CoC's Commercial Wisdom Must Be Respected In Replacing Resolution Professional: NCLAT

The National Company Law Appellate Tribunal (NCLAT) at Chennai has recently held that while a Resolution Professional (RP) must function independently and not at the whims of a dominant creditor, the Committee of Creditors' (CoC) majority view on replacing an RP must be respected.

This is subject to compliance with the Insolvency and Bankruptcy Code, 2016.

The bench of Judicial Member Justice N. Seshasayee and Technical Member Jatindranath Swain observed:

“While it has to be accepted that RP must function independently and not as per the whims and fancies of the dominant creditor, the commercial wisdom of the CoC (as represented by the majority view) has to be respected unless he is being asked to perform a task contrary to the provisions of the Code and the Regulations framed thereunder.”

The observation came while the NCLAT upheld the replacement of S. Viswanathan as RP of Maylari Agro Products Ltd. It held that Viswanathan had no vested right to continue as RP and that the Bengaluru bench of the National Company Law Tribunal (NCLT) was justified in ordering his replacement.

Maylari Agro Products was admitted into the Corporate Insolvency Resolution Process (CIRP) on March 8, 2021, with Viswanathan appointed as Interim Resolution Professional. At the first CoC meeting, minutes prepared by him recorded that Canara Bank and Karnataka Bank had unanimously resolved to retain him as RP. Canara Bank later disputed the minutes and withdrew its consent.

Canara Bank held 84.6% voting share in the CoC, while Karnataka Bank held 15.4%. At the subsequent CoC meeting, Canara Bank voted in favour of replacing Viswanathan, while Karnataka Bank voted against the proposal.

Canara Bank then sought his replacement before the NCLT. The Bengaluru bench allowed the application and appointed Shirley Mathew as the new RP.

Viswanathan challenged the decision before the NCLAT. He argued that the NCLT had not considered his defence to the allegations raised by Canara Bank and had thereby violated the principle of audi alteram partem, which requires a fair opportunity to respond.

He also disputed the finding concerning the absence of voting records for the first CoC meeting. He contended that electronic voting was not required where all members were present and voted unanimously.

Viswanathan sought ₹17.83 lakh towards professional fees and ₹3.38 lakh towards CIRP expenses. He also sought removal of adverse remarks made against him in the NCLT's order.

Canara Bank argued that Viswanathan could not question its decision to seek his replacement. The bank also relied on the absence of voting records and other procedural deficiencies.

After Viswanathan's replacement, the new RP obtained approval for a ₹5.05 crore resolution plan. The CoC approved the plan with 100% voting share on March 30, 2022.

The NCLAT did not decide Viswanathan's ₹21.21 lakh claim. It held that the fees payable would depend on the work performed and the CoC's willingness regarding the scale of fees.

The appellate tribunal gave him liberty to approach the NCLT for adjudication of the claim. It directed the NCLT to decide it preferably within two months of the appropriate application being filed.

The NCLAT also expunged adverse observations made against Viswanathan, noting their bearing on his professional reputation.

The NCLAT ultimately upheld Viswanathan's replacement and disposed of both appeals. His claim for professional fees and CIRP expenses was left open for adjudication by the NCLT.