Home » Between The Lines » Between The Lines | NCLAT: Erstwhile resolution professional has no right to be heard before being replaced under Section 27 of the Insolvency and Bankruptcy Code.

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The National Company Law Appellant Tribunal, Principal Bench, New Delhi (“NCLAT”) has in its judgement dated September 2, 2022 (“Judgement”), in the matter Sumat Kumar Gupta v. Committee of Creditors of M/s. Vallabh Textiles Company Limited [Company Appeal (AT) (Insolvency) No. 1037 of 2022] held that when the Committee of Creditors (“CoC”) decides to replace the resolution professional under Section 27 (Replacement of resolution professional by CoC) of the Insolvency and Bankruptcy Code, 2016 (“IBC“) and an application is filed before the National Company Law Tribunal (“Adjudicating Authority/ NCLT”) for approval, the erstwhile resolution professional would have no right to be heard before the Adjudicating Authority, before being replaced.

Facts

In the instant case, M/s. Vallabh Textiles Company Limited (“Corporate Debtor“) was admitted into Corporate Insolvency Resolution Process (“CIRP“) pursuant to which Mr. Sumat Kumar Gupta (“Appellant“) was appointed as the resolution professional of the Corporate Debtor.

However, the CoC in its meeting dated June 4, 2022, decided with 100% vote, to replace the Appellant with another resolution professional namely Mr. Rajiv Khurana.

Consequently, an application was filed before the Adjudicating Authority by Punjab National Bank (“Financial Creditor”), for replacement of the Appellant and the NCLT vide its order dated July 7, 2022 (“Impugned Order”), allowed the application and Mr. Rajiv Khurana was appointed as the resolution professional of the Corporate Debtor in place of the Appellant.

Aggrieved by the Impugned Order passed by the NCLT, the Appellant preferred an appeal before the NCLAT.

Issue

Whether an erstwhile resolution professional has the right to be heard before being replaced under Section 27 (Replacement of resolution professional by CoC) of the IBC in consonance with the principles of natural justice.

Arguments

Contentions raised by the Appellant:

The Appellant submitted that the NCLT passed the Impugned Order for replacement of the resolution professional of the Corporate Debtor, without giving him an opportunity of being heard and without issuing any notice to him. The Appellant further contended that when the Impugned Order was being passed by the Adjudicating Authority, he was entitled for an opportunity of being heard in consonance with the principles of natural justice.

Moreover, Section 27 of the IBC that provides for replacement of the resolution professional by the CoC does not exclude applicability of natural justice. Therefore, he was entitled for the opportunity of being heard before being replaced.

The Appellant cited the observations of the judgment in MCL Global Steel Private Limited and Another v. Essar Projects India Limited and Another [Company Appeal (AT) (Ins.) No. 29 of 2017] (“Essar Projects Case”), wherein paragraph 50 of the judgment of the Hon’ble Calcutta High Court in Sree Metaliks Limited and Another v. Union of India and Another [Writ Petition 7144(W) of 2017] was relied upon. In the said case, the Hon’ble Calcutta High Court held that a person cannot be condemned unheard and that where a statute is silent on the right of hearing and it does not in express terms oust the principles of natural justice, the same can and should be read into. When the Adjudicating Authority receives an application under Section 7 (Initiation of corporate insolvency resolution process by financial creditor) of the IBC, it must afford a reasonable opportunity of hearing to the corporate debtor as Section 424 (Procedure before Tribunal and Appellate Tribunal) of the Companies Act, 2013, mandates it to ascertain the existence of default as claimed by the financial creditor in the application.

Contentions raised by the CoC:

The CoC refuted the submissions of the Appellant and contended that Section 27 of the IBC does not contemplate any opportunity to be given to the resolution professional by the Adjudicating Authority, before passing an order approving the resolution of the CoC for replacement of such resolution professional.

The CoC further submitted that as per the scheme delineated by Section 27 of the IBC, replacement of a resolution professional is complete when a resolution is passed for replacement with 66% votes of the CoC and the Adjudicating Authority is communicated the name of the new resolution professional, for approval.

