2025 (1) TMI 486 - AT - IBC

IRP removed for failing to disclose consultant relationships and violating fiduciary duties during insolvency proceedings

NCLAT Principal Bench ordered replacement of IRP of corporate debtor undergoing CIRP after finding breach of Code of Conduct. IRP failed to disclose ... Seeking replacement of the Interim Resolution Professional of Sequel Buildcon Private Limited-Corporate Debtor undergoing Corporate Insolvency Resolution Process - whether the conduct of the IRP in the given factual matrix gives adequate reason to believe that there was a breach of the Code of Conduct of Insolvency Professionals by IRP warranting his removal and replacement by another IRP? - HELD THAT:- Regulation 3(1) and the explanatory clause of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 lays down that the RP must not have any conflict of interest or business relationship with the corporate debtor, its promoters, or any other stakeholders. Regulation 7(2)(h) of the IBBI (Insolvency Professionals) Regulations, 2016 provides that insolvency professionals must adhere to a Code of Conduct specified in the First Schedule to these regulations for avoiding conflicts of interest and maintaining independence. Keeping in mind the status of Applicant as a strategic project partner and a key financier of the project, it does stand to reason for them to have raised questions on the manner of selection of consultants followed by the IRP when they were not satisfied with the quality of services rendered. From material on record, it is noticed that the Applicant had issued letters to the IRP to clarify the manner in which these consultants were appointed including details of their credentials, professional profile, work experience, man power and HR structure etc. The stone-walling of such relevant information by the IRP does create room for suspicion on the conduct of the IRP of trying to conceal/supress relevant and necessary facts. The apprehensions of the Applicant with regard to the manner of appointment of the consultants ought to have been allayed by the IRP rather than create a shroud of opacity. There was a clear breach of fiduciary duties on the part of the IRP besides conflict of interest in the appointment of the consultants. Hence the IRP should be immediately replaced. Per contra, the IRP has justified non-disclosure of its association with CLL, PMC and other related business entities on the ground that Clauses 8B, 8C and 8D of the Code of Conduct apply only to a period of 3 years preceding their appointment of IRP and since their association had terminated more than 3 years back, it need not have been disclosed - this cannot come to the rescue of the IRP since in terms of Clause 8C of the Code of Conduct, the disclosure requirement comes into play “at any time” when the IRP is a key managerial person, a partner of a related party or a partner or director of the concerned company, firm or LLP. In the conduct of Reverse CIRP, the relationship between the IRP and stakeholders of the Corporate Debtor including home-buyers and interim financier is built on trust. Once this trust is belied, it has the potential to jeopardise the resolution process. In the present case, the IRP has been found to be forthcoming in parting with all relevant information with regard to the credentials of their consultants to the Applicant. As a key financier, the Applicant had a definite stake in the manner of appointment of the PMC and LC. The contention of the IRP that the consent of the Applicant had been obtained before the appointment of the PMC and LC has been denied by the Applicant. The IRP had merely informed the Applicant regarding the appointment of PMC post their appointment which cannot be viewed as their concurrence after consultation - For a Corporate Debtor which was already financially stressed and insolvent, payment of fees by the IRP to related party consultants without commensurate services forthcoming from them constituted sufficient ground to seek change of the IRP. The Applicant definitely enjoys locus standi to file the present application since it has been infusing funds into the project for the benefit of all stakeholders including the home-buyers. There is merit in the application filed by the Applicant seeking replacement of the IRP with another IRP who can better safeguard the interest of all stakeholders, especially home-buyers. Conclusion - There is incidence of infringement of the Code of Conduct of the Insolvency Professionals by the present IRP for not having disclosed their relationships or potential conflicts of interest in the appointment of consultants. To prevent further abuse of process and to meet the ends of justice, the removal of the IRP directed forthwith and the consultants appointed by them. Application allowed. 