COC of Torque Automotive Pvt Ltd Vs Parag Sheth IRP of Torque Automotive Pvt Ltd - Appointment or Replacement of IRP as RP is an exercise of the Administrative nature.

NCLT Ahmedabad-1 (12,07,2021) in COC of Torque Automotive Pvt Ltd Vs Parag Sheth IRP of Torque Automotive Pvt Ltd [Item No 165 IA/370(AHM)2021 in CP(IB) 781 of 2019] held that;

• Thus, appointment or replacement of IRP as RP is an exercise of the administrative nature, therefore, the question of immunity from interference by Adjudicating in the name of commercial wisdom does not arise at all. Even otherwise, in our humble view, the supremacy of commercial wisdom is of very limited application i.e., wherever the coc has been specifically empowered as a final Authority, the same cannot be questioned.

• Thus, there is a greater probability that such the Financial Creditor may obtain a much stronger position, if the IRP of their choice is appointed by them by way of replacement without any justified reason. This may also result into a situation, where Committee of Creditors having regard to security interest possessed by them and personal guarantees also existing, the interests of all other stakeholders may suffer.

• Thus, it is incumbent upon this Adjudicating Authority to prevent the happening of a situation whereby IRP/RP works only according to the dictates of the Committee of Creditors. Further, RP is an officer of the Court who is expected to act in an unbiased manner for the benefit of all stakeholders and on whom the Adjudicating Authority can rely upon. Thus, independence of RP not only with reference to COC as well as suspended management needs to be maintained.

• Before parting, we may add that the success of CIRP is contingent upon independence competence of IRP and genuineness of intent of Committee of Creditors who acts in fiduciary capacity for all stakeholders and not merely confining to fulfilling of their own interests which makes IBC, 2016 like earlier regimes where individual actions and rights were a primary focus.

 

Excerpts of the order;

# 1. The instant application has been filed on behalf of the Committee of Creditors (hereinafter referred to as “COC") under section 22 (2) (b) of Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC, 2016") for appointment of Resolution Professional (hereinafter referred to as “RP") Mr. Kamal Aggarwal in place the Interim Resolution Professional (hereinafter referred to as “IRP”) Mr. Parag Seth. 

 

# 2. The facts, in brief, are that the corporate Debtor was admitted into Corporate Insolvency Resolution Process (hereinafter referred to as "CIRP") by this Authority vide order dated 24.02.2021 and Mr. Parag Seth was appointed as an IRP. It has also been submitted by the applicant that in the first COC meeting dated 05.04.2021, the COC has passed the resolution to not to continue IRP as RP on the recommendation made by a Financial Creditor namely Volkswagen Finance Private Limited. The COC has approved the name of RP i.e. Mr. Kamal Agarwal on 08.04.2021 with 78.26% votes. 

 

# 3. The COC through one of its members has filed an affidavit in support of the application wherein it has been submitted that the objectors are opposing the appointment of RP without any valid ground which is absurd, vexatious, and not tenable in law. The COC has already passed the resolution to appoint Mr. Kamal Agarwal as an RP with 78.26 % votes after rejecting the appointment of IRP as RP with similar percentage of votes. Moreover, the erstwhile IRP can't claim to be appointed as RP as a matter of right. The appointment of the RP is the prerogative of COC and is based upon its commercial wisdom. 

 

# 4. The original Financial Creditor who filed application under Section 7 of IBC, 2016 and the IRP have also raised objections. Their objections are on the ground that there is no need for such replacement as the decision has been taken arbitrarily by two Financial Creditors i.e. Bank of Baroda and M/s. Volkswagen Finance Private Limited and the proposed RP is based at a location which is far distant from the location where the Corporate Debtor and its properties are situated. One more ground regarding lack of authority for filing this application has been raised. It has also been stated that the action for replacement should have been taken under Section 27 and not under Section 22 of IBC, 2016. It has also been submitted that the fee of new RP was higher than the fee which quoted by IRP. 

 

# 5. We have considered the submissions made by both the parties and perused the material on record. It is noted that in the first meeting itself, the COC has decided so and that too without assigning any reason therefore. It is also noted that the originally appointed IRP performed his duties as expected from such IRP under the Code r.w. relevant Regulations made there-under. The Original IRP was situated at the place where the registered office of the Corporate Debtor and assets of the Corporate Debtor are situated. The new RP is from New Delhi. The fee quoted by him is also higher as compared to the fee quoted by erstwhile IRP. No material has been brought on record to show the incompetence or otherwise non-suitability of the erstwhile IRP while passing a resolution of removal of such IRP and appointing a new RP in place of erstwhile IRP. From the perusal of the consent form given by the new RP, it is noted that he is acting as Resolution Professional of three Corporate Debtors, two individuals, as liquidator in four matters, one more assignment as the liquidator are handled by such person, hence, such proposed IRP appears to have enough workload and, therefore, this fact also need consideration having regard to the objects of CIRP. 

