Genericide: Death of a Trademark

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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