Summary: Based on the provisions of the Insolvency and Bankruptcy Code (IBC), 2016, and relevant case law, the Managing Director’s statement is incorrect. While Section 17(1) of the IBC suspends the powers of the board of directors upon the appointment of an Interim Resolution Professional (IRP) or Resolution Professional (RP), it does not suspend the directors or other employees from their duties. The management and affairs of the company now vest with the RP, but the officers and managers, including the Managing Director, are required to assist the RP and perform their contractual duties to ensure the company remains a going concern. The suspension applies to the directors’ powers to manage the corporate debtor, not to their obligation to work and report to the RP. The National Company Law Appellate Tribunal (NCLAT) in the case of M/s. Subasri Realty Private Limited v. Mr. N. Subramanian & Anr affirmed this, stating that the suspension of the Board of Directors does not relieve the managing director or other directors and employees of their duties. They are expected to continue functioning and providing necessary assistance to the RP. Therefore, the Managing Director of Nimbo Ltd. cannot refuse to perform his duties.
QUERY: Managing Director of Nimbo Ltd. (undergoing CIRP) states that since the powers of the Board of directors are suspended, he cannot be forced to perform duties as included in his employment contract with the company. Examine the correctness of the statement in light of the relevant provisions of Insolvency and Bankruptcy Code, 2016 along with relevant case law(s).
| APPLICABLE PROVISIONS:
SECTION 17 OF IBC, 2016 (1) From the date of appointment of the interim resolution professional,— (a) the management of the affairs of the corporate debtor shall vest in the interim resolution professional; (b) the powers of the board of directors or the partners of the corporate debtor, as the case may be, shall stand suspended and be exercised by the interim resolution professional; (c) the officers and managers of the corporate debtor shall report to the interim resolution professional and provide access to such documents and records of the corporate debtor as may be required by the interim resolution professional; (d) the financial institutions maintaining accounts of the corporate debtor shall act on the instructions of the interim resolution professional in relation to such accounts and furnish all information relating to the corporate debtor available with them to the interim resolution professional. (2) The interim resolution professional vested with the management of the corporate debtor shall— (a) act and execute in the name and on behalf of the corporate debtor all deeds, receipts, and other documents, if any; (b) take such actions, in the manner and subject to such restrictions, as may be specified by the Board; (c) have the authority to access the electronic records of corporate debtor from information utility having financial information of the corporate debtor; (d) have the authority to access the books of account, records and other relevant documents of corporate debtor available with government authorities, statutory auditors, accountants and such other persons as may be specified. |
REPLY:
Section 17(1) of the Insolvency & Bankruptcy Code provides that from the date of appointment of the Interim Resolution Professional the powers of the board of directors or the partners of the corporate debtor, as the case may be, shall stand suspended and be exercised by the interim resolution professional.
It is pertinent to note that only powers are suspended; however, the directors can continue to work and provide assistance to the Resolution Professional.
In the case of M/s. Subasri Realty Private Limited v. Mr. N. Subramanian & Anr, the NCLAT directed that after the appointment of the Resolution Professional and declaration of moratorium, the Board of Directors stands suspended, but that does not amount to a suspension of Managing Director, or any of the directors or officers or employees of the Corporate Debtor (CD).
To ensure that the CD remains a going concern, all the directors/ employees are required to function and to assist the RP who manages the affairs of the CD during the moratorium.
If one or other officer or employee had the power to sign a cheque on behalf of the CD prior to the order of moratorium such power does not stand suspended on suspension of Board of Directors nor can it be taken away by the RP.
If the person empowered to sign cheque refuses to function on the direction of the RP or misuse the power it is always open to the RP to take away such power, after issuing notice to the person concerned.
Therefore, the statement made by Managing Director is not in accordance with the Code.
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DISCLAIMER: Case Study presented here is only for sharing knowledge with the readers. The views are personal, shall not be considered as professional advice. In case of necessity do consult with professional for more clarity and understanding on subject matter.
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