Recently NCLT, vide orders dated 04.01.2020, disqualified the Interim Resolution Professional (IRP) proposed by the applicant bank (Section 7, application for initiation of insolvency), on a plea of apprehension of bias by the Corporate Debtor (CD). In the present case the proposed IRP is a former employee and pensioner of the applicant bank. The said decision was upheld by NCLAT vide orders dated 22.05.2020. Following are the observations of the NCLT & NCLAT.
A. NCLT (04.01.2020) State Bank of India Vs M/s. Metenere Ltd. [CP No. (IB)-639(PB) / 2018]
- It is submitted that Mr. Sailesh Verma is an ex-employee of SBI; joined the service of SBI in the year 1977 and since then he had been working with SBI till his retirement in 2016, He has been in the service of SBI for a period of over 39 years. Thus, there is an apprehension of bias against the appointment of the proposed IRP.
- The Petitioner in its rejoinder has not disputed the aforesaid factum.
- In view of the aforesaid facts, it is evident that such an interim Resolution Professional is unlikely to act fairly and cannot be expected to act as an independent empire.
B. NCLAT (22.05.2020) State Bank of India Vs M/s. Metenere Ltd.[Company Appeal (AT) (Insolvency) No. 76 of 2020]
1. Appellant (Applicant - SBI) contended;
- a)....that the ‘I & B Code’ and the Regulations framed thereunder do not attach any disqualification to an ex-employee of a ‘Financial Creditor’ from being appointed as an ‘Interim Resolution Professional’.
- b)....that the ‘Interim Resolution Professional’ 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.
- c)....that the ‘Resolution Professional’ has no adjudicatory powers and only acts as a facilitator in the ‘Corporate Insolvency Resolution Process’ as all major decisions are taken only with the approval of the ‘Committee of Creditors’.
- d).....It is further submitted that the ‘Financial Creditor’ also plays part only to the extent of its voting share as a member of ‘Committee of Creditors’ and not beyond that. Therefore, merely because the proposed ‘Interim Resolution Professional’ happens to be an ex-employee of the ‘Financial Creditor’ cannot be a ground to allege bias against him.
- e). …It is contended that the proposed ‘Interim Resolution Professional’ is not on any panel of the Appellant Bank or handling any portfolios and has no role in the decision making committee of the Appellant Bank.
Per contra, Respondent -‘Corporate Debtor’ submitted;-
- a)... that Mr. Shailesh Verma was in employment with the Appellant for over 39 years and retired as the Chief General Manager in 2016. He is drawing pension from the Appellant - ‘Financial Creditor’ which falls within the definition of ‘salary’ under the Income Tax Act, 1961. It is submitted that in view of the same, Mr. Shailesh Verma is an ‘interested person’ being an ex-employee and on the payroll of ‘Financial Creditor’, thus rendered ineligible under the ‘I & B Code’ to act as an ‘Interim Resolution Professional’.
- b)... submitted that mere apprehension of bias is sufficient ground of apprehension of biasness of the proposed ‘Interim Resolution Professional’ towards the Appellant.
NCLAT in it’s judgement observed as under;-
# 4. The sole question arising for determination in this appeal is whether an ex-employee of the ‘Financial Creditor’ having rendered services in the past, should not be permitted to act as ‘Interim Resolution Professional’ at the instance of such ‘Financial Creditor’, regard being had to the nature of duties to be performed by the ‘Interim Resolution Professional’ and the ‘Resolution Professional’.
# 8. The fact that the proposed ‘Resolution Professional’ Mr. Shailesh Verma had a long association of around four decades with the ‘Financial Creditor’ serving under it and currently drawing pension coupled with the fact that the ‘Interim Resolution Professional’ is supposed to collate all the claims submitted by Creditors, though not empowered to determine the claims besides other duties as embedded in Section 18 of the ‘I&B Code’ raised an apprehension in the mind of Respondent - ‘Corporate Debtor’ that Mr. Shailesh Verma as the proposed ‘Interim Resolution Professional’ was unlikely to act fairly justifying the action of the Adjudicating Authority in passing the impugned order to substitute him by another Insolvency Professional. Observations of the Adjudicating Authority in the impugned order with regard to ‘Interim Resolution Professional’ to act as 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.
