Related Party Exclusion: Resolution Professional cannot unilaterally remove admitted creditors; Authority may order re-verification and reconstitution.

Where a resolution professional acted beyond the Code and regulations by arbitrarily outsourcing verification duties and excluding admitted financial creditors as 'related parties' without adequate basis, the Adjudicating Authority may direct re-verification of claims, reconstitution of the Committee of Creditors and replacement of the RP to ensure smooth conduct of CIRP. A resolution professional has no statutory power to unilaterally change a creditor's admitted status or remove members of the CoC as related parties without prior Adjudicating Authority approval, and affected creditors must be afforded opportunity to be heard before rejection, reduction of claims or exclusion from the CoC.

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Issues: (i) Whether the Adjudicating Authority erred in suo motu replacing the Resolution Professional and in making adverse remarks against the CoC; (ii) Whether a Resolution Professional can, without prior approval of the Adjudicating Authority, remove financial creditors from the Committee of Creditors on the ground that they are related parties and reconstitute the CoC; (iii) Whether the affected creditors were correctly held to be related parties and whether opportunity of hearing was required before exclusion or reduction of claims.

Issue (i): Whether the Adjudicating Authority erred in suo motu replacing the Resolution Professional and in making adverse remarks against the CoC.

Analysis: The Tribunal examined the impugned order and the conduct of the RP and CoC, including appointment and reliance on a transactional auditor, alleged procedural violations, alleged outsourcing of RP duties contrary to IBBI circulars, and breaches of natural justice. The Tribunal considered authorities permitting the Adjudicating Authority to act where RP conduct frustrates CIRP and noted Rule 11 NCLT inherent powers as applied previously by the Appellate Tribunal.

Conclusion: The Adjudicating Authority did not commit error in replacing the Resolution Professional and making incidental comments; replacement was justified for smooth conduct of CIRP and the appellate challenge to that replacement fails.

Issue (ii): Whether a Resolution Professional can remove financial creditors from the Committee of Creditors on the basis that they are related parties without prior approval of the Adjudicating Authority.

Analysis: The Tribunal analysed Sections 18, 21 and 24 of the Insolvency & Bankruptcy Code, 2016 and relevant CIRP Regulations, noting that the RP is responsible for receiving and collating claims and preparing the list of creditors but has no statutory power to change a creditor's status or exclude admitted creditors from the COC without Adjudicating Authority direction. Regulation 12(3) and provisos were considered, and the Tribunal emphasised that changes to COC constitution other than by admission of subsequent claims require Adjudicating Authority oversight; RP cannot unilaterally oust members.

Conclusion: RP cannot remove admitted financial creditors from the COC as a related party without prior approval of the Adjudicating Authority; the Adjudicating Authority's direction to reconstitute the COC by including the applicants was legally sustainable.

Issue (iii): Whether the affected creditors were correctly held to be related parties and whether opportunity of hearing was required before exclusion or reduction of claims.

Analysis: The Tribunal reviewed Form-C requirements, the statutory definition of "related party" under Section 5(24) of the Code, the limited role of external transactional reports, and the need for RP to afford affected creditors opportunity to respond before adverse action. The Tribunal found the transactional auditor's conclusions unsupported, reliance on an old SAT order and incomplete data inappropriate, and that principles of natural justice were violated by exclusion without adequate notice or hearing.

Conclusion: The findings that the creditors were related parties lacked satisfactory basis in the record; opportunity to be heard was required before rejecting/reducing claims or excluding members, and the Adjudicating Authority correctly ordered re-verification and reconstitution.

Final Conclusion: The appeal is dismissed; the Adjudicating Authority's directions to re-verify claims, reconstitute the Committee of Creditors, and replace the Resolution Professional are upheld, and the interim stay is vacated.

Ratio Decidendi: Where an RP acts beyond or in contravention of the Code, regulations and IBBI guidance-including arbitrary exclusion of admitted financial creditors or outsourcing core verification duties without adequate basis-the Adjudicating Authority may, in exercise of its supervisory and inherent powers, direct re-verification of claims, reconstitution of the COC and replacement of the RP; an RP cannot unilaterally remove admitted creditors from COC as related parties without prior Adjudicating Authority approval and affected creditors must be afforded opportunity of hearing.

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