1. ISSUES PRESENTED and CONSIDEREDThe judgment primarily addresses the following legal issues:Whether the conduct of the Interim Resolution Professional (IRP) warranted his removal and replacement due to alleged breaches of the Code of Conduct for Insolvency Professionals.Whether the IRP had a conflict of interest due to his associations with related parties, affecting his impartiality in the Corporate Insolvency Resolution Process (CIRP).Whether the Applicant, Eka Life Ltd., as a strategic project partner and financier, had the locus standi to seek the replacement of the IRP.Whether the IRP failed to fulfill the conditions precedent for further fund infusion by the Applicant, thereby affecting the project's progress.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Conduct and Replacement of IRPLegal Framework: The Insolvency and Bankruptcy Code (IBC) and relevant regulations for insolvency professionals, particularly focusing on the Code of Conduct.Court's Interpretation: The Tribunal examined whether the IRP's actions violated the Code of Conduct, specifically regarding transparency and conflict of interest.Key Evidence and Findings: The IRP's alleged failure to disclose relationships with related parties and the questionable selection process for consultants were central to the Tribunal's findings.Application of Law to Facts: The Tribunal found that the IRP's lack of transparency and potential conflicts of interest warranted his removal to ensure the CIRP's integrity.Treatment of Competing Arguments: The IRP argued that his past associations did not constitute a conflict of interest, but the Tribunal found ongoing relationships that undermined his impartiality.Conclusions: The Tribunal concluded that the IRP's conduct justified his removal and replacement to protect stakeholders' interests.Issue 2: Conflict of Interest and TransparencyLegal Framework: Regulations under the IBC regarding disclosure and avoidance of conflicts of interest by insolvency professionals.Court's Interpretation: The Tribunal emphasized the importance of transparency and the need for insolvency professionals to disclose any potential conflicts.Key Evidence and Findings: The IRP's connections with the law firm CLL and related entities were not adequately disclosed, raising concerns about impartiality.Application of Law to Facts: The Tribunal found that the IRP's undisclosed relationships with related parties breached the Code of Conduct.Treatment of Competing Arguments: The IRP contended that his past affiliations were irrelevant, but the Tribunal highlighted ongoing connections that required disclosure.Conclusions: The Tribunal determined that the IRP's failure to disclose relationships justified his replacement.Issue 3: Locus Standi of the ApplicantLegal Framework: The rights of stakeholders, particularly financiers, in the CIRP process under the IBC.Court's Interpretation: The Tribunal recognized the Applicant's significant financial stake and role as a strategic partner, granting them the standing to seek IRP replacement.Key Evidence and Findings: The Applicant's substantial financial contribution and concerns about the project's management supported their standing.Application of Law to Facts: The Tribunal found that the Applicant's role and financial commitment gave them a legitimate interest in the IRP's conduct.Treatment of Competing Arguments: The IRP argued that only the Committee of Creditors (CoC) could seek his removal, but the Tribunal found the Applicant's involvement sufficient for standing.Conclusions: The Tribunal affirmed the Applicant's right to seek the IRP's replacement due to their financial and strategic involvement.Issue 4: Fulfillment of Conditions PrecedentLegal Framework: Contractual obligations under the Memorandum of Understanding (MoU) between the Applicant and the Corporate Debtor.Court's Interpretation: The Tribunal assessed whether the IRP met the conditions necessary for further fund infusion by the Applicant.Key Evidence and Findings: The IRP's failure to secure necessary approvals hindered the project's progress and the Applicant's further financial contribution.Application of Law to Facts: The Tribunal found that unmet conditions precedent justified the Applicant's reluctance to infuse additional funds.Treatment of Competing Arguments: The IRP argued that the Applicant was avoiding their financial obligations, but the Tribunal found that unmet conditions justified the Applicant's position.Conclusions: The Tribunal concluded that the IRP's failure to meet conditions precedent supported the Applicant's case for IRP replacement.3. SIGNIFICANT HOLDINGSVerbatim Quotes: 'The IRP has violated the Code of Conduct and in the process failed to act impartially in the discharge of its duties.'Core Principles Established: The necessity of transparency and disclosure by insolvency professionals to maintain integrity and trust in the CIRP process.Final Determinations: The Tribunal ordered the removal and replacement of the IRP and directed the Adjudicating Authority to appoint a new IRP to ensure the project's continuation and stakeholders' interests.The judgment underscores the critical importance of maintaining transparency, avoiding conflicts of interest, and ensuring stakeholder trust in insolvency proceedings. The Tribunal's decision reflects a commitment to uphold these principles to protect the interests of all parties involved in the CIRP.