# 9. In the given set of circumstances, we are of the considered opinion that the apprehension of bias expressed by the ‘Corporate Debtor’ qua the appointment of Mr. Shailesh Verma as proposed ‘Interim Resolution Professional’ at the instance of the Appellant - ‘Financial Creditor’ cannot be dismissed offhand and the Adjudicating Authority was perfectly justified in seeking substitution of Mr. Shailesh Verma to ensure that the ‘Corporate Insolvency Resolution Process’ was conducted in a fair and unbiased manner. This is notwithstanding the fact that Mr. Shailesh Verma was not disqualified or ineligible to act as an ‘Interim Resolution Professional’. Viewed thus, we find no legal flaw in the impugned order which is free from any legal infirmity and has to be upheld. It goes without saying that the Appellant- ‘Financial Creditor’ should not have been aggrieved of the impugned order as the same did not cause any prejudice to it.”
C. The issues are;-
What is bias ?
If the Corporate Debtor has Locus - Standi to raise the apprehensions of the bias of the proposed IRP ?
Whether the following constitute continuing beneficial relationships ?
a). Drawing pension from the Applicant (FC).
b). Being on the panel of Insolvency Professionals of the Applicant (FC).
c). Drawing pension & / or on the panel of Insolvency Professionals of other stakeholders.
What are the provisions of the “Code” & regulations framed therein ?
What are provisions of the “Code” for disclosure of relationships between different stakeholders & measures to prevent quid pro quo, the principal reason for the bias ?
Past decisions of different courts in the matter.
Now let’s examine the issues in detail.
1. Bias.
Bias - inclination or prejudice for or against one person or group, especially in a way considered to be unfair. (Inclination towards something, predisposition, partiality, prejudice, preference, predilection.)
The genesis of “Bias” lies in beneficial relationships (past & / or continuing) & quid pro quo. Bias can only be when either party has some form of control over the other or some beneficial relationship exists.
However if an IP enters into a contract with a bank for a bank' s empanelment the bias is created of continued beneficial relationship.
2. Locus - Standi of the Corporate Debtor (CD)
What is the Locus - Standi of the Corporate Debtor to raise the apprehensions of the bias of the proposed IRP, as none of the actions of the IRP / RP have any implications on the welfare of the present owners of the CD? The IRP comes into the picture only after the application for insolvency of the CD is accepted by the AA (Adjudicating Authority). Further all the decisions in respect of insolvency resolution and / or Liquidation are taken by the CoC.
The moment application for insolvency is accepted by the Adjudicating Authority, the owners of CD / CD are devoid of any stake in the business, rendering the apprehensions of CD, of the bias of IRP meaningless.
Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, (IPR), provides as under;
# Regulation 3 (1) An insolvency professional shall be eligible to be appointed as a resolution professional for a corporate insolvency resolution process of a corporate debtor if he, and all partners and directors of the insolvency professional entity of which he is a partner or director, are independent of the corporate debtor.”
The above disqualification of IRP / RP, is to ensure that IRP / RP examines preferential / undervalued / extortionate / fraud transactions, impartially & independently, without any favours to CD.
3. Continuing beneficial relationships ?
Whether the following relationships constitute the continuing beneficial relationships warranting disclosures & will raise apprehensions of bias of stakeholders.
Drawing pension from the Applicant (FC).
Being on the panel of Insolvency Professionals of the Applicant (FC).
Drawing pension & / or on the panel of Insolvency Professionals of other FC / stakeholders.
In the case under reference, SBI the applicant, in it’s appeal before NCLAT contended as under;
# 2 …. Lastly, it is contended that the proposed ‘Interim Resolution Professional’ is not on any panel of the Appellant Bank or handling any portfolios and has no role in the decision making committee of the Appellant Bank.
With the above contention SBI has admitted that being on the panel of the applicant (FC), will raise apprehensions of bias. Further SBI exercises control over empanelled Insolvency Professional in terms of circular no CPPD / SKD / Cir Dated: 31.07.2019 on Punitive Action Against Empanelled Insolvency Professional in case of Misconduct / Misdemeanour, Standard Operating Procedure (SOP). This establishes that being placed on the panel of the bank (FC) creates the Continuing beneficial relationship between the bank and the Insolvency Professional. This will raise serious apprehensions of bias, as IRP / RP is required to admit the claims of creditors during the insolvency resolution process.
Following are representative Pension regulations of Banks.
Bank of Baroda (Employees’) Pension Regulations, 1995.
# 42. Pension subject to future good conduct.-
Future good conduct shall be an implied condition of every grant of pension and its continuance under these regulations.
