Is apprehension of bias a valid ground to substitute IRP

State Bank of India Vs. Metenere Ltd. (National Company Law Appellate Tribunal)

Is apprehension of bias a valid ground to substitute Insolvency Resolution Professional (IRP)?

Recently, an appellate tribunal in its judgment upheld the NCLT order which prohibits the appointment of an ex-bank employee as an Interim Resolution Professional [IRP] of a bankrupt company due to the possibility of bias. This judgment is said to have wide ramifications on the ongoing and future corporate insolvency resolution process [CIRP].

Facts

The Appellant – Financial Creditor (State Bank of India) had filed an application for initiation of CIRP under Section 7 of the Insolvency and Bankruptcy Code, 2016 [IBC] before the principal bench of NCLT, New Delhi. However, the Respondent – Corporate Debtor (Metenere Ltd.) objected against Mr. Shailesh Verma [Verma] being appointed as the IRP on the ground of apprehension of bias due to his prior employment history with the appellant.

The NCLT after taking note of the objection raised by the respondent regarding the proposed name of the IRP passed an impugned order stating that a new name should be substituted for the appointment of IRP. The fact that Verma had worked with the Financial Creditor for 39 years before his retirement in 2016 raised the issue of apprehension of bias as it would impair his ability to conduct CIRP in a fair manner. Similarly, he might fail in acting as an Independent Umpire between the Corporate Debtor and the Financial Creditor.

Aggrieved by the NCLT’s order, the Financial Creditor preferred an appeal against the impugned order. It argued that the IBC does not disqualify an ex-employee (Verma) of the Financial Creditor’s organization from being appointed as the IRP.

Issue

Whether an ex-employee of the Financial Creditor having a long employment history with the Financial Creditor, should not be permitted to act as Interim Resolution Professional?

Analysis of NCLAT order

While it is true that Verma draws a pension from the Financial Creditor for his services offered in the past, it is debatable whether he qualifies as an ‘interested person’.  The Financial Creditor does not recognize him as an employee on the payroll of the organization. Further, the payment of pension is for the services rendered by him in the past and he is entitled to such benefit as a privilege under the Service Rules but the same cannot be considered as a perk offered by the ex-employer. However, the Corporate Debtor contended that pension is covered within the ambit of salary under Section 17(1) of the Income Tax Act, 1961 which makes Verma an ‘interested person’.  In response to the same, the 3 member bench of NCLAT headed by Acting Chairperson, Justice Bansi Lal Bhat held that the intent behind the inclusion of pension within the definition of ‘salary’ is to determine tax liability.

Regulation 3 (1) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 states that an Insolvency Professional is eligible to be appointed as a ‘Resolution Professional’ for the CIRP of a Corporate Debtor if he or his associates are independent of the Corporate Debtor. Further, it states that in order to be appointed he should have no disciplinary proceedings pending against him. Verma is compliant with every aspect of this Regulation and he does not have any disciplinary proceedings pending against him. Moreover, he does not occupy a position either in the decision-making committee or in any panel of the Appellant Bank. The Resolution Professional is only a facilitator and plays a limited role in the CIRP  i.e. to the extent of its voting share as a member of the ‘Committee of Creditors’ and nothing beyond. However, the NCLAT opined that the perception of ‘apprehension of bias’ by the Corporate Debtor overshadows Verma’s eligibility to be appointed as IRP under the aforesaid Regulation.

The fact that the Financial Creditor has restricted its choice to propose Verma as ‘Interim Resolution Professional’ indicates that they have taken into account, his past loyalty and long association with the organization. This argument is further augmented from the instant appeal preferred by the Financial Creditor who is aggrieved with the NCLT order that barred Verma’s appointment and instructed the Financial Creditor to propose a different name for carrying out CIRP in the present case. This fortifies the ‘apprehension of bias’ argument raised by the Corporate Debtor.

After taking all the arguments into consideration, the NCLAT observed that the proposed IRP (Verma) had a long association of nearly four decades with the Financial Creditor’s organization and is currently drawing pension as a privilege for the services rendered by him in the past. The duties of the IRP as laid down under Section 18 of the IBC, inter alia, requires him to gather all the claims submitted by the Financial Creditor. Even though he is not empowered to determine the claims, it gives rise to the apprehension of bias in the Corporate Debtor’s mind. After considering Verma’s long association with the Financial Creditor, it is almost impossible to rule out the likelihood of the inherent bias of a long-serving ex-employee of an organization. The impugned order with regard to IRP acting as an Independent Umpire in CIRP must be understood in the context of discharge of statutory duties by the IRP and not his competence to admit or reject a claim advanced by the creditors.

Conclusion

The NCLAT concluded that the apprehension of bias expressed by the ‘Corporate Debtor’ qua the appointment of Verma as proposed IRP is valid and cannot be dismissed. Further, it contended that the NCLT order was justified in seeking substitution of Verma to ensure that CIRP is conducted in a fair and impartial manner. It also observed that the Financial Creditor should not have been disgruntled due to the NCLT order since it was not detrimental to it in any manner. Hence, the NCLAT upheld the impugned order thereby disqualifying Verma to act as an IRP in the present case.

However, it remains to be seen whether the Financial Creditor will challenge the judgment in the Supreme Court on the ground that the Hon’ble NCLAT did not possess the power to interpret the present case beyond the Regulations of IBC.