The Resolution Professional (“RP”) plays a very dynamic
role in the entire Corporate Insolvency and Bankruptcy Process (“CIRP”). Fortunately,
an RP is the cardinal point of the whole operation of CIRP.
The Bankruptcy Law Reforms Committee in its
final report also emphasized on the role of an RP which stated
that “Insolvency professionals form a crucial pillar upon which rests
the effective, timely functioning as well as credibility of the entire edifice
of the insolvency and bankruptcy resolution process.”[1]The
IBC regime propounds a shift from the ‘debtor in control' regime
to a ‘creditor in control' regime and provides a mechanism
wherein a neutral person is appointed by the Hon'ble National Company Law
Tribunal (“NCLT”) known as the Interim Resolution Professional
(“IRP”), to manage the corporate debtor (“CD”) as a
going concern. With such appointment by NCLT, the powers of the Board of
Directors or the partners of the CD as the case may be are to stand suspended. Such
powers are to be exercised by the IRP by the virtue of Section 17 of the
Insolvency and Bankruptcy Code, 2016 (“Code”).
The RP is entrusted with the entire working of CD, which
comes with the responsibilities of timely resolution of the CD. There are
several issues that RP faces in managing the CD out of which the major cause
of concern in timely resolution of cases is the
non-cooperation of the CD, its promoter and directors. Globally, the
experts have argued that vague and ambiguous financial reporting often affected
the insolvency environment. This may be due to internal conflicts and financial
incentives to hide reasons for not performing well. However, given the business
landscape, where most companies are promoter-driven, the challenge becomes more
profound. The breach of mandatory provisions by the ex-management of the CD
cause hardship to the RP in performing its duties. These provisions are
mandatory in nature and the statutory dictate cannot be undermined by the
inherent power provided to the court under section 482 CrPC. However, the High
Court, in a very recent order, failed to protect the statutory dictates
provided u/s 14 and 17 of the code by allowing the breach of the provisions of
the Code.
Duties
of Resolution Professional in managing the affairs of the Corporate Debtor
The RP is vested with handful of duties and responsibilities
under the Code. As per Section 23, the RP conducts the entire CIRP
and manages the operations of the CD during the period of the CIRP. Further,
even after the expiry of the period of CIRP, the RP continues to manage the
operations until a resolution plan is approved or a liquidator is appointed. As
provided by Section 17, on and from the date from which the IRP is
appointed he is vested with the management of the affairs of the CD. The power
of the Board of Directors of the CD also vests and is exercised by the IRP. The
IRP acts and executes all the deeds, receipts, documents in the name and on
behalf of the CD and takes all such action specified by the Board. For the
purpose of the resolution, the control and custody of the assets from the CD is
taken over by the RP as per Section 18(f). When the CoC approves
the resolution plan, the entity continues as a going concern. Section 20 mandates
the IRP to preserve and protect the value of the property and to manage the
operations of the CD as a going concern. The IRP or RP must do all such acts
that is necessary for keeping the corporate debtor in a going concern
phase.
[1]https://www.ibbi.gov.in/uploads/resources/BLRCReportVol1_04112015.pdf
The Resolution Professional (“RP”) plays a very dynamic
role in the entire Corporate Insolvency and Bankruptcy Process (“CIRP”). Fortunately,
an RP is the cardinal point of the whole operation of CIRP.
The Bankruptcy Law Reforms Committee in its
final report also emphasized on the role of an RP which stated
that “Insolvency professionals form a crucial pillar upon which rests
the effective, timely functioning as well as credibility of the entire edifice
of the insolvency and bankruptcy resolution process.”[1]The
IBC regime propounds a shift from the ‘debtor in control' regime
to a ‘creditor in control' regime and provides a mechanism
wherein a neutral person is appointed by the Hon'ble National Company Law
Tribunal (“NCLT”) known as the Interim Resolution Professional
(“IRP”), to manage the corporate debtor (“CD”) as a
going concern. With such appointment by NCLT, the powers of the Board of
Directors or the partners of the CD as the case may be are to stand suspended. Such
powers are to be exercised by the IRP by the virtue of Section 17 of the
Insolvency and Bankruptcy Code, 2016 (“Code”).
The RP is entrusted with the entire working of CD, which
comes with the responsibilities of timely resolution of the CD. There are
several issues that RP faces in managing the CD out of which the major cause
of concern in timely resolution of cases is the
non-cooperation of the CD, its promoter and directors. Globally, the
experts have argued that vague and ambiguous financial reporting often affected
the insolvency environment. This may be due to internal conflicts and financial
incentives to hide reasons for not performing well. However, given the business
landscape, where most companies are promoter-driven, the challenge becomes more
profound. The breach of mandatory provisions by the ex-management of the CD
cause hardship to the RP in performing its duties. These provisions are
mandatory in nature and the statutory dictate cannot be undermined by the
inherent power provided to the court under section 482 CrPC. However, the High
Court, in a very recent order, failed to protect the statutory dictates
provided u/s 14 and 17 of the code by allowing the breach of the provisions of
the Code.
