Can an Ex-Employee Of Financial Creditor Be Interim Resolution Professional (IRP)?

State Bank of India v. M / s. Metenere Limited1

National Company Law Appellate Tribunal ( "NCLAT")

Can an Ex-Employee Of Financial Creditor Be IRP?

 

 In the latter case, the National Company Law Appellate Tribunal ( "NCLAT"), vide ruling dated May 22, 2020 upheld the order passed by the Law on respective National Company Law Tribunal ( "NCLT") dated January 4, 2020 with respect to the substitution of the appointment of former employees of Creditors Financial as Interim Resolution Professional (IRP).

Factual Background

In this appeal, the State Bank of India is the Appellant ( "Financial creditors") and M / s Metenere Limited is the Respondent (the "Company Debtors"). The Appellant has completed the application under Section 7 of the Bankruptcy and Insolvency Code, 20162 ( "Code") for the initiation process of the Corporate Insolvency Resolution Process ( "CIRP") against the Respondent.

The applicant has nominated one of its former employees, who work at Benchmark Bank for 39 years, to be appointed as an IRP for bankruptcy proceedings against the debtor company. IRP harmed by this proposed appointment, the Company, or the Respondent Debtor's same objection on the ground that the appointment of the IRP is partial and biased.

NCLT Order

In view of the objections mentioned above was made by the Debtor Companies, concerned NCLT vide order dated January 4, 2020 ordered and directed Creditors Treasury to substitute the IRP as he has worked for the Bank Appellant for 39 years in a row, so that then creates a fear of bias and not possible to make a fair and unbiased service.

Therefore, the creditor of Finance ordered substitution IRP.

Appeal before NCLAT

Aggrieved and dissatisfied with the order passed by the NCLT, Financial Creditors filed an appeal before NCLAT on the ground that the IRP is concerned and it is proposed to meet the requirements, eligibility and qualifications as mentioned in the Code and thus, must be designated as IRP.

Issues Are Financial Creditors of former employees may be appointed as a professional Interim Resolution?

Order and Observations of NCLAT

Relying on Rule 3 (1) of the Bankruptcy and Insolvency Board of India (Bankruptcy Resolution Process for Corporate Persons) Regulations, 20 163 (the "Company Persons Regulations"); NCLAT regarded as IRP designation nomination as valid and legitimate.

The Court observed that just because the IRP was nominated was an employee of the Financial Creditors do not disqualify him / her and make him / people who are interested and biased. The Court also stated that in accordance with the regulations, an IRP should be independent of any relationship with the debtor company and the Financial Creditors.

NCLAT also relied upon the case of the State Bank of India v. Ram Dev International Limited4 where he observed that, even if the IRP act / work as Lawyer, Corporate Secretary or Chartered Accountant with 'Creditors Finance', such as the proposal for the appointment can not be disqualified merely on the basis of such work, except when there are disciplinary process pending against him / her or if that person is interested parties, such as employees or the salaries of 'Creditors Finance'.

The Court noted that in this case, the proposed IRP it does not undergo any disciplinary proceedings or not the panel afore stated or involved as a retainer by the 'Financial Creditors' but it was just a retired because he had been instrumental to the Bank Appellant for nearly four decades.

Appeals court also refers to Article 17 (1) of the Income Tax Act 1961 and found to bring the pension within the scope of 'salary' can not be construed to create a retiree from 'Creditors Financial' within the framework of fulfilling the legal requirements as a 'person interested' are The work of the 'Financial Creditors' as the definition of 'salary' under the income tax Act 1961 is designed only for the purpose of computing income for determining tax liabilities.

However, the Court could not avoid taking note of the fact that in this case, the Appellant chose to propose a former employee, namely, Mr. Shailesh Verma as 'Interim Resolution Professional' in view of his past loyalty and long service given to the bank. The NCLAT while making this observation further noted that his view was further strengthened in view of the appeal was initiated by the 'Financial Creditors' as Bank Appellant was aggrieved over this NCLT direct command substitution IRP.

The Court of Appeal also in the case of Ranjit Thakur v. Union of India and Ors5 where, the need to test the fear of bias was considered in order to ensure the possibility of impartiality, unfairness and bias.

Given the facts above and circumstances, NCLAT decided that fear and neglect expressed by creditors of Finance in this case can not be ignored and therefore dismissed the appeal.
Conclusion

Sequence NCLAT, in this case, is an important one for the Court if rated ex-employee Creditor Financial as IRP eligible under the Code but refused to appoint him as IRP, such as complaints Creditors of Finance for not pointing ex-employee as IRP, in this case, is clear and therefore does not pass fear and bias test.

Reference:

  1. https://www.mca.gov.in/Ministry/pdf/TheInsolvencyandBankruptcyofIndia.pdf
  2. https://ibbi.gov.in/webadmin/pdf/legalframwork/2018/Apr/word%20copy%20updated %20upto%2001.04.2018%20CIRP%20Regulations%202018_2018-04- 11%2016:12:10.pdf
  3. https://nclat.nic.in/Useradmin/upload/17783526875b6a8fe536213.pdf