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Implanting the principles of the Arbitration Act to the IBC

The article highlights the lacunae and possible changes which may be required to the Code of Conduct for Insolvency Professionals.

Pawan Jhabakh

Harini Subramani

The recent judgement in the matter of State Bank of India Vs. Metenere Limited (“Judgment”) has brought to the fore, the lacunae and possible changes which may be required to the Code of Conduct for Insolvency Professionals provided under regulation 7(2)(h) of the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016 (“Regulations”). Bridging this lacuna would protect the resolution professionals and also solemnize the process of the corporate insolvency resolution process and liquidation contemplated under the Insolvency & Bankruptcy Code 2016 (“Code”).

For the uninitiated, we are providing a brief background on the matter of State Bank of India (“SBI”) v/s Metenere Limited. SBI, as a financial creditor sought to initiate corporate insolvency resolution process under the Code against Metenere Limited before NCLT, New Delhi, Principal Bench (“NCLT”). Metenere objected to the Interim Resolution Professional (“IRP”) proposed by SBI on the grounds that the proposed IRP was a pensioner with SBI, which per the Income Tax Act was a salary, thereby making him a connected person. Based on this submission, the NCLT had directed SBI to substitute the proposed Interim Resolution Professional against which SBI had filed an appeal before the National Company Law Appellate Tribunal, Delhi (“NCLAT”). The NCLAT held that the apprehension of bias expressed by Metenere could not be overlooked and subsequently upheld the order passed by NCLT.

The Law around IRP appointments

The Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016, is an exhaustive regulation governing resolution professionals. Rule 9 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 provides for a written communication in “Form 2” which is a formal consent and declaration confirming the eligibility of the proposed insolvency professional to act as a resolution professional. As per the relevant portion of “Form 2 point (vi)”, the resolution professional shall make disclosures in accordance with the Regulations. However, such disclosures, on viewing the Code of Conduct are only in the context of circumstances which arise consequent to appointment and upon acting as a resolution professional. The Code of Conduct does not provide for any disclosures of bias, independence or impartiality prior to the consent and confirmation issued by the Resolution Professional under “Form 2”.

For the purposes of relevance in the context of this judgment, reference is made to point 8 A of the Code of Conduct which is extracted below:

“8A. An insolvency professional shall disclose as to whether he was an employee of or has been in the panel of any financial creditor of the corporate debtor, to the committee of creditors and to the insolvency professional agency of which he is a professional member and the agency shall publish such disclosure on its website.”

On appointment, it is incumbent on a resolution professional to disclose his employment or an empanelment to any financial creditor of the Corporate Debtor, to the committee of creditors. However, the said rule does not require disclosures to be made prior to the appointment or declaration under “Form 2” which would serve greater purpose in maintaining the sanctity of the appointment of the resolution professional. The said rule only contemplates disclosure and not disqualification.

Point 3, 3A and 5 of the Code of Conduct are of great relevance which are extracted and analysed in the content of the Judgment.

“3 .An insolvency professional must act with objectivity in his professional dealings by ensuring that his decisions are made without the presence of any bias, conflict of interest, coercion, or undue influence of any party, whether directly connected to the insolvency proceedings or not. “

An insolvency professional must act with objectivity and decisions must be without bias, conflict of interest, coercion or undue influence. The said point does not contemplate any such disclosures of bias or conflict of interest prior to the appointment of the resolution professional to an insolvency process under the Code.

“3A. An insolvency professional must disclose the details of any conflict of interests to the stakeholders, whenever he comes across such conflict of interest during an assignment.”

An insolvency professional has to disclose conflict of interest during an assignment and not prior to his appointment and issuance of confirmation to act under “Form 2”. The disclosure of conflict of interest arising post appointment only contemplates disclosure. There are other points which may be discussed in this context but is consciously restricted.

Fifth Schedule of the Arbitration & Conciliation Act, 1996

At this juncture, it is worth referring to the Fifth Schedule of the Arbitration and Conciliation Act, 1996. The extensive disclosure under the Fifth Schedule mandated for an arbitrator in “relation to the dispute, or the parties to a dispute or any indirect/ direct interest in the dispute, any previous services for any one of the parties, relationship between the counsels and parties and other involved in an arbitration......” relate to instances and grounds of “ineligibility” prior to appointment. The adoption of the Fifth Schedule ensures that there exist no circumstances which give rise to any justifiable doubts as to the independence, biasness or impartiality of an arbitrator. If any similar or close provision to the Fifth Schedule is grafted and brought into these Regulations under the Code, it could serve the purpose and there would exist no doubts as to the appointment of the resolution professional.

Conclusion

Additions made to the Code of Conduct and the Regulations possibly along the lines of the Fifth Schedule of the Arbitration & Conciliation Act, 1996, would go a long way in preserving the ever important pillars of independence, impartiality and unbiasness of a resolution professional. Such possible legislative changes would protect the sanctitude of the resolution professional and also shield the resolution process under the Code which is time bound. Post this Judgment, there is no doubt that these Regulations would be examined with as great a scrutiny as any other provision of the Code by a party intending to initiate a corporate insolvency resolution process. This Judgment has elevated not only the importance of changes needed in the Regulations, but has also made this aspect sine qua non to any insolvency proceedings.

The article is authored by Advocates, Pawan Jhabakh (practicing at the High Court of Judicature at Madras) and Harini Subramani (founder, HS Law & Associates). Views expressed here are personal.

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