State Bank of India Vs. M/s. Metenere Ltd. (NCLAT) – A Preliminary Review by Adv. Shreyas Shrivastava & Adv. Shreerat Kamath

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State Bank of India Versus M/s. Metenere Ltd. (NCLAT) – A Preliminary Review

(By Shreyas Shrivastava, Associate Partner & Shreerat Kamath, Associate, M/s. B.K. Dass, Advocates, Mumbai.) 1

A recent judgement dated 22nd May, 2020 was passed by the Hon’ble National Company Law Appellate Tribunal (“NCLAT”) in an appeal filed by the State Bank of India vs Metenere Ltd. [2020] ibclaw.in 114 NCLAT, arising out of an order of the Principal bench of the Hon’ble National Company Law Tribunal (“NCLT”) in the matter by the same title. The point of consideration in before the Hon’ble NCLAT was whether or not the order passed by the Hon’ble NCLT with respect to the apprehension of the Corporate Debtors regarding the appointed Interim Resolution Professional (“IRP”) was sound, given that the person proposed to be appointed was duly qualified and eligible to be appointed as an IRP.

Facts of the matter

  1. State Bank of India filed an application under Section 7, as a financial creditor of M/s. Metenere Ltd., the corporate debtor. In the said application SBI proposed an ex-employee to be appointed as the IRP. The Corporate Debtor objected to the appointment of an ex-employee as the IRP, and who is currently drawing pension from the SBI. The corporate debtor raised the apprehension of unfairness and bias in dealings by the proposed IRP on the above grounds.
  2. The Principal Bench of the Hon’ble NCLT agreeing with claims of the corporate debtor passed an order directing the Financial Creditor to substitute a different IRP since the NCLT was of the view that the IRP could not function fairly and without bias as an independent Umpire.
  3. Aggrieved by the Order of the Hon’ble NCLT, the Financial Creditor approached the Hon’ble NCLAT seeking to have the impugned order set aside. However, the Hon’ble NCLAT refused to entertain the Appeal, stating that it does not see any merit in it. The Hon’ble NCLAT while agreeing that there was no disqualification or ineligibility towards the proposed IRP to act as an IRP, yet the NCLAT concluded that apprehensions of bias cannot be dismissed and hence, upheld the order of NCLT.

The practice of proposing a known person as an IRP by a Financial Creditor is very common, especially in cases where the Financial Creditors are PSBs. Therefore, the present ruling strikes directly at the heart of the issue and is likely to be brought under scrutiny of Hon’ble Apex Court by way of an appeal. In the present article the authors try contrast the present ruling against the legal provisions which deal with the issue of appointment of IRP.

In this relation, it is very important to note that the Hon’ble NCLAT has made three very interesting observations:

  1. Firstly, that the proposed IRP (the ex-employee of Financial Creditor) was not disqualified or ineligible to act as IRP.
  2. Secondly, even though the proposed IRP continues to draw pension from SBI, still he cannot be treated as an ‘interested person’.
  3. Lastly, the Hon’ble NCLAT has indulged into an objection raised by the Corporate Debtor (and not any other Financial/ Operational Creditor) on the fairness/ biasness of the proposed IRP and acted on it.

Qualification/ Eligibility of IRP – Nexus Between Parties

In order to understand the appointment of an IRP under the I&B Code, it is important to under the eligibility of the proposed IRP. For the same we refer to Regulation 3(1) of the Insolvency and Bankruptcy Board of India (Insolvency of Corporate Persons) Regulations, 2016 which provide that RP should be independent of the Corporate Debtor. The Explanation to the Regulation also provides for certain disqualification/ ineligibility to act as RP:

  1. He should not be a related party of the corporate debtor;
  2. He should be not an employee or proprietor or a partner of a firm of auditors or secretarial auditors in practice or cost auditors of the corporate debtor; or of a legal or a consulting firm, that has or had any transaction with the corporate debtor amounting to five per cent or more of the gross turnover of such firm, in the last three financial years.
  3. A resolution professional, who is a director or a partner of an insolvency professional entity, shall not continue as a resolution professional in a corporate insolvency resolution process if the insolvency professional entity or any other partner or director of such insolvency professional entity represents any of the other stakeholders in the same corporate insolvency resolution process.

