) initiated for M/s. Metenere Limited, the corporate debtor. The NCLAT judgment effectively created a new requirement of independence for the interim resolution professional from the financial creditor.

 

Brief facts of the case

 

M/s. Metenere Limited opposed the proposal of Mr. Shailesh Verma as the interim resolution professional on the ground that there was an apprehension of bias. He had been associated with State Bank of India for 39 years till retirement as the Chief General Manager in 2016 and continued to draw pension regularly. The NCLT passed the impugned order directing the financial  creditor to substitute the name of the resolution professional to act as interim resolution professional, instead of Mr. Shailesh Verma. It accepted that it was unlikely he would act fairly and would not act as an ‘independent umpire’.

 

Thereafter, State Bank of India preferred an appeal in front of the NCLAT, contending that Mr. Shailesh Verma fulfilled the eligibility requirements under the Insolvency and Bankruptcy Code 2016 (IBC) and, therefore, should not be removed. The NCLAT had to consider whether an ex-employee of the financial creditor should not be permitted to be appointed as an interim resolution professional by the financial creditor, having regard to the nature of duties performed by an interim resolution professional and resolution professional. The appellate tribunal upheld the order of the NCLT, notwithstanding that Mr. Shailesh Varma was not disqualified or ineligible to be appointed as the interim resolution professional. The order raises a question on the nature of an interim resolution professional’s duty and the expectation of independence from them.

 

Eligibility of the interim resolution professional

 

Section 16(2) of the IBC qualifies the appointment of an interim resolution professional with the sole requirement that there are no pending disciplinary proceedings against them. Regulation 3(1) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporation Persons) Regulations 2016 (2016 Regulations) elaborates on the eligibility of the (interim) resolution professional. The provision expressly calls for independence of the professional and “all partners and directors of the insolvency professional entity of which he is a partner or director” from the corporate debtor. It further provides how the independence is to be determined. Importantly, there is no requirement of independence from the financial creditor expressly mentioned under the IBC or the 2016 Regulations.

 

The insolvency professional also has a duty to make relevant disclosures in accordance with the Code of Conduct provided in the First Schedule of the Insolvency and Bankruptcy Board of India (Insolvency Professional) Regulations 2016. As per Clause 8A, an insolvency professional merely has to disclose whether they were an employee of the financial creditor and the insolvency professional agency. The disclosure of a past relationship does not seem to entail a disqualification.The Code of Conduct also casts a duty on the insolvency professional to make decisions without any bias or conflict of interest (Clause 3).

 

In State Bank of India v. Ram Dev International, Company Appeal (AT) (Insolvency) No. 302 of 2018 (quoted with approval by the NCLAT in the present case),  the NCLAT noted that “a resolution professional if empaneled as an Advocate or Company Secretary or Chartered Accountant with one or other ‘financial creditor’ that cannot be a ground to reject the proposal, if otherwise there is no disciplinary proceeding is pending or it is shown that the person is an interested person being employee or in the payroll of the ‘financial creditor’.” In the present case, admittedly there were no disciplinary proceedings against Mr. Shailesh Verma and he was neither an interested person nor on the payroll of the financial creditor. Despite this, the NCLAT went on to hold there was an apprehension of bias, on the basis that State Bank of India limited its proposal to Mr. Shailesh Verma because of his past loyalty and the bank’s action to challenge the impugned order substantiated this.

 

The ‘real danger’ test for bias

 

The question of bias arose in the present case as the NCLAT used the term ‘independent umpire’ to define the role of an interim resolution professional / resolution professional. In Swiss Ribbons v. Union of India [(2019) 4 SCC 17], the Indian Supreme Court stated that the resolution professional has been given administrative and not quasi-judicial powers under the IBC (para 88). However, in the present judgment, the NCLAT observed that “an independent umpire must be understood in the context of the ‘interim resolution professional’ acting fairly qua the discharge of his statutory duties irrespective of the fact that he is not competent to admit or reject a claim.” It has in fact recently been argued that a resolution professional may exercise quasi-judicial functions in determining creditors’ claims. Independence of the professional from the financial creditor is all the more a cause for concern if their powers take such adjudicatory colour. There are discretionary powers given to the professional that do not come with an internal system of checks and balances. 

 

With regards to the test for bias, Indian courts have largely followed the English jurisprudence. In Kumaon Mandal Vikar Nigam Limited v. Girja Shankar Pant and Others [(2001) 1 SCC 182], the Apex Court had held that there needs to be a real danger of bias, rather than a mere apprehension. The same is to be determined with the availability of positive and cogent evidence (para 35). The court approvingly quoted the House of Lords judgment in Locabail Limited v. Bayfield Properties for the application of the ‘real danger’ test.

 

The determination of whether past employment is sufficient to satisfy the test for bias has to be fact-specific. In the present case, Mr. Shailesh Verma was a high-ranking official of the financial creditor with a decades-long relationship and retirement in 2016. However, currently he was merely a pensioner, a capacity he has as a right in law. Drawing of pension is connected with his past employment, leaving no present working relationship with the bank. Even if the bank wanted to, it could not legally deny him pension and thereby influence his decision. Therefore, the requirement of ‘real danger’ was clearly absent. Recently, in Government of Haryana v. M/s G.F. Toll Road Private Limited and Others [(2019) 3 SCC 505], the Supreme Court noted (quoting Locabail) that in the absence of a specific provision, a person could not be disqualified from appointment of an arbitrator simply because they were a past employee of the party, many years ago.

 

 

Law making by NCLT and NCLAT?

 

Nevertheless, the NCLT and the NCLAT seem to have introduced a new legal requirement of independence during appointment that is absent in the IBC. NCLT / NCLAT have been bestowed solely with adjudicatory functions under the IBC, while the Insolvency and Bankruptcy Board of India is empowered to make regulations and guidelines on relevant issues. On the other hand, NCLT / NCLAT may contend that first, Section 60 of the IBC empowers the NCLT to decide on a question of law or facts. And second, the NCLT Rules 2016 provide the tribunal with inherent powers to 'make such orders as may be necessary for meeting the ends of justice or to prevent abuse of the process of the Tribunal' (Rule 11). It is to be seen whether the Supreme Court will deem the creation of a new standard of independence within these powers of NCLT / NCLAT. In general, the Supreme Court has noted in the past that courts cannot take over the role of the legislature and dictate what a law should be.

 

This judgment is likely going to have an impact on other insolvency cases now wherein ex-employees have been appointed as resolution professionals. However, there is still uncertainty as the NCLAT judgment may be appealed in front of the Supreme Court (Section 62 of the IBC). More clarity is the need of the hour and the exact scope of a resolution professional’s independence with respect to a financial creditor and possibly other stakeholders in the insolvency process requires legislative consideration as well.

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