# 45. Pensioner guilty of grave misconduct.-
In a case not falling under Regulation 44 if the Competent Authority considers that the pensioner is prima facie guilty of grave misconduct, it shall, before passing an order, follow the procedure specified in Bank of Baroda Office Employees' (Discipline and Appeal) Regulation, 1976 or in Settlement at the case may be.
# 48. Recovery of Pecuniary loss caused to the Bank.-
(1) ……..
(2) No departmental proceedings, if not initiated while the employee was in service, shall be instituted in respect of an event, which took place more than four years before such institution.:
Provided that the disciplinary proceedings so instituted shall be in accordance with the procedure applicable to disciplinary proceedings in relation to the employee during the period of his service.
From the above pension regulations it can be observed that banks exercise some form of control over the pensioners for the period of four years from the date of retirement, which may create apprehension of bias of a pensioner.
4. Provisions of the “Code” & regulations
Now let’s look at the various provisions of the Code & Regulations which have implications of bias of various participants of the insolvency process.
i). Insolvency & Bankruptcy Code, 2016
# Section16. Appointment and tenure of interim resolution professional. -
(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.
ii). Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016,
Regulation 3 (1) An insolvency professional shall be eligible to be appointed as a resolution professional for a corporate insolvency resolution process of a corporate debtor if he, and all partners and directors of the insolvency professional entity of which he is a partner or director, are independent of the corporate debtor.”
Explanation– A person shall be considered independent of the corporate debtor, if he:
(a) is eligible to be appointed as an independent director on the board of the corporate debtor under section 149 of the Companies Act, 2013 (18 of 2013), where the corporate debtor is a company;
(b) is not a related party of the corporate debtor; or
(c) is not an employee or proprietor or a partner:
(i) of a firm of auditors or secretarial auditors in practice or cost auditors of the corporate debtor; or
(ii) 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.
# Regulation 27. Appointment of registered valuers.
The resolution professional shall within seven days of his appointment, but not later than forty-seventh day from the insolvency commencement date, appoint two registered valuers to determine the fair value and the liquidation value of the corporate debtor in accordance with regulation 35:
Provided that the following persons shall not be appointed as registered valuers, namely:
(a) a relative of the resolution professional;
(b) a related party of the corporate debtor;
(c) an auditor of the corporate debtor at any time during the five years preceding the insolvency commencement date; or
(d) a partner or director of the insolvency professional entity of which the resolution professional is a partner or director.
5. Relationship disclosures.
Insolvency Professional (IP) & other professionals appointed by IRP / RP are required to file relationship disclosures within 3 days of appointments with Insolvency Professional Agency (IPA). IPA in turn places these disclosures on its website (in public domain), which can be viewed by any stakeholder of the insolvency / liquidation process.
i). Disclosures by Insolvency Professionals and other Professionals appointed by Insolvency Professionals conducting Resolution Processes. (IBBI Circular No. IP/005/2018 16th January, 2018)
# 3. An insolvency professional shall disclose his relationship, if any, with (i) the Corporate Debtor, (ii) other Professional(s) engaged by him, (iii) Financial Creditor(s), (iv) Interim Finance Provider(s), and (v) Prospective Resolution Applicant(s) to the Insolvency Professional Agency of which he is a member, within the time specified as under:
# 4. An insolvency professional shall ensure disclosure of the relationship, if any, of the other professional(s) engaged by him with (i) himself, (ii) the Corporate Debtor, (iii) Financial Creditor(s), (iv) Interim Finance Provider(s), and (v) Prospective Resolution Applicant(s) to the Insolvency Professional Agency of which he is a member, within the time specified as under:
# 5. ……… relationship’ shall mean any one or more of the four kinds of relationships at any time or during the three years preceding the appointment:
Note;- The relationship disclosures filed by the IRP /RP with Insolvency Professional Agency (IPA) are placed by IPA in public domain, by placing them on the website of IPA.
Author’s comments;-
From the above, it can be observed that following restrictions have been placed on the appointment of a professionals;
An auditor of the corporate debtor at any time during the five years preceding the insolvency commencement date.
An insolvency professional shall be eligible to be appointed as a resolution professional for a corporate insolvency resolution process of a corporate debtor if he, and all partners and directors of the insolvency professional entity of which he is a partner or director, are independent of the corporate debtor.”
No other restriction has been placed for appointment of other professionals including Insolvency Professionals.,except for disclosing relationships during preceding three years from the insolvency commencement date. These relationship disclosures are placed in the public domain by IPA’s. probably to put on guard the stakeholders for such relationships, if exists.
Past service & drawing of pension does not fall under the ambit of relationships defined under the rules & regulations.