Explanation to Regulation 3 also states that a person shall be considered independent of the corporate debtor if such person is eligible to be appointed as Independent Director on the Board of the corporate debtor.

The abovesaid Regulation makes it clear that the RP should in no way, whether directly or indirectly, be related to Corporate Debtor and that any such nexus will act as a disqualification for RP to act as IRP/RP in that particular case. Interesting to note here is that no such disqualification has been provided for any such nexus with the Financial/ Operational Creditor unless the body or organisation of the RP is representing any other stakeholder.

While the eligibility is a pre-condition to appointment of IRP/RP, the appointment itself is in the hands of the Adjudicating Authority (NCLT in this case). Section 16 of the I&B Code provides for such power of appointment of the NCLT, where sub-section (2) provides that:

“(2) Where the application for corporate insolvency resolution process is made by a financial creditor or the corporate debtor, as the case may be, the resolution professional, as proposed respectively in the application under section 7 or section 10, shall be appointed as the interim resolution professional, if no disciplinary proceedings are pending against him.”

Further, subsection (3) also provides that:

“(3) Where the application for corporate insolvency resolution process is made by an operational creditor and-

(b) a proposal for an interim resolution professional is made under sub-section (4) of section 9, the resolution professional as proposed, shall be appointed as the interim resolution professional, if no disciplinary proceedings are pending against him.”

A cursory reading of the section 16 shows that an IRP as suggested by the Financial Creditor or the Operational Creditor as the case may be, can only be disqualified from appointment on the grounds of disciplinary proceedings against them. Further, a person shall only be ineligible to act as an IRP if they do not fulfill any of the 4 criteria mentioned in regulation 3.

Therefore, Code itself in no manner provides for bar on appointment of any person as IRP who in the past has had nexus with the Financial Creditor.

The NCLAT in the present case also referred to SBI vs Ram Dev International [Company Appeal (AT)(Insolvency) No. 302 of 2018] where it was held that there is no bar for appointment of an IRP except for pending disciplinary proceedings or if he is an ‘interested person’. The NCLAT further went on to admit that no disciplinary proceedings were pending against the IRP proposed by SBI. In fact, the NCLAT also concluded that past employment will not make the proposed IRP an ‘interested person’. Yet the Hon’ble NCLAT went on to conclude the apprehension of bias merely on the ground of an assumption that SBI is upset with the order of substitution passed by the Ld. NCLT and that there is past loyalty and long service in favour of SBI.

IRP, Committee of Creditors & RP – Role of an Umpire

For all practical purposes the appointment of an IRP is temporary is nature unless the COC wishes to continue with the IRP as RP. In other words, an IRP can be replaced with an RP as is procedurally possible within the ambit of The Code, provided in section 22. The only pre-requisite for such removal of IRP and substitution with another RP is 66% votes by the members of the COC. Further, COC has got plenary power for removal of an RP (appointed under Section 22) and substitution with another professional. Therefore, the nature of appointment of IRP under Section 16 is temporary and within complete control of the COC, as and when the same is constituted.

This merely indicates at the temporary and limited role an IRP plays in the initial phase of the Corporate Insolvency Resolution Process (CIRP). Thus, question remains as to whether any circumstances arise where IRP is required to act as an ‘Umpire’ when that role is clearly played by the Adjudicating Authority. If anything, jurisprudence has shown that the even after the appointment of COC, aggrieved parties have had access to the NCLT and have been granted adequate reliefs as and when required in the interest of justice.

 Bias and its Assumption

The NCLT and the NCLAT both in their orders have come to a conclusion of bias. However, in coming to such conclusions, rarely any material finding has been recorded to show such bias. On one hand, the Hon’ble NCLAT has concluded that the proposed IRP cannot be treated as an ‘interested person’ and on the other it has arrived at the aforesaid conclusions.

