Supreme Court in State Bank of India vs. Metenere Ltd. Ruling Analysed By: Adv. Partho Sarkar

(The Author can be reached at sarkarpartho@yahoo.com.)

SUPREME COURT OF INDIA
State Bank of India vs. Metenere Ltd.
[2020] ibclaw.in 17 SC
Decided on 19th August, 2020

Ruling Analysed By: Adv. Partho Sarkar

 Held

A Resolution Professional (RP), just because he was in the employment of a financial creditor can’t summarily be disentitled to act as RP/IRP, wherein the said financial creditor constitutes CoC of the corporate debtor.

[It is a matter of intrigue, that Shailesh Verma (Ex-CGM of SBI) ‘the IRP proposed by SBI’ didn’t contest the order of NCLT seeking his replacement, all along it was SBI who was insisting the appointment of Shailesh Verma as IRP’ – a fundamental question arises that, would SBI have spared it’s resources in contesting at multiple appellate levels, had the proposed IRP been other than its Ex-Senior Executive – the author is of the opinion that it is a callous wastage of public funds nay abuse of authority by public servants for some inexplicable reasons.]

PROLOGUE

NCLAT upheld1 the NCLT ruling directing State Bank of India to substitute its nominee, an Ex-CGM of theirs, to act as the Interim Resolution Professional (IRP) in the insolvency proceedings of Metenere Limited. A three-member bench of NCLAT said that apprehension of bias expressed by ex-management of Metenere Ltd./Corporate Debtor – cannot be dismissed and the NCLT was right in asking for substitution of the IRP. NCLAT expressed that though I & B Code does not prohibit an ex-employee of the financial creditor to be appointed as an IRP, in this particular case, the person, whose name was proposed as IRP (Shailesh Verma) had worked with SBI for 39 years and had retired as Chief General Manager (Ex-CGM). It was submitted on behalf of SBI that the IRP is not required to act as an ‘Independent Umpire’ between the ‘Financial Creditor’ and the ex-management of the ‘Corporate Debtor’ or decide any conflicting issues between them. It was further submitted that the RP has no adjudicatory powers and only acts as a facilitator in the ‘Corporate Insolvency Resolution Process’ as all major decisions are taken by the CoC. It was further argued that the ‘Financial Creditor’ plays its part only to the extent of its voting share therefore, merely because the proposed IRP happens to be an ex-employee of SBI can’t be a ground to allege bias against him. The question arising for determination is whether an ex-employee of the ‘Financial Creditor’ having rendered services in the past should or should not be permitted to act as IRP at the instance of such ‘Financial Creditor’ regard being had to the nature of duties to be performed by the IRP/RP. The fact that Shailesh Verma/Ex-CGM is drawing pension from SBI does not clothe him with the status of an employee on the payroll of ‘SBI. Pension is paid for the past services under the relevant Service Rules. Regulation 3 (1) of the CIRP Regulations, provides that an Insolvency Professional shall be eligible for appointment as an RP if he or his partners and directors of the Insolvency Professional Entity are independent of the ‘Corporate Debtor’. Admittedly Ex-CGM/Shailesh Verma nor any of his associates is alleged to be connected with the ‘Corporate Debtor’ in any manner rendering him ineligible to act as a ‘Resolution Professional’. Provision engrafted in Section 17(1) of the Income Tax Act, 1961 bringing pension within the ambit of ‘salary’ cannot be interpreted to render a pensioner ineligible holding him as an ‘interested person’ being in employment of the ‘Financial Creditor’; as the definition of ‘salary’ under the Income Tax Act, is designed only for the purposes of computing of income to determine tax liability. With regard to IRP to act as an Independent Umpire must be understood in the context of the IRP acting fairly in the context of his statutory duties, to admit or reject a claim under Regulation 13 of CIRP Regulations, read with Regulation 17 of CIRP regulations as to constitution of CoC.

NCLT had expressed apprehension of bias as was argued by the ex-members of Corporate Debtor/Metenere Ltd. regarding appointment of the Ex-CGM as proposed IRP at the instance of SBI. NCLAT too had upheld the order of NCLT. Further NCLAT had observed it goes without saying that SBI shouldn’t have been aggrieved of the NCLT order as it doesn’t prejudice it. NCLAT had observed in pertinence, it cannot be denied that SBI restricted its choice to propose Shailesh Verma as IRP obviously having regard to past loyalty and the long services rendered by him, this conclusion is further reinforced by filing of instant appeal by the financial creditor (SBI) who is upset with the impugned order directing SBI to substitute the name of IRP in place of the Ex-CGM.

