2019 (4) TMI 1191 - Tri - Insolvency and Bankruptcy

COC's Bid to Replace IRP Rejected, Directors Face Fraud Probe

The Tribunal rejected the Committee of Creditors' application to replace the Interim Resolution Professional (IRP) with another Resolution Professional ... Discretion of the Adjudicating Authority in appointment or change of Resolution Professional - requirement of tenable, rational and reasonable grounds for change of Interim Resolution Professional/Resolution Professional - mandatory procedural route for replacement of Interim Resolution Professional under Section 22(3)(b) and forwarding for confirmation under Section 22(4) - right to be heard/opportunity to explain in relation to allegations against the IRP - public interest and continuation of investigations as a factor in deciding retention of the IRPDiscretion of the Adjudicating Authority in appointment or change of Resolution Professional - requirement of tenable, rational and reasonable grounds for change of Interim Resolution Professional/Resolution Professional - Whether the Committee of Creditors has absolute power to change the Interim Resolution Professional/Resolution Professional and whether the Adjudicating Authority may exercise discretion to refuse such change in absence of tenable reasons. - HELD THAT: - The Tribunal held that the legislative scheme does not confer absolute power on the Committee of Creditors to replace the IRP/RP at will. The procedure under the Code (including filing an application under Section 22(3)(b) and forwarding the proposed name to the Board under Section 22(4)) reflects that the Adjudicating Authority has a role and discretion in the appointment or replacement of the RP. Where the Adjudicating Authority, after hearing parties, forms the view that the incumbent IRP is competent, has acted with integrity and continuing him would serve the interests of creditors and public/investigative authorities, it may refuse a COC decision to replace the IRP if the COC fails to produce valid, tenable or reasonable grounds for change. The Tribunal applied this principle on the facts, observing that the application to change the IRP did not set out reasons, and the subsequent affidavit containing allegations was filed without first affording the IRP an opportunity to explain; the IRP's in court explanations were accepted and the Bank/COC failed to press any tenable reason for change. The Tribunal therefore concluded that the COC's resolution to appoint a different RP was not sustainable and that the Adjudicating Authority properly exercised its discretion to confirm the incumbent as RP. [Paras 2, 4, 5, 6]The COC is not vested with absolute power to change the IRP/RP; absent tenable and reasonable grounds and after consideration by the Adjudicating Authority, the change may be refused and the incumbent confirmed as RP.Right to be heard/opportunity to explain in relation to allegations against the IRP - public interest and continuation of investigations as a factor in deciding retention of the IRP - Whether the manner in which allegations against the IRP were raised and the consideration of ongoing investigative interest justified retaining the incumbent RP. - HELD THAT: - The Tribunal noted procedural infirmity in the manner the Axis Bank/COC advanced allegations: the application to change the IRP filed on 19.12.2018 did not state reasons; a later affidavit containing allegations (dated 29.01.2019) was filed without first seeking the IRP's explanation. The IRP addressed the allegations in open court and provided explanations which the Tribunal found credible. Further, the Tribunal took into account that the IRP had unearthed material suggesting fraudulent conduct by directors and that continuity of the IRP was relevant to facilitate cooperation with investigative agencies and protect public interest. On these factual and procedural bases, the Tribunal held that there were no valid reasons to displace the incumbent RP and the application for replacement was rejected. [Paras 2, 3, 4, 5, 6]Because allegations were raised without affording the IRP a proper opportunity to explain and because continuity of the IRP served public and investigative interests, the application to change the IRP was dismissed and the incumbent was confirmed as RP.Final Conclusion: The Misc. Application for replacement of the Interim Resolution Professional was dismissed; the Tribunal exercised its discretion to confirm the incumbent IRP as Resolution Professional because the Committee of Creditors failed to furnish tenable or reasonable grounds for change and procedural fairness and public/investigative interests warranted continuance of the incumbent. Issues involved:1. Change of Interim Resolution Professional (IRP) by Committee of Creditors (COC) without valid reasons.2. Allegations of misconduct against the IRP.3. Fraudulent activities by Directors of the Corporate Debtor.4. Discretion of Adjudicating Authority in appointing or changing the Resolution Professional (RP).5. Compliance with legal provisions regarding the appointment of RP.Issue 1: Change of Interim Resolution Professional (IRP) by Committee of Creditors (COC) without valid reasons:The COC filed an application seeking to replace the IRP with another RP, alleging various shortcomings, including improper verification of claims, acceptance of claims without proper proof, failure to collect rent receivables, and charging exorbitant fees. However, during the proceedings, the IRP refuted these allegations, stating they were baseless and that the Bank was interested in appointing their preferred RP. The Tribunal found the allegations frivolous and criticized the COC for not providing valid reasons for the change. The Tribunal emphasized the importance of a rational and justifiable basis for replacing the IRP and ultimately rejected the application for change, confirming the existing IRP as the RP.Issue 2: Allegations of misconduct against the IRP:The COC accused the IRP of various misconduct, such as accepting claims without proper verification, not collecting rent receivables, and charging excessive fees. However, during the proceedings, the IRP defended himself, stating the allegations were unfounded and that the Bank had ulterior motives in replacing him. The Tribunal, after reviewing the facts and the IRP's conduct, found the allegations baseless and noted the IRP's diligent efforts in handling the case. The Tribunal highlighted the importance of allowing the IRP to explain allegations before making a decision and ultimately rejected the COC's application for change.Issue 3: Fraudulent activities by Directors of the Corporate Debtor:During the proceedings, serious fraudulent activities by the Directors of the Corporate Debtor came to light. The IRP discovered illegal activities by the promoters, leading to ongoing investigations by the CBI. Due to the sensitive nature of the information, the Tribunal directed the Axis Bank officials to provide further details in a sealed cover. The Tribunal acknowledged the gravity of the fraudulent activities and emphasized the need for thorough investigations by appropriate authorities.Issue 4: Discretion of Adjudicating Authority in appointing or changing the Resolution Professional (RP):The Tribunal deliberated on the discretion vested in the Adjudicating Authority regarding the appointment or replacement of the RP. It highlighted the legal provisions requiring approval from the Adjudicating Authority for changing the IRP. The Tribunal questioned the COC's authority to replace the IRP without valid reasons, especially when the Adjudicating Authority found the IRP competent and diligent. The Tribunal stressed the need for a rational and justifiable basis for changing the RP, considering the public interest and the ongoing investigations into fraudulent activities.Issue 5: Compliance with legal provisions regarding the appointment of RP:The Tribunal examined the legal provisions related to the appointment and replacement of the RP. It emphasized the mandatory requirement for seeking approval from the Adjudicating Authority for changing the IRP. The Tribunal questioned the COC's authority to arbitrarily select or replace RPs without valid reasons, highlighting the importance of following due process and ensuring that decisions are rational and justifiable. Ultimately, the Tribunal rejected the application for changing the IRP, confirming the existing IRP as the RP based on the lack of valid reasons provided by the COC.