Limited discretion & Resolution Professional

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Can resolution professional itself decide the fate of resolution without constituting the committee of creditors?

Shubham Budhiraja

(Advocate, Delhi High Court)

(ACS, LLB, BCOM(H))

Shubhambudhiraja02@gmail.com , 9654055315

 


Section 9 petition admitted by NCLT & Mr. A appointed as resolution professional. The Resolution professional did not constitute the COC for the simple reason that there is only 1 financial creditor and the company is solvent, therefore it will not be fruitful to let the company go into CIRP. The resolution professional allowed the corporate debtor to pay loan EMI to the financial creditor despite the moratorium. The IBBI held that Mr. A is guilty of professional misconduct because he has itself decided the fate of CIRP without even constituting the COC. He also allowed payment of EMI to the bank despite the moratorium being under process. The IBC imposes a limited role of acceptance, verification of claim and constitution of COC and ensures corporate debtor as a going concern. In case of non-cooperation by the existing director, the resolution professional can file an application before NCLT for appropriate directions. In the present case, the resolution professional itself played the role of COC and itself decided that the company needs no resolution. This is violation to code and regulations.[1] 

 

(1)    In case of a CIRP under the Code, an IP is vested with a whole array of statutory and legal duties and powers. He exercises the powers of the board of directors of the CD under CIRP, manages its operations as a going concern, makes every endeavor to protect and preserve the value of its property and complies with applicable laws in its behalf. He takes important business and financial decisions having substantial bearing on such persons and its stakeholders.

 

(2)    In the performance of duties, the personnel of the CD, its promoter/s and other persons are required to extend complete co-operation to the IRP. In the event of non-cooperation, the IRP may also make an application to AA for giving necessary directions in this regard under section 19(2) of the Code

 

(3)    During CIRP, the provision on “moratorium” under section 14 of the Code envisages prohibition on institution of suits by or against the CD, transfer, alienation or disposal of any of the assets or legal right or beneficial interest of the CD, action to foreclose, recover or enforce any security interest created by CD in respect of his property. This moratorium period is analogous to the insolvency resolution process period.

 

(4)    It is the duty of an IP to ensure that his conduct during CIRP does not undermine the credibility of the insolvency process. Therefore, while granting certificate of registration to an IP they are subjected to follow the Code of Conduct specified in the First Schedule to the IP Regulations.

 

(5)    An IP shall befittingly perform a wide array of responsibilities and duties which are bestowed upon him in the CIRP. Hence, successful resolution of insolvency of a CD depends mainly on the professionalism demonstrated by the IP in discharging his functions under the Code as well as the Regulations made thereunder. Section 21 of the Code provides that an IRP shall constitute a CoC comprising of all FCs. However, Regulation 16 of the CIRP Regulations provides for constitution of CoC with OCs only.

 

(6)    When a CD fails to service the debt, its control shifts to the creditors, represented by a CoC for resolving insolvency. The Code empowers and facilitates the CoC to decide the fate of the CD and consequently of its stakeholders.

 

(7)    The institution of IP is a key facilitator. An IP, who is appointed by the AA on the recommendation of the CoC, cannot substitute itself for the CoC.

 

(8)    In the present case, Mr. A has displayed utter misunderstanding of the provisions of the Code and regulations made thereunder. He failed to constitute CoC with only one OC who filed its claim and thus, deprived the CoC of its right to decide the fate of the CD.

 

(9)    He himself stepped into the shoes of the CoC and unilaterally decided that no resolution was possible and no loss is caused to anyone. He also failed to appreciate the value of time in insolvency proceedings and waited for instructions and advice from IBBI and AA indefinitely, despite clarity of provisions of the Code in that regard.


[1] No. IBBI/DC/81/2021, 29th December, 2021

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