The captioned Civil Appeal arose out of the NCLAT order.

Order:

Prima-facie satisfied that the approach adopted by NCLAT is not correct that merely Resolution Professional who remained in the Service of SBI and is getting pension, was dis-entitled to be RP. However, since SBI have agreed for appointment of new RP, let the new RP be appointed by the NCLT within a week in accordance with the provisions of the I & B Code. Supreme Court Observed that the change of RP shall not reflect adversely upon the integrity of concerned RP, who has been replaced. Since the impugned order does not reflect the correct approach, the same shall not be treated as a precedent.

EPILOGUE

  1. The controversy can be viewed in the context of Judicial pronouncement(s) that held the office of the RP as a quasi-judicial authority/officer of the court, thus the question arises should the Ex-CGM ought to have recused himself as RP once an objection, that too prima-facie not unreasonable been raised as regards his appointment !!! Supreme Court in P.K. Ghosh V/s J.G. Rajput (1995) 3 SCC 744, had ruled that a basic postulate of the rule of law being, that justice should not only be done but must also seem to have been done. If there is a basis which can’t be treated as unreasonable for a litigant to expect that a particular judge should not adjudicate a particular matter and there is no compelling necessity, such as absence of any alternative, probity demands the judge to recuse himself. This is required not because the judge is likely to be influenced in any manner but his conducting the proceedings is likely to give rise to a reasonable apprehension in the mind of the litigant, that the mind of the judge may be subconsciously influenced of some extraneous factors; justice should not only be done, but should also seem to have been done. In the NCLAT order, the ruling of Ranjit Thakur V/s UoI & Ors. (1987) 4 SCC 611 was cited, wherein the Supreme Court held:

As to the tests of the likelihood of bias what is relevant is the reasonableness of the apprehension in that regard in the mind of the party. The proper approach for the judge is not to look at his own mind and ask himself, however, honestly, “Am I Biased?”; but to look at the mind of the party before him”.

In the captioned matter, the Supreme Court had rightly held there is no inherent disqualification inhibiting the Ex-CGM of SBI to have acted as Resolution Professional – but despite NCLT/NCLAT ruling in opposition to the appointment of their Ex-CGM as the IRP, and it is not that there are no alternatives other than the Ex-CGM to be appointed as RP, yet SBI pursuing for appointment of him at multiple levels in itself is sufficient to give reasonable apprehension in the mind of a litigant of a sub-conscious influence working in the mind of the Ex-CGM which might prejudice the litigant, which in the present matter is the Corporate Debtor/Metenere Ltd.; on grounds of self-honour, Ex-CGM/ Shailesh Verma ought to have recused himself.

  1. Prima-facie it might be censorious of an Ex-Official of the lender being appointed as RP/IRP; the independence of such person will always be in the realm of speculation. Some of the corporate debtors which have been admitted for proceedings under I & B Code, wherein either through board membership or some other direct or circuitous engagement the erstwhile top officials of the financial creditor are a part of the defaulting corporate debtor, it had also been the case, there was rampant siphoning of funds; and year on year the corporate debtor was suffering losses on one hand yet the exposure of the banks/financial creditor(s) were increasing concurrently – it would be naïve to believe that such top officials who been co-opted in the board of the defaulting corporate debtor weren’t aware of the fraud happening, where not loose change but significant sum of public money were being siphoned. It is in this backdrop in case an Ex-employee of the very same bank/financial creditor gets appointed as RP/IRP, will he or can he remain immune to pulls and pressures of his former employer is anybody’s guess; thus as a matter of probity ‘even if not the mandate of law’, an ex-employee of a creditor should not be appointed as RP/IRP, lest the nagging needle of suspicion of bias persists.

For the benefit of Judicial Officers/Resolution Professionals/ Advocates/ Contestants/ Students/ Academicians, Adv. Partho Sarkar is nearing completion of his book, analysing more than 75 Judgments on IBC Laws – sample shared.

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References

References
1 State Bank of India Vs. M/s. Metenere Ltd. [2020] ibclaw.in 114 NCLAT