The Hon’ble Supreme Court in the case of A.K. Kraipak Vs. Union of India [Manu/SC/0427/1969] has opined that-

“..Therefore what we have to see is whether there is reasonable ground for believing that he was likely to have been biased. We agree with the Learned Attorney-General that a mere suspicion of Bias is not enough. There must be reasonable likelihood of bias. In deciding the question of bias we have to take into consideration human probabilities and ordinary course of human conduct.

Further, the Apex Court in the case of Kumaon Mandal Vikas Nigam Ltd. vs Girja Shankar Pant & Ors. [Manu/SC/0639/2000] has opined as follows-

10. The word ‘Bias’ in popular English parlance stands included within the attributes and broader purview of the word ‘malice’, which in common acceptation mean and imply ‘spite’ or ‘ill-will’ (Stroud’s Judicial Dictionary (5th Ed.) Volume 3) and it is now well settled that mere general statements will not be sufficient for the purposes of indication of ill-will. There must be cogent evidence available on record so come to the conclusion as to whether in fact there was existing a bias which resulted in the miscarriage of justice.

29. The test, therefore, is as to whether a mere apprehension of bias or there being a real danger of bias and it is on this score that the surrounding circumstances must and ought to be collated and necessary conclusion drawn therefrom. In the event however the conclusion is otherwise inescapable that there is existing a real danger of bias, the administrative action cannot be sustained: If on the other hand, the allegations pertaining to bias is rather fanciful and otherwise to avoid a particular Court, Tribunal or authority, question of declaring them to be unsustainable would not arise. The requirement is availability of positive and cogent evidence and it is in this context that we do record our concurrence with the view expressed by the Court of Appeal in Locatable case (Supra).

Reference is also invited to the Hon’ble Supreme Court’s ruling in Municipal Corporation, Ujjain v BVG India Ltd dt. 27.3.2018:

“50(c) It is not open to the Court to independently evaluate the technical bids and financial bids of the parties as an appellate authority for coming to its conclusion inasmuch as unless the thresholds of mala fides, intention to favour someone or bias, arbitrariness, irrationality or perversity are met, where a decision is taken purely on public interest, the Court ordinarily should exercise judicial restraint.”

Thus, mere suspicion of Bias should not be sufficient to determine whether or not bias exists or will exist. There must be cogent evidence and whether in the existing circumstances there will be an unescapable conclusion that there is a real danger of bias. An example or indicator of such biasness can be past proposition of the proposed RP by Financial Creditor in other of its cases.

In the instant case while on the one hand the point of biasness has been raised by the Corporate Debtor, on the other, there is no recording of any evidence that the proposed IRP will be biased against other Financial/ Operational Creditors in his operation. Here, it is to be realized that a Resolution Professional is a duly qualified professional who is bound by the code of conduct and shall act within such bonds. Any assumption to the contrary must be based on cogent evidence.

IRP & Principles of Natural Justice

It is well settled principle that no party can be judge in his own case. The same should equally apply to the cases under I&B Code. While there is a imminent question on the role of the IRP as an Umpire, still assuming the IRP has to act according to the principles of natural justice, a question into his fairness is not clearly warranted by the written word of the law. Although, the powers of the Adjudicating Authority for Corporate Persons under Section 60 should be wide enough to warrant such enquiry, should the authority get into it in the absence of a clearly mandate under Section 16, dealing with appointment?

Assuming that the Hon’ble NCLT has the necessary discretion for deciding the fairness of the Interim Resolution Professional, the NCLT in the instant case merely states that “In view of the aforesaid facts, it is evident that such an IRP is unlikely to act Fairly and cannot be expected to act as an Independent Umpire”. The Hon’ble NCLAT further agrees that there is no disqualification or ineligibility, still concludes on apprehension of bias given the past relationship with the Financial Creditor

The order of the Hon’ble NCLAT as well NCLT both appear wanting in terms of cogent evidence of biasness, especially when it is concluded that the proposed IRP is neither disqualified nor ineligible to be appointed as an IRP. One hopes that a deeper scrutiny is conducted on issues such as these where the law does not provide for such an enquiry in so many words.

 

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References

1 The Authors thank Mr. S. Srikanthan, Advocate (Chennai) & Visiting Faculty – Sastra University, Thanjavur for his kind review and inputs.

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