 

# 6. The stand of the COC is that it is their prerogative to change the IRP and appoint the new RP. In this regard, we state that Insolvency and Bankruptcy Code, 2016 (Code) is new economic legislation which has come into force with the object of maximizing the value of Corporate Debtor by putting the Corporate Debtor back on its feet along with other objects such as balancing the interests of all stakeholders and IRP/RP is a key person in achieving such objects. As per Section 18(1)(c) of IBC, 2016, the IRP is required to constitute COC. The CoC is normally comprised of Financial Creditors. The Financial Creditors are ascertained based upon the claims submitted by such creditors to the IRP in pursuance of the public announcement published under Section 13 r.w. Section 15 of IBC, 2016. The tenure of "Interim Resolution Professional” remains valid till the date of appointment of Resolution Professional under Section 22 of IBC, 2016. During this tenure, specific duties are being performed by IRP which  are prescribed in Section 18 &20 of IBC,2016. 

 

Thus, the smooth conduct of the CIRP in the initial phase is the responsibility of IRP and IRP is also required to manage the operations of the Corporate Debtor as a going concern. The role of IRP is important as during this period COC is not in place. It is also to be noted that under earlier law tenure of the IRP was 30 days from the date of his appointment in terms of provisions of section 16(5) of IBC,2016. However a suitable amendment has been made whereby this term  remains till the appointment of RP under section 22 of IBC,2016, This position also goes to show that IRP may be required to work for a longer period in some cases. As per section 22(1) of IBC,2016, the first meeting of COC shall be held within seven days from the constitution of COC. As per Regulation 17 of Insolvency and Bankruptcy Board of India ( Insolvency Resolution Process for Corporate Persons) Regulations ,2016 (herein after referred to as IBBI (CIRP) Regulations ,2016), a report certifying the constitution of Committee to the Adjudicating Authority is to be filed within two days of the verification of claims received under Regulation 12(1) of IBBI (CIRP) Reguations,2016. Regulation 17(2) of IBBI(CIRP) Regulations, 2016 prescribes that the first meeting of COC shall be held within seven days of the filing of the report of the constitution of COC with the Adjudicating Authority. Regulation 17(3) of IBBI (CIRP) Regulations, 2016 also prescribes that in case of delay of appointment of RP under Section 22 of IBC, 2016, IRP shall function as RP from the fortieth day of the insolvency commencement date till the RP is appointed. 

 

Having discussed the provisions relating to the appointment and tenure of IRP as well as functions to be performed by IRP, now, we would consider the provisions relating to the appointment of Resolution Professional. As per Section 22(2) of IBC, 2016, the Committee of Creditors may in its first meeting either resolve to appoint IRP as RP or replace him with another Resolution Professional. In the event of replacement, COC shall file an application before the Adjudicating Authority for the appointment of the proposed Resolution Professional. The Adjudicating Authority shall forward the name of such proposed Resolution Professional to IBBI and shall make such appointment after confirmation by IBBI. Where the Board does  not confirm the name of the proposed Resolution Professional within ten days, the Adjudicating Authority would direct the Interim Resolution Professional to function as RP until such time the Board confirms the appointment of proposed Resolution Professional. 

 

However, subsequently, the procedure prescribed under sub-section 4 or 5 of Section 16 of IBC, 2016 has been modified in practice whereby IBBI prepares the list of approved Insolvency Professionals for specific territorial jurisdictions of various Benches from which IRP/RP is proposed/appointed. This procedure shows that IRP/RP should, in normal circumstances, be appointed on the basis of location of the Corporate Debtor and its assets. In case of the Corporate Debtor having business assets and operations on Pan India basis, an Insolvency Professional having presence at multiple locations connected with such Corporate Debtor may be appointed so as to complete CIRP in a time-bound manner. In the case of Section 7 of IBC, 2016, the name of IRP is to be proposed by Financial Creditor, being the applicant, mandatorily and the Adjudicating Authority has to appoint the same person in terms of provisions of Section 16(2) provided that no disciplinary proceedings are pending against such proposed IRP. In the case of Section 9 of IBC, 2016 application, if the name of IRP is proposed by the Operational Creditor, though, such proposition of name of IRP is not mandatory still the Adjudicating Authority will appoint the same person as IRP provided in Section 16(3) of IBC, 2016 that no disciplinary proceedings are pending against such person. 