If past employment is the basis of bias, then the entire judiciary is biased towards the Govt as salary is paid by the Govt. If employment is the cause of bias then entire criminal jurisprudence will crumble as all the criminal cases are fought State Vs accused.
ii). Measures to prevent quid pro quo.
Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016.
# Regulation 23A. Where an insolvency professional has conducted a corporate insolvency resolution process, he and his relatives shall not accept any employment, other than an employment secured through open competitive recruitment, with, or render professional services, other than services under the Code, to a creditor having more than ten percent voting power, the successful resolution applicant, the corporate debtor or any of their related parties, until a period of one year has elapsed from the date of his cessation from such process.
6. Past decisions of different courts in the matter.
i). NCLAT (16.07.2018) State Bank of India Vs Ram Dev International Ltd.[Company Appeal (AT) (Insolvency) No. 302 of 2018]
# 15. We have already held that except for pendency of a disciplinary proceeding or ineligibility in terms of provisions of the I&B Code, there is no bar for appointment of a person as Resolution Professional. 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.
ii). SCI (15.10.1987) Ranjit Thakur vs Union Of India (Civil Appeal No. 2630 of 1987)
# 7. 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.
iii). SCI (18.10.2000) Kumaon Mandal Vikas Nigam Ltd vs Girja Shankar Pant & Ors (Civil Appeal No. 5747 of 1998)
“# 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 are rather fanciful and otherwise to avoid a particular court, tribunal or authority, the question of declaring them to be unsustainable would not arise”.
iv). SCI (10.09.1957) Kanai Lal Sur Vs.Paramnidhi Sadhukhan (Civil Appeal No. 291 of 1955.)
“ If the words used are capable of one construction only then it would not be open to the courts to adopt any other hypothetical construction on the ground that such hypothetical construction is more consistent with the alleged object and policy of the Act .”
v). SCI (04.09.1991) Union Of India v. Deoki Nandan Aggarwal (Civil Appeal No. 3674 of 1988)
“It is not the duty of the Court either to enlarge the scope of the legislation or the intention of the legislature when the language of the provision is plain and unambiguous. The Court cannot rewrite, recast or reframe the legislation for the very good reason that it has no power to legislate. The power to legislate has not been conferred on the courts. The Court cannot add words to a statute or read words into it which are not there. Assuming there is a defect or an omission in the words used by the legislature the Court could not go to its aid to correct or make up the deficiency. Courts shall decide what the law is. and not what it should be. The Court of course adopts a construction which will carry out the obvious intention of the legislature but could not legislate itself. But to invoke judicial activism to set at naught legislative judgment is subversive of the constitutional harmony and comity of instrumentalities.”
vi). SCI (13.11.1981) R.K. Garg And Ors. vs Union Of India (Uoi) And Ors.[(1981) 4 SCC 675]
# 10. Another rule of equal importance is that laws relating to economic activities should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion etc. …The court should feel more inclined to give judicial deference to legislature judgment in the field of economic regulation than in other areas where fundamental human rights are involved. Nowhere has this admonition been more felicitously expressed than in Morey v. Dond 354 US 457 where Frankfurter, J. said in his inimitable style:
“In the utilities, tax and economic regulation cases, there are good reasons for judicial self-restraint if not judicial difference to legislative judgment. The legislature after all has the affirmative responsibility.”
Conclusions;
Corporate Debtor has no Locus - Standi to raise the apprehensions of the bias.
Regulations do not prohibit the appointment of an insolvency professional related to parties, other than the Corporate Debtor.
NCLAT, State Bank of India v. Ram Dev International Ltd. observed that merely because an IRP has business with the ‘financial creditor’ being on panel cannot be a ground to reject the proposal of his appointment. However it needs to be examined whether the situation has changed after the issue of SBI circular laying down SOP for Punitive Action against Empanelled Insolvency Professional.
SBI by raising the contention in the appeal before NCLAT, that Mr. Verma is not on the panel of SBI, has given credence to this aspect unnecessarily.
Status of pensioner falls under continuing beneficial relationship, for the period upto 4 years from the date of retirement, during which period, the bank (FC) can initiate punitive action under pension regulations.
Past employment / engagement of the insolvency professionals is beyond the scope of disqualifications mentioned in CIRP Regulation 3(1).
In the present case I understand that SBI filed the appeal. So Mr. Verma does not have any locus standi to file appeal in SCI. Secondly NCLAT in its judgement has observed that SBI is not an aggrieved party in the case.
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