Duties
of Resolution Professional in managing the affairs of the Corporate Debtor
The RP is vested with handful of duties and responsibilities
under the Code. As per Section 23, the RP conducts the entire CIRP
and manages the operations of the CD during the period of the CIRP. Further,
even after the expiry of the period of CIRP, the RP continues to manage the
operations until a resolution plan is approved or a liquidator is appointed. As
provided by Section 17, on and from the date from which the IRP is
appointed he is vested with the management of the affairs of the CD. The power
of the Board of Directors of the CD also vests and is exercised by the IRP. The
IRP acts and executes all the deeds, receipts, documents in the name and on
behalf of the CD and takes all such action specified by the Board. For the
purpose of the resolution, the control and custody of the assets from the CD is
taken over by the RP as per Section 18(f). When the CoC approves
the resolution plan, the entity continues as a going concern. Section 20 mandates
the IRP to preserve and protect the value of the property and to manage the
operations of the CD as a going concern. The IRP or RP must do all such acts
that is necessary for keeping the corporate debtor in a going concern
phase.
[1]https://www.ibbi.gov.in/uploads/resources/BLRCReportVol1_04112015.pdf
Cooperation and Assistance to the RP in Managing the Affairs
of the Corporate debtor
The
RP, while performing the duties as discussed above, requires immense cooperation
form entire management of the CD however the same is not the general practice
performed by the ex-managements of the CD in several cases. It is worth noting
that the Code provides a remedy to this problem in the form of Section 19 of
the Code by filing for non-cooperation by the RP. However, it has not been
adequately utilised. As stated in Section 19(1) of the Code, the
personnel of the CD, its promoters or any other person associated with the
management of the CD shall extend all assistance and cooperation to the IRP as
may be required by him in managing the affairs of the CD. In case they do not render
their cooperation, an application can be made by IRP to the NCLT for necessary
directions under section 19(2). For the
purpose of managing the affairs of the CD by the IRP, the officers and managers
of the CD are required to give access to the IRP of all the relevant documents,
books of accounts, records, etc as may be required. This Section also makes it
obligatory for the officers and managers of the CD to report to the IRP.
The
aforesaid provision makes it abundantly clear that ex-management of the CD must
furnish information and all assistance to the RP as required by him in managing
the affairs of the CD. In the absence of cooperation, powers have been
conferred on the NCLT. The language of Section 19 suggests that it must issue
directions to such defaulting personnel of the ex-management to comply with the
directions of the RP and to cooperate with him. The aforesaid provisions are
mandatory in character so as to enable the RP to complete the CIRP
expeditiously and manage the affairs of the CD as a going concern. [1]
The NCLT, Chandigarh, in the matter of Mr. Ashwini Mehra, vs.
Mr. Vinod Kumar Dandona, Suspended Director & Ors.[2],
held that Section 19 of the Code casts an obligation on the Ex-Personnel of the
CD, its promoter or any other person associated with the Ex-Management
including ex-Directors to extend all assistance and cooperation to IRP to
manage the affairs of the CD.
Court’s Power to Permit the Breach of the Statutory Dictate u/s
17 and 14 of the Code
Section 19(2) of the Code provides for a remedy to the RP for
any breach conducted by the CD during the moratorium declared under Section 14
of the Code. Section 14 of the code is emphatic, subject to the
provisions of sub section (2) and (3). Under section 14, moratorium is declared
once an application for initiation of CIRP is accepted. The impact of the
moratorium includes prohibition on transferring, encumbering, alienating or
disposing of by the CD of any of its assets. The CD cannot sale/transfer/dispose
of any of its assets. Further he also cannot give his legal rights to do so nor
can he create any beneficial interest for the purpose of disposing off any
assets during that moratorium. In P Mohanraj&Ors
vs M/S Shah Bros Ispat Ltd.[3]
the SC directed that clause
(b) of Section 14(1) also makes it clear that during the moratorium period, any
transfer, encumbrance, alienation, or disposal by the corporate debtor of any
of its assets or any legal right or beneficial interest is not allowed.
Section 17 and section 14 of the Code are mandatory
provisions and the courts cannot overuse the power provided to them under
section 482 of CrPC to countenance the breach of such statutory provision of the
Code. In a very recent case, the Supreme Court held that the power under
section Sec 482, CrPC cannot be invoked to subvert Section 14 and 17 of the
Code.