 

As noted earlier, under Section 22(2) of IBC, 2016, it is not necessary that IRP appointed by this  Adjudicating Authority is to be replaced necessarily as the word “may” has been used. The use of the word “may” indicates that discretion is given. Once a discretion is given, such discretion, as settled judicially, cannot be exercised in an unreasonable or arbitrary manner and there must be some valid grounds/justifiable reasons to replace the IRP with another RP. For example, if the conduct of IRP is not up to the mark or it is observed that such person was proposed by Financial Creditor or Operational Creditor, hence, either he is not working independently or is under their influence. 

 

Section 27 of IBC, 2016 comes into play in a situation where a Resolution Professional appointed under Section 22 of IBC, 2016 is required to be replaced during the CIRP, if COC is of the opinion that such replacement is required. Thus, there could be a situation with the original IRP who was confirmed to act 'as RP or was replaced with the new Resolution Professional to act as RP, both the categories of Resolution Professionals can be changed. However, in doing so, COC is required to form an opinion which by fact itself imposes a prerequisite condition that there should be ostensible reasons for replacement of Resolution Professional and it should not be based upon whims and fancies as a replacement, being done on that basis, would adversely affect the conduct of CIRP which is to be completed in time-bound manner and unnecessary litigation may also happen which would consume precious judicial time. However, it may be said that under Section 22(2) of IBC, 2016, the COC may either appoint or replace IRP without forming any opinion but if in every case IRP proposed by the Original Financial Creditor is replaced without assigning any reasons, then, provisions of Section 7(3) of IBC, 2016 shall become redundant. It is to be noted that under Section 7(3) of IBC, 2016, the name of IRP is proposed mandatorily otherwise the application filed under Section 7 of IBC, 2016 may be dismissed. 

 

Further, absence of words “of the opinion” in Section 22(2) of IBC, 2016 cannot be construed to mean that no opinion is required as the use of the word “may'' therein requires so by necessary implication. Thus, even under Section 22 of IBC, 2016, proper justification is required for not appointing IRP as RP, as IRP performs very critical functions in the initial phases of CIRP which have already been discussed and on that basis the performance of IRP can be evaluated. In our considered view, such evaluation for changing the IRP even under Section 22 of IBC, 2016 is necessary and it must be born out of deliberations on this aspect in the minutes of COC where a resolution for replacement of IRP is passed. In the facts of the present case, minutes of relevant meeting indicate nothing in this regard. 

 

# 7. The other aspect is that the final power to replace the IRP does not rest with COC as such proposal is to be confirmed by IBBI as prescribed under Section 22(5) of IBC, 2016. As stated earlier, this requirement of law has to be looked into and exercised by Adjudicating Authority now due to change in procedure. Thus, it would be incorrect to say that if the COC passes the resolution with the requisite percentage of votes to replace the IRP such decision needs to be confirmed by the Adjudicating Authority in all circumstances. If that would be so, the Adjudicating Authority would become a signpost and not a check post which is not the intent of the legislature in view of Section 7(3) of IBC, 2016 and consequence of its non compliance and provisions of Section 16, 22 and 27 of IBC, 2016. 

 

# 8. In case of a situation arising under Section 27(1) of IBC, 2016 the same principle applies and it applies more strictly because the change of IRP in midway would adversely impact the timelines under which resolution of insolvency has to be achieved. 

 

# 9. There is one more aspect of pendency of disciplinary action against Insolvency Professional and details/data relating thereto remains with IBBI and not with COC, hence, for this reason also, replacement of IRP/RP needs the approval of Adjudicating Authority who on the basis of the approved list of Resolution Professional can certainly look into it. 

 