In order to support its submissions, the CoC relied on the following judgements passed by the NCLAT:

  • Punjab National Bank v. Kiran Shah, Insolvency Resolution Professional of ORG Informatics Limited [Company Appeal (AT) (Ins) No. 749 of 2019] (“PNB Case”), wherein it was held that the CoC is not required to record any reason or ground for replacing the resolution professional, which may otherwise call for proceedings against such resolution professional. The CoC having decided to remove the resolution professional, does not entitle the Adjudicating Authority to interfere with such decision, till it is shown that the decision of the CoC is perverse or without jurisdiction.
  • Bank of India v. Nithin Nutritions Private Limited [Company Appeal (AT) (Ins.) No. 497 of 2020], (“Nithin Nutritions Case”) wherein it was held that the law nowhere provides for the COC to give reasons for replacing the resolution professional.
  • Committee of Creditors of LEEL Electricals Limited through State Bank of India v. Leel Electricals Limited through its Interim Resolution Professional, Arvind Mittal [Company Appeal (AT) (Insolvency) No. 1100 of 2020] (“Leel Electricals Case”), wherein it was held that in the face of CoC resolution being passed with more than the requisite majority, it cannot lie in the mouth of the resolution professional that any of his legal rights have been infringed.

Observations of the NCLAT

The NCLAT observed that a reading of Section 27 of the IBC clearly provides that when the CoC is of the opinion that a resolution professional appointed under Section 22 (Appointment of resolution professional) of the IBC, is required to be replaced, it may replace him with another resolution professional in the manner prescribed under Section 27 of the IBC. The manner provided under Section 27(2) of the IBC, is that a resolution be passed at the meeting of the CoC by 66% voting share to replace the resolution professional and to appoint another resolution professional, subject to a written consent from the proposed resolution professional.

The NCLAT further observed that Section 27 of the IBC does not contemplate any opportunity of hearing to the resolution professionals by the Adjudicating Authority before approving the proposal of a new resolution professional. The CoC is required to merely forward the name of the proposed resolution professional to the Adjudicating Authority, which in turn forwards the name of the proposed resolution professional to the Insolvency and Bankruptcy Board of India for its confirmation. Section 27 in no way indicates that a resolution professional is to be made a party and is to be issued a notice before taking a decision to appoint another resolution professional.

Besides, looking to the purpose and object of the IBC, where timeline is an essential factor to be taken into consideration at all stages, there is no warrant to permit a Lis (suit) to be raised by the resolution professional, challenging his replacement by the CoC. When the decision is by votes of a collective body, that is the CoC, such decision is not easily assailable and replacement of a resolution professional is complete as per the scheme of Section 27 when the resolution is passed by the CoC with requisite 66% voting share.

With regard to the contention of the Applicant that Section 27 does not exclude applicability of the principles of natural justice, the NCLAT observed that the said Section of the IBC excludes the principles of natural justice, by implication, and it is clear that the scheme nowhere provides for any opportunity to the Appellant for hearing.

The NCLAT further observed that the Essar Steel Case, relied upon by the Appellant, provides for hearing under Section 7 (Initiation of corporate insolvency resolution process by financial creditor) and Section 9 (Application for initiation of corporate insolvency resolution process by operational creditor) of the IBC, which is for an entirely different purpose and that the principle laid down in the Essar Steel Case cannot be imported to the instant case.

Decision of the NCLAT

The NCLAT asserted the view laid down in the judgements relied upon by the CoC, namely the PNB Case, the Nithin Nutritions Case and the Leel Electricals Case. Undisputedly, the replacement of resolution professional is complete when the required decision is taken by the CoC in its meeting with requisite majority.

Therefore, there being no grounds to interfere with the Impugned Order of the NCLT approving the replacement of the resolution professional, the NCLAT dismissed the appeal filed by the Appellant.

VA View:

The NCLAT through this Judgement threw light on the legislative intent of Section 27 (Replacement of resolution professional by CoC) of the IBC. It has rightly held that when a resolution professional has been replaced by the CoC in the manner prescribed under Section 27(2) of the IBC, which is by 66 % voting share, such decisions are not amenable to challenges easily.

The scheme delineated by Section 27 of the IBC, in no way indicates that a resolution professional is to be made a party and is to be issued a notice before taking a decision to appoint another resolution professional. The provisions of Section 27 of the IBC are self-explanatory in nature, and therefore, do not entitle the resolution professional of the right to be heard before the Adjudicating Authority, before being replaced.

For any query, please write to Mr. Bomi Daruwala at [email protected]

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