In SANDEEP KHAITAN, RP FOR
NATIONAL PLYWOOD INDUSTRIES LTD. VS. JSVM PLYWOOD INDUSTRIES LTD.[4]an appeal was directed against the order passed by the Hon’ble High
Court of Guwahati to the apex court. By
the order, the High Court allowed an IA filed by a creditor (“Respondent”)
to allow it to operate its bank account maintained with the ICICI Bank and to
unfreeze the bank account of its creditors over which the lien has been created
and the accounts frozen pursuant to the lodging of an FIR by the RP (“Appellant”).
[1] CA No.67/2018 IN CP (IB) No.60/Chd/PB/2017
[2]CA No.335/ 2018 in CP (IB) No.10/ Chd/ Hry/ 2018
[3] CIVIL APPEAL NO.10355 OF 2018
[4]Supreme Court of India in Criminal Appeal No. 447 of 2021 (Decided on 22.04.2021)
the lien has been created and the accounts frozen pursuant to the lodging of an FIR by the RP (“Appellant”).
FACTUAL BACKGRAOUND:
In this case, an application u/s 7 of the Code was admitted
on 26.08.2019 by NCLT, where Appellant was appointed as the IRP and moratorium
was declared. With the declaration of the said moratorium, all the prohibition
as enacted u/s 14 of the code came into force. After the declaration of the
moratorium, an illegal transaction of Rs. 32.5 Lakh was done without the
authority of the Appellant and in violation of section 14 of the Code. It was remitted
to the account of the Respondent. The RP, pursuant to such transaction, filed
a cyber complaint and also filed an application u/s 19 read with Section 23 (2)
of the Code alleging non-corporation by the previous management of the CD. The
Appellant also lodged a FIR in the present matter.
The Respondent contended that the Company has had business
relations with the CD for more than 15 years and that the amount remitted in
its account represented the price of the materials supplied to the CD. Apart
from this amount a sum of more than Rs 39 lakh is still due.
The Respondent challenged the FIR filed by the Appellant in a
petition u/s 482, CrPC. The High Court allowed the
Respondent and its creditors to operate their bank account over which lien has
been created and those accounts which have been frozen based on the FIR. The Appellant pursuant to such order filed an appeal
before the Apex court contending that the whole purpose of the moratorium would
be defeated if members of the previous management of the CD are left free to
transfer the funds of the CD.
REASONING
AND DECISION OF THE COURT:
The Court noted that after RP is appointed, it is for him to
conduct the CIRP and manage the operations, though he is bound to seek prior
approval of the CoC in certain matters. The court noted that in this case,
moratorium was declared and the assets of the company would include the amounts
lying to the credit in the bank accounts.
The apex court did not state anything particularly about the
fact that there is a FIR and which is pending consideration in the High Court
also. The SC considered it significant to notice that the appellant is
essentially aggrieved by the transactions representing the sum of Rs 32.5 lakh,
all of which took place after the order of March 20, 2020.
The apex Court observed that the
contours of the jurisdiction u/s 482 of CrPC are far too well settled to
require articulation or reiteration, while at the same time pointed out that in
passing the impugned order, the Guwahati High Court appears to have overlooked
the statutory limits on its power u/s 482. According to the SC, the power u/s
482 may not be available to the High Court to countenance the breach of a
statutory provisions of the Code.
It observed that the words ‘to
secure the ends of justice’ in Section 482 cannot mean to overlook the undermining
of a statutory dictate, which in this case is the provisions of Section 14 and
17 of the Code. The SC held that, having regard to the orders passed by the NCLT
admitting the application u/s 7 and also ordering of moratorium u/s14 of the Code
and the orders which have been passed by the Tribunal otherwise, the impugned
order of the High Court resulting in the Respondent being allowed to operate
the account without making good the amount of Rs 32.5 lakh to be placed in the
account of the CD cannot be sustained. The SC has also noted the ‘no objection’
from the Appellant to the Respondent being permitted to operate its account
subject to it remitting an amount of Rs 32.5 lakh into the account of the CD.
The SC allowed the appeal to modify the impugned order passed by the High Court and allowed the Respondent to operate its account subject to it to first remitting into the account of the CD, the amount of Rs 32.5 lakh which stood paid to it by the management of the CD. The assets of the CD shall be managed strictly in terms of the provisions of the Code. The SC has, however, made it clear that its order shall not be taken as its pronouncement on the issues arising from the FIR including the petition pending under section 482 of the CrPC.
CONCLUSION
There
is a need to design an indigenous solution within the existing framework to
ensure a company’s management doesn’t create roadblocks in the working of the
RP while managing the affairs of the CD. The role
of IRP/RP is critical to the entire CIRP process and the IBC regime has laid
down certain safeguards to ensure that the CIRP is conducted in a smooth manner.
In case the safeguards available in the Code will be subvert by the courts
without any authority, the entire intent behind the Code will be devastated. There
is a need for an amendment which may aim to severely penalise any form
of non-cooperation on the part of the CD with the Resolution Professional.
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