2025 (9) TMI 1165 - AT - IBC

IBBI exceeded power under Section 34(4)(b) by banning IRP/RP as liquidator; blanket replacement policy struck down

Manish Jaju Erstwhile Resolution Professional of Rajesh Landmark Projects Private Limited Versus The Committee of Creditors of Rajesh Landmark Projects Private Limited Through M/s Asset Care & Reconstruction Enterprise Limited and Ms. Smita Gupta Liquidator Rajesh Landmark Projects Pvt Ltd., Mumbai

NCLAT (PB, New Delhi) held that IBBI exceeded its power under Section 34(4)(b) by issuing a general circular directing that an IRP/RP not be appointed as ... Seeking liquidation of the corporate debtor - appointment of an insolvency professional other than the resolution professional to act as liquidator - HELD THAT:- Insolvency professional functions under regulatory control of the IBBI hence Section 34(4) the board has been given right to recommend for replacement of the RP. The right given for board to recommend the replacement of the RP under Section 34(4)(b) is right to recommend the replacement of a resolution professional i.e., resolution professional of the corporate debtor with regard to whom liquidation order has been passed. The decision to recommend for replacement has to be qua the particular RP which may be due to work and conduct of the RP, which is under constant monitoring and gaze of the IBBI. The power under Section 34(4)(b) cannot be exercised by the board to take a decision that in all cases of liquidation, IRP and RP be not appointed as liquidator. The power envisages under Section 34(4)(b) is a power to recommend replacement of the particular RP on the facts specific to that particular RP and that is not a general power which can be exercised by the board for passing the circular dated 18.07.2023, as has been brought on the record. Legislature while giving power to board under Section 34(4)(b) contemplated recommendation by board for replacement of the particular RP not the said power has to be exercised qua a particular RP in the CIRP of the corporate debtor on account of work and conduct of that particular RP and the power under Section 34(4)(b) cannot be exercised to issue a general circular as issued by the IBBI on 18.07.2023, which is contrary to scheme under Section 34(1). IBBI has misinterpreted the power given to the IBBI under Section 34(4)(b) - The present is not a case where the letter dated 18.07.2023, was written by the IBBI recommending replacement of the appellant, hence the said letter cannot be basis for replacing the appellant as a liquidator. The order of the adjudicating authority insofar as it appoint Ms. Smita Gupta as liquidator cannot be sustained. The appeal is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the Adjudicating Authority lawfully appointed an insolvency professional other than the resolution professional to act as liquidator by relying on an IBBI communication dated 18.07.2023. 2. Whether the IBBI, in exercise of powers under Section 34(4)(b) of the Code, can issue a general circular/recommendation directing that an IP other than the IRP/RP be appointed as liquidator in all liquidation orders. 3. Whether, upon passing of a liquidation order under Section 33, the resolution professional who gives written consent must be appointed liquidator unless one of the statutory grounds for replacement under Section 34(4) exists. 4. Whether the particular communication relied upon constituted a recommendation under Section 34(4)(b) qua the resolution professional in the present corporate debtor and, if not, whether replacement on that basis was permissible. 5. Entitlement to reimbursement of expenses incurred by the person appointed as liquidator who was subsequently replaced. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Legality of appointment of an IP other than the RP by reliance on IBBI communication Legal framework: Section 34(1) provides that where liquidation is ordered under Section 33 the RP shall, subject to written consent, act as liquidator unless replaced by the Adjudicating Authority under Section 34(4). Section 34(4) identifies specific grounds (rejection of RP's plan under s.30(2); Board recommendation to replace RP for reasons recorded; failure to give written consent) on which the Adjudicating Authority shall replace the RP. Precedent treatment: No judicial precedents were applied or distinguished in the judgment; analysis rests on statutory text and legislative scheme. Interpretation and reasoning: The Court examined the impugned order which, though noting the CoC's resolution to appoint the RP as liquidator and the RP's written consent, declined to appoint the RP and instead appointed an alternate IP citing the IBBI communication of 18.07.2023. The Court reasoned that Section 34(1) creates a default rule in favour of appointment of the RP as liquidator upon liquidation unless one of the specified replacement grounds under s.34(4) is satisfied. The Adjudicating Authority's reliance on a general IBBI communication not addressing the RP's suitability in the particular CIRP was therefore inconsistent with the statutory scheme. Ratio vs. Obiter: Ratio - Adjudicating Authority cannot displace the statutory mandate to appoint the RP (who gives written consent) by relying on a general board communication that does not amount to a recommendation under s.34(4)(b) specific to that RP. Conclusion: Appointment of an alternate IP on the basis of the 18.07.2023 communication was not sustainable; the RP should have been appointed as liquidator in absence of grounds under s.34(4). Issue 2 - Scope of IBBI's power under Section 34(4)(b) to issue a general circular recommending replacement in all cases Legal framework: Section 34(4)(b) mandates replacement where 'the Board recommends the replacement of a resolution professional to the Adjudicating Authority for reasons to be