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Can Ex-employee of Financial Creditor be Interim Resolution Professional?

October 8, 2020

By Lucy Rana and Anuj Jhawar

State Bank of India v. M/s. Metenere Limited[1]

In a recent case, the National Company Law Appellate Tribunal (“NCLAT”), vide its ruling dated May 22, 2020 upheld the order passed by respective National Company Law Tribunal (“NCLT”) dated January 4, 2020 with respect to substitution of appointment of an ex-employee of the Financial Creditor as the Interim Resolution Professional (IRP).

Factual Background

In the present appeal, State Bank of India is the Appellant (“Financial creditor”) and M/s Metenere Limited is the Respondent (“Corporate Debtor”). Appellant had furnished an application under Section 7 of Insolvency and Bankruptcy Code, 2016[2] (“Code”) for initiation of Corporate Insolvency Resolution Process (“CIRP”) against the Respondent. The Appellant had nominated one of its ex-employee, who worked in the Appellant Bank for 39 years, to be appointed as the IRP for insolvency proceedings against the Corporate Debtor. Aggrieved by IRP’s proposed appointment, the Corporate Debtor or Respondent objected the same on the ground that the appointment of IRP was partial and biased.

NCLT’s Order

In view of the aforesaid objection made by the Corporate Debtor, the concerned NCLT vide its order dated January 4, 2020 ordered and directed the Financial Creditor to substitute IRP as the he had worked for Appellant bank for 39 years straight, thereby subsequently creating apprehension of bias and unlikely to render fair and unbiased services.

Hence, the Financial creditor was ordered substitution of IRP.

Appeal before NCLAT

Aggrieved and dissatisfied with the order passed by NCLT, the Financial Creditor appealed before the NCLAT on the ground that the concerned and proposed IRP fulfilled the requirements, eligibility and qualification as enumerated in the Code and thus, should be appointed as the IRP.

Issue- Whether an ex-employee of Financial Creditor can be appointed as an Interim Resolution Professional?

NCLAT’s Order and Observations

  • Relying on Regulation 3(1) of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016[3](“Corporate Persons Regulations”); NCLAT considered such nomination of IRP appointment as valid and legitimate. The Tribunal observed that merely because a nominated IRP was an employee of Financial Creditor did not disqualify him/her and did not make him/her an interested and biased person. The Tribunal also stated that as per the regulations, an IRP should independent of any relation with Corporate debtor and not Financial Creditor.
  • NCLAT also relied upon the case of State Bank of India v. Ram Dev International Limited[4] wherein it was observed that, even if an IRP is acting/working as an Advocate , Company Secretary or Chartered Accountant with the ‘Financial Creditor’, such a proposal for appointment couldn’t be disqualified merely on such employment basis, except, when there is any disciplinary proceeding pending against him/her or if that person is an interested party, such as an employee or on the payroll of the ‘Financial Creditor’.
  • The Tribunal noted that in the present case, the proposed IRP was neither undergoing any disciplinary proceedings nor not on afore stated panel or engaged as a retainer by the ‘Financial Creditor’ but was merely a pensioner as he had rendered his services to the Appellant Bank for almost four decades.
  • The Appellate Tribunal also made reference to Section 17(1) of the Income Tax Act, 1961 and opined that bringing pension within the ambit of ‘salary’ could not be interpreted to render a pensioner of a ‘Financial Creditor’ under the statutory framework ineligible as an ‘interested person’ being in employment of the ‘Financial Creditor’ as the definition of ‘salary’ under the Income Tax Act, 1961 is designed only for the purposes of computing of income to determine tax liability.
  • However, the Tribunal could not avoid taking note of the fact that in the present case, the Appellant chose to propose its ex- employee, namely, Mr. Shailesh Verma as ‘Interim Resolution Professional’ in view of his past loyalty and long services rendered to the Bank. The NCLAT while making this observation further noted that its view was further reinforced in view of the present appeal initiated by ‘Financial Creditor’ as the Appellant Bank was aggrieved by NCLT’s order directing substitution of IRP.
  • The Appellate Tribunal also on the case of Ranjit Thakur v. Union of India and Ors[5] wherein, the necessity for a test of apprehension of bias was considered in order to ascertain the probability of impartiality, unfairness and bias.

In view of the aforesaid facts and circumstances, the NCLAT ruled that the apprehension and disregard expressed by Financial creditor in the present case could not be overlooked and hence dismissed the appeal.

Conclusion

The order of NCLAT in the present case is an essential one as the Tribunal though judged the Financial Creditor’s ex- employee as an eligible IRP under the Code but refused to appoint him as IRP, as the Financial Creditor’s grievance for not appointing its ex-employee as IRP in the case was evident and hence did not pass the test of apprehension and bias.

[1] MANU/NL/0241/2020

[2] https://www.mca.gov.in/Ministry/pdf/TheInsolvencyandBankruptcyofIndia.pdf

[3]https://ibbi.gov.in/webadmin/pdf/legalframwork/2018/Apr/word%20copy%20updated%20upto%2001.04.2018%20CIRP%20Regulations%202018_2018-04-11%2016:12:10.pdf

[4] https://nclat.nic.in/Useradmin/upload/17783526875b6a8fe536213.pdf

[5] MANU/SC/0691/1987

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