2025 (12) TMI 231 - AT - IBC

RP Replacement Order Set Aside for Violating Natural Justice and s.27 IBC Despite Maintainable s.60(5) Application

NCLAT (Chennai) allowed the appeal filed by the Resolution Professional, holding that the order of the Adjudicating Authority directing his replacement ... Replacement of Resolution Professional - Violation of the Principles of Natural Justice - Appellant was required to be mandatorily heard, which has not been done prior to passing of the order - violation of adoption of the procedure prescribed under Section 27 of the I & B Code, 2016 - The financial creditor sought his replacement as Resolution Professional on the ground that his attitude and aptitude were found to be non-cooperative. - HELD THAT:- The argument which has been extended by the Appellant in person, is to the effect that as to whether at all an application under Section 60(5) of the I & B Code, 2016, for the nature of relief prayed for could be pressed into particularly, when it related to the prayer for replacement of the Resolution Professional, which has to be resorted to in the light of the provisions contained under Section 27 of the I & B Code, 2016. But it cannot be oblivious of the fact that, in all the earlier communications made by the Respondent, they were consistently requesting the 2nd CoC meeting be conducted to consider their proposal for replacement of RP under the provisions contained under Section 27 of the I & B Code, 2016 and that there was persistent inaction on the part of the Appellant as he was trying to take an advantage of his own inaction so as to continue to function as Resolution Professional. The filing of an application under Section 60(5) of the I & B Code, 2016, would be tenable as the statute does not contain any such contingency that, where the Financial Creditor intends to replace the Resolution Professional, owing to his misconduct or misbehaviour which disrupts the CIRP process, the motion for replacement could be placed in any other manner except for Section 27 of the I & B Code, 2016. Nothing under law holds back the Learned Adjudicating Authority on or even this Appellate Tribunal for the said purpose, to formulate an agenda for replacement of RP as raised in IA(IBC)/917/CHE/2025 in the light of the provisions contained under Section 27 of the I & B Code, 2016, and to place it before the CoC for its consideration. Thus, the only legal lacuna, which the impugned order suffers from, though it is not basically disagree with the spirit and purpose in, which the order has been passed, is the procedural flaw of not placing the Agenda before the CoC, prior to the order of replacement of the Resolution Professional as per Section 27 of the I & B Code - thus, any order, which is to be passed for either replacement or removal of the Resolution Professional as appointed under Section 22 of the I & B Code, 2016, would have a civil consequence and therefore before ousting/replacing the Resolution Professional, was atleast required to be heard before the CoC. The Learned Adjudicating Authority directed to discharge the onus of formulating an Agenda for consideration of replacement of Resolution Professional on its own, in the light of the allegations levelled in the application and to direct it to be placed before the CoC for its consideration in the light of the provisions contained under Section 27(2) of the I & B Code, 2016 - appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the replacement of the resolution professional without prior hearing violated principles of natural justice, given the civil consequences of such an order. 1.2 Whether the replacement of the resolution professional complied with the mandatory procedure prescribed under Section 27 of the Insolvency and Bankruptcy Code, 2016. 1.3 Whether an application under Section 60(5) of the Insolvency and Bankruptcy Code, 2016, is maintainable for seeking replacement of a resolution professional when the resolution professional deliberately avoids placing the agenda for his replacement before the Committee of Creditors. 1.4 Whether the resolution professional, having himself failed to place the agenda of his replacement before the Committee of Creditors, could challenge the impugned order on the ground of non-compliance with Section 27 of the Insolvency and Bankruptcy Code, 2016. 1.5 Whether the Adjudicating Authority (and correspondingly the Appellate Tribunal) can formulate and direct placement of an agenda for replacement of the resolution professional before the Committee of Creditors when the resolution professional fails to do so. 2. ISSUE-WISE DETAILED ANALYSIS 2.1 Principles of natural justice in replacement of resolution professional Interpretation and reasoning: The Court held that any order for replacement or removal of a resolution professional appointed under Section 22 of the Insolvency and Bankruptcy Code, 2016, has civil consequences. Therefore, before ousting or replacing the resolution professional, he was required at least to be heard before the Committee of Creditors. The impugned order was passed without the agenda of replacement being properly placed before the Committee of Creditors and without affording such opportunity. Conclusion: The Court concluded that the manner in which the resolution professional was replaced suffered from violation of principles of natural justice, since he was not properly heard in the CoC forum prior to an order that had civil consequences. 2.2 Compliance with Section 27 of the Insolvency and Bankruptcy Code, 2016 Legal framework: Section 27 of the Insolvency and Bankruptcy Code, 2016, provides that the Committee of Creditors may, during the corporate insolvency resolution process, resolve by at least 66% of voting shares to replace the resolution professional appointed under Section 22 with another resolution professional, subject to written consent of the proposed replacement. The name is then forwarded to the Adjudicating Authority, which forwards it to the Board for confirmation, and appointment follows the manner laid