Introduction
The Madras High Court recently set aside an order passed by the National Company Law tribunal whereby, the recommended Interim Resolution Professional, (IRP) was substituted by another professional citing that it was done in the interest of stakeholders.
The court mainly investigated relevant sections of the insolvency and bankruptcy code of 2016 which were, section 7,10(3((b) ,16(2) and 16(3).
The Court conducted a thorough statutory analysis of the order passed by the NCLT in substituting the IRP who was proposed in the application filed under Section 10 and held that the same cannot be done unless there is disciplinary proceedings pending against that Insolvency Resolution professional and clarified that the NCLT had violated its statutory jurisdiction.
Background
In this case, the corporate debtor had filed an application under section 10 of IBC with the proposed recommendation of the IRP. However, when the matter came for admission, the National Company Law Tribunal passed an order wherein, instead of appointing the proposed IRP who is the petitioner, substituted petitioner with another professional. The Petitioner contended that this was a statutory violation of the NCLT and that it had no discretion to do so. Therefore, the petitioner had approached the Honorable Madras High court through a certiorarified mandamus to quash the order passed by NCLT. The Madras High Court held that such action by the NCLT was against Section 16(2) which clearly states that the NCLT is bound to appoint such professionals as is recommended in the application filed by the corporate debtor or financial debtor and set aside the order.
Key point
Statutory mandate: The Madras High Court relied on Section 16(2) of IBC, which clearly mandates and leaves no space for discretion in its wordings, that the NCLT shall appoint the IRP who is recommended as per section 10 (3) (b) by the applicant unless there are any disciplinary proceedings pending against him. This was a straightforward mandate which the court interpreted to say that the NCLT absolutely had no discretion to substitute at all and held that it was a clear violation of its jurisdiction. The court found that there is no statutory backing to support the action of substituting the IRP recommended.
Statutory discretion: The Honorable court emphasized that the IBC grants discretion to the NCLT only under section 16(3) when the application is filed by an operational creditor, when no IRP is proposed, to make a reference to the Board for the recommendation of the insolvency professional.
NCLT’s justification: The NCLT’s justification was given by its registrar with a report, wherein, it stated multiple past instances where the tribunal had deviated from the recommendations and appointed the professional on its own. The justification was that the corporate debtor had changed the recommendation multiple times so the NCLT thought it was best to go ahead and appoint the IRP from the IBBI recommended list in the interest of stakeholders. The court held that apart from this justification, there is no statutory backing for the action of the NCLT.
Lack of transparency in appointments: The court reasoned its concern of lack of transparency in the appointments made by the NCLT by placing reliance on Section 22 (2) of the code, which, talks about the Committee of creditors who at the very first meeting may and if they have a majority vote of not less than 66%, either to resolve to appoint the IRP as the RP or to replace the IRP by another RP.
Recent Developments
This ruling has clarified the grey area on whether a justification of the corporate debtor changing the recommendation of the IRP can stand strong against the statutory mandate which states that it cannot do so.
Conclusion
Therefore, the court with the above detailed statutory analysis ruled that the IBC is very clear in laying down the statutory limitation within which the NCLT must operate, and any discretion exercised by it in appointing IRP except according to section 16(3) shall be considered as a violation of its statutory jurisdiction. This ruling is more than just a technical interpretation of the Insolvency and Bankruptcy Code. It reinforces the importance of respecting the choices made by applicants under the law and limiting unnecessary judicial overreach.
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WRITTEN BY _S. KAVIYA SRI
