NCLAT New Delhi Expunges Remarks Against Mahavir Medicare RP, Clarifies RP's Independent IBC Duty

The New Delhi Bench of the National Company Law Appellate Tribunal (NCLAT) on 6 July, held that a Resolution Professional (RP) must independently ensure that the Corporate Insolvency Resolution Process (CIRP) complies with the Insolvency and Bankruptcy Code, 2016 (IBC), and cannot merely implement the decisions of the Committee of Creditors (CoC).

Judicial Member Justice N. Seshasayee with Technical Members Arun Baroka and Indevar Pandey allowed the application filed by the RP and expunged the adverse remarks made against him in the earlier order passed in the insolvency proceedings involving Mahavir Medicare. The Bench observed:

“The Resolution Professional is not expected to merely act upon the decisions of the Committee of Creditors but is also required to ensure that the process conforms to the provisions of the Code and the Regulations framed thereunder. Where any circumstance arises which has the potential to affect the fairness or legality of the process, it is the duty of the Resolution Professional to place the same before the Adjudicating Authority so that appropriate directions may be obtained.”

Earlier, the NCLAT had set aside the resolution plan submitted by Mahavir Medicare, the sole operational creditor and the only member of the CoC. It had held that an operational creditor acting as a Resolution Applicant could not vote on its own resolution plan, as Section 30(5) of the IBC bars a Resolution Applicant from voting on its own plan unless it is also a financial creditor.

While setting aside the plan, the NCLAT had also made adverse remarks against the RP, observing that an RP is expected to be familiar with the relevant provisions of the IBC. It had directed the Insolvency and Bankruptcy Board of India (IBBI) to take appropriate action against him.

The RP challenged the remarks before the Supreme Court. The top court granted him liberty to approach the NCLAT, following which he filed an application under Rule 11 of the National Company Law Appellate Tribunal Rules, 2016, seeking deletion of the observations. He submitted that the circumstances in the case were unusual and that he had to deal with a situation where there was no clear precedent. He argued that he had to balance competing obligations under the IBC and the Regulations framed under it.

The NCLAT observed that an RP holds a position of trust under the IBC and must function as an independent professional. It said the RP is responsible for ensuring that the CIRP is conducted in a fair, transparent and lawful manner. It accepted the RP's explanation and observed that the error occurred because of the peculiar statutory framework involved in the case. It held that there was no indication that the RP intentionally violated the provisions of the IBC.

Further, the Bench examined the constitution of the CoC and noted that it was validly constituted under Regulation 16 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. It observed that where a CoC consists only of operational creditors, it has the same powers as a CoC comprising financial creditors. However, the sole operational creditor in the present case could not vote on its own resolution plan because of the restriction under Section 30(5) of the IBC. The Tribunal held:

“The Applicant appears to have proceeded on the understanding that since Regulation 16(4) gave the sole Operational Creditor the same rights and powers as a Financial Creditor, it could also exercise voting rights, while considering its own Resolution Plan. However, the proviso to Section 30(5) of the Code specifically provides that a Resolution Applicant cannot vote on its own Resolution Plan, unless it is also a Financial Creditor.”

Lastly, the Bench held that the record did not show that the RP acted for personal gain or with an intention to bypass the provisions of the IBC. It concluded that the omission was a result of an incorrect interpretation of the law.

Accordingly, the NCLAT allowed the RP's application and expunged the adverse observations made against him in the earlier order.