recorded.' Section 196 confers regulatory and supervisory functions on the Board/IBBI, including monitoring and issuing directions for compliance, specifying standards, and recommending action in respect of particular insolvency professionals. Precedent treatment: None cited; statutory construction applied. Interpretation and reasoning: The Court parsed the language and legislative purpose of s.34(4)(b) and related regulatory provisions. It held that the Board's power to 'recommend the replacement of a resolution professional' contemplates a recommendation directed to the Adjudicating Authority in respect of a particular RP arising from facts specific to that RP's performance or conduct. A blanket policy or circular directing that an IP other than the RP/IRP be appointed in all liquidation orders constitutes a misinterpretation and overreach of the limited recommendatory power envisaged by s.34(4)(b), because it negates the statutory default in s.34(1) and circumvents the requirement of a case-specific recommendation with reasons recorded. Ratio vs. Obiter: Ratio - The Board cannot, by issuing a general circular, convert a case-specific recommendatory power under s.34(4)(b) into a standing directive that overrides the RP's statutory entitlement to be appointed liquidator upon giving consent. Conclusion: The 18.07.2023 communication, insofar as it recommends that an IP other than the RP/IRP be appointed in all cases, exceeded the Board's authority under s.34(4)(b) and is not a valid basis for replacing the RP in the present matter. Issue 3 - Interpretation of the replacement grounds in Section 34(4) and application to present facts Legal framework: Section 34(4) sets out three discrete circumstances for mandatory replacement: (a) rejection of plan submitted by the RP for failure to meet s.30(2); (b) Board's recommendation for replacement with reasons; (c) RP's failure to submit written consent. Precedent treatment: Not invoked; statutory analysis used. Interpretation and reasoning: The Court emphasized that replacement is an act to be undertaken by the Adjudicating Authority when one of the statutorily enumerated conditions is present. Here the RP submitted written consent and there was no rejection of the RP's plan for s.30(2) reasons, nor was there a Board recommendation directed at replacing that particular RP with reasons recorded. Thus none of the statutory conditions in s.34(4) applied. Ratio vs. Obiter: Ratio - In absence of any of the specific replacement grounds in s.34(4), the RP who gives written consent must be appointed as liquidator; general policy pronouncements do not substitute for a statutorily mandated ground for replacement. Conclusion: The Adjudicating Authority's replacement of the RP lacked any statutory foundation under s.34(4) and could not be sustained. Issue 4 - Whether the 18.07.2023 communication constituted a Board recommendation under Section 34(4)(b) qua the RP in this CIRP Legal framework: s.34(4)(b) requires the Board to recommend replacement to the Adjudicating Authority 'for reasons to be recorded'. Precedent treatment: None relied upon. Interpretation and reasoning: The Court examined the content of the 18.07.2023 letter and found it to be a general policy communication setting out macro concerns about liquidation outcomes and suggesting that AAs may appoint IPs other than the RP to enhance independence and maximise value. The communication did not record reasons specific to the performance or conduct of the RP in the present CIRP nor did it address the particular facts of this corporate debtor. Therefore it could not be treated as a Board recommendation under s.34(4)(b) aimed at replacing the specific RP before the Adjudicating Authority. Ratio vs. Obiter: Ratio - A communication lacking case-specific reasons and not addressed as a recommendation to replace a particular RP cannot be equated with a s.34(4)(b) recommendation justifying replacement. Conclusion: The 18.07.2023 letter was not a recommendation under s.34(4)(b) in respect of the RP in this matter; it could not lawfully support the Appellate Authority's decision to appoint an alternate liquidator. Issue 5 - Entitlement to reimbursement of expenses by the person initially appointed as liquidator and subsequently displaced Legal framework: No specific statutory provision was cited in the judgment addressing reimbursement in this precise factual context; the Court treated expense claims made in the reply. Precedent treatment: Not addressed. Interpretation and reasoning: The person appointed as liquidator (and subsequently displaced) had incurred certain expenses in performance of fiduciary duties (publication, office, legal costs) amounting to a quantified sum. The Court accepted those amounts as proper and directed that such expenses be reimbursed to that person despite the substitution of appointment. Ratio vs. Obiter: Ratio - Where a person appointed as liquidator incurs bona fide expenses in furtherance of fiduciary duties prior to being replaced, equitable reimbursement of those expenses may be ordered. Conclusion: The Court directed reimbursement of the documented expenses (totaling Rs.45,625/-) to the person who had been appointed and had acted as liquidator prior to being replaced. Overall Disposition (derived conclusions) The Adjudicating Authority's order appointing an alternate IP as liquidator by reliance on the IBBI communication of 18.07.2023 was set aside insofar as it displaced the RP. In absence of statutory grounds under Section 34(4) and given the RP's written consent, the RP was directed to be appointed as liquidator. The general IBBI communication could not be treated as a case-specific recommendation under Section 34(4)(b). The person initially appointed and discharged was awarded reimbursement of documented expenses incurred in discharge of fiduciary duties.