# 10. A further point has been made on behalf of the COC that such decision falls within the ambit of commercial wisdom of COC which is considered to be supreme in the context of the structure of IBC, 2016. We are unable to understand as to how the exercise of appointment or replacement of IRP, in the very first meeting of COC after Corporate Debtor is being admitted into CIRP, becomes an exercise of commercial wisdom because till that stage no significant developments as regard to steps specified in Section 25(2)(h) of IBC, 2016, are taken normally and only for such steps need for application of commercial wisdom arise in real sense. This aspect can further be explained from the perusal of Section 15, 17, 18 and 20 of IBC, 2016 which define the scope of duties and powers of IRP which mainly concern with the background work for smooth conduct of CIRP in future and management of the Corporate Debtor as a going concern during his tenure as IRP. Thus, appointment or replacement of IRP as RP is an exercise of the administrative nature, therefore, the question of immunity from interference by Adjudicating in the name of commercial wisdom does not arise at all. Even otherwise, in our humble view, the supremacy of commercial wisdom is of very limited application i.e., wherever the coc has been specifically empowered as a final Authority, the same cannot be questioned. For example, in the context of approval of resolution plan or approval of certain actions as envisaged under Section 28 of IBC, 2016, majority decision of COC  i.e. with the prescribed percentage, the such decisions cannot be interfered with in normal circumstances. It may not be out of place to mention that even such commercial wisdom is being put in check and balances by virtue of an amendment of the provision of Section 31 of IBC, 2016 and Regulation 36 to 39 of CIRP Regulations, 2016 subsequently whereby the role of the Adjudicating Authority has gradually been increased and COC is being required to record its deliberations on various aspects of Resolution Plan. Even, there is a paradigm shift in the judicial approach as regard to this aspect. Reference can be made to the observations of Hon'ble Supreme Court in the case of Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta reported in 2019 SCC Online SC 1478 in para 54 of the said order, the Hon'ble Supreme Court observed as under: 

• "This is the reason why Regulation 38(1A) speaks of a resolution plan including a statement as to how it has dealt with the interests of all stakeholders, including operational creditors of the corporate debtor. Regulation 38(1) also states that the amount due to operational creditors under a resolution plan shall be given priority in payment over financial creditors. If nothing is to be paid to operational creditors, the minimum, being liquidation value - which in most cases would amount to nil after secured creditors have been paid – would certainly not balance the interest of all stakeholders or maximise the value of assets of a corporate debtor if it becomes impossible to continue running its business as a going concern. Thus, it is clear that when the Committee of Creditors exercises its commercial wisdom to arrive at a business decision to revive the corporate debtor, it must necessarily take into account these key features of the Code before it arrives at a commercial decision to pay off the dues of financial and operational creditors. There is no doubt whatsoever that the ultimate discretion of what to pay and how much to pay each class or subclass of creditors is with the Committee of Creditors, but, the decision of such Committee must reflect the fact that it has taken into account maximising the value of the assets of the corporate debtor and the fact that it has adequately balanced the interests of all stakeholders including operational creditors. This being the case, judicial review of the Adjudicating Authority that the resolution plan as approved by the Committee of Creditors has met the requirements referred to in Section 30(2) would include judicial review that is mentioned in Section 30(2)(e), as the provisions of the Code are also provisions of law for the time being in force. Thus, while the Adjudicating Authority cannot interfere on merits with the commercial decision taken by the Committee of Creditors, the limited judicial review available is to see that the Committee of Creditors has taken into account the fact that the corporate debtor needs to keep going as a going concern during the insolvency resolution process; that it needs to maximise the value of its assets; and that the interests of all stakeholders including operational creditors has been taken care of. If the Adjudicating Authority finds, on a given set of facts, that the aforesaid parameters have not been kept in view, it may send a resolution plan back to the Committee of Creditors to re-submit such plan after satisfying the aforesaid parameters. The reasons given by the Committee of Creditors while approving a resolution plan may thus be looked at by the Adjudicating Authority only from this point of view, and once it is satisfied that the Committee of Creditors has paid attention to these key features, it must then pass the resolution plan, other things being equal." 

 

Apart from this legal position, it is not in dispute that Adjudicating Authority, being NCLT is guided by the principles of natural justice which inherently involve equitable considerations. On the basis of equitable considerations also, a person cannot be punished or may be made to suffer without assigning any reasons or afforded the opportunity of being heard to make out his case. In case of happening of such violation, the Adjudicating Authority can invoke its jurisdiction under Rule 11 of NCLT Rules, 2016 to prevent the miscarriage of justice and render substantial justice. We are further of the view that IRP/RP is not a free bird or cannot act arbitrary as suitable checks and balances have been provided in the Code itself. The IBBI is the regulator and various compliances have been prescribed which are to be done by the RP. As per Section 217 of IBC, 2016 any person which includes COC also can approach IBBI in case of any misconduct or arbitrariness being shown by RP. Further, under Section 28(5) of IBC, 2016, COC is also empowered to report the actions of Resolution Professional taken by Resolution Professional without seeking  approval of COC in addition to action being treated as void under Section 28(4) of IBC, 2016. We may also add that once a Corporate Debtor is admitted into CIRP, the role of its suspended management becomes practically negligible as far as conduct of CIRP is concerned. Even, the role of the Financial Creditor or Operational Creditor in the conduct of CIRP is very minimal in their individual capacity. The Financial Creditor, if having a large voting percentage, can certainly have meaningful say in CIRP. Thus, there is a greater probability that such the Financial Creditor may obtain a much stronger position, if the IRP of their choice is appointed by them by way of replacement without any justified reason. This may also result into a situation, where Committee of Creditors having regard to security interest possessed by them and personal guarantees also existing, the interests of all other stakeholders may suffer. Thus, having regard to considerations of these aspects, it is always preferable that IRP/RP should be independent of undue influence of COC as far as possible. It may not be out of place to mention that the experience gained from last five years of working of IBC, 2016, the Financial Creditors are preferring IRP/RP of their choice which is resulting into other imbalances. Thus, it is incumbent upon this Adjudicating Authority to prevent the happening of a situation whereby IRP/RP works only according to the dictates of the Committee of Creditors. Further, RP is an officer of the Court who is expected to act in an unbiased manner for the benefit of all stakeholders and on whom the Adjudicating Authority can rely upon. Thus, independence of RP not only with reference to COC as well as suspended management needs to be maintained. In case, IRP proposed by Financial Creditor or Operational Creditor acts otherwise, that would certainly justify the action under Section 22 or 27 of IBC, 2016, as the case may be. However, in the present case no such case has been made out and for this reason also the resolution passed by COC to replace IRP stands rejected. 

 

# 11. We may also observe that a lot emphasis has been given on the aspect of supremacy of commercial wisdom of COC. In this regard, it is noteworthy that these words are not defined in the IBC, 2016 or Regulations made there-under. Thus, these words are to be understood as per common parlance as per their dictionary meaning or as understood and used in the commercial world. . . .   

 

The word “wisdom” indicates the quality of being wise. 

The word "wise” is defined as under: 

Wise.adj. 1 having or showing experience, knowledge, and good judgment. wise to informal aware of, especially so as to know how to act. -v. (wise up) informal become alert or aware. 

When the dictionary meaning of word “wisdom” is looked at, one can define wisdom as a quality of being able to use experience, knowledge and good judgment together to discern or judge what is true, right or lasting. It also implies the use of common sense and good judgment. One of the characteristics of wisdom is not to do the thing in desperate manner. 

 

Therefore, the exercise of commercial wisdom involves rational thinking, justified reasons and ability to understand the consequences of such action while taking such action. If commercial wisdom is viewed in this manner, then, it becomes apparent that decision to replace the IRP, in view of the fact that these two Financial Creditors, having required voting powers in Coc, is not an instance of exercise of commercial wisdom but exercise of voting strength. It may not be inappropriate to state that it is an instance of an imprudent decision in the facts and circumstances of the case where proposed IRP is located at a different location who has also quoted higher fee and appears to be having sufficient assignments in his hand and, therefore, the basic objects of IBC, 2016 including timely resolution of insolvency of Corporate Debtor may not be possible to achieve. Thus, considering this factual situation, the action of COC deserves to be cancelled. 

 

# 12. Before parting, we may add that the success of CIRP is contingent upon independence competence of IRP and genuineness of intent of Committee of Creditors who acts in fiduciary capacity for all stakeholders and not merely confining to fulfilling of their own interests which makes IBC, 2016 like earlier regimes where individual actions and rights were a primary focus. Further, under the present structure such approach of Committee of Creditors would result into substantial damage to larger public interests including slowing down of economy due to massive write-offs imposed upon Operational Creditos who may become insolvent or go out of business due to loss of their legitimate dues. Thus, more unemployment and non-availability of credit, defeating one of the objects of IBC, 2016. Such approach of Committee of Creditors gets reflected from the very beginning in replacing IRP in this manner, hence, this needs to be checked at this stage only, so as to make CIRP achieve the stated objectives to the fullest extent. 

 

# 13. Considering the overall facts and circumstances of the case and the applicable legal position as discussed above, we are of the view that the decision of the COC is liable to be rejected and the originally appointed IRP is confirmed as RP. In this view of the matter, the new RP as appointed by COC is ordered to vacate the office of IRP and hand over all documents and records of the Corporate Debtor to the new IRP forthwith. 

 

# 14. Accordingly, IA No. 370 of 2021 in CP(IB) 781 of 2019 filed by COC stands dismissed and disposed of in terms indicated above. 

 

# 15. Urgent certified copy of this order, if applied for, be issued upon compliance with all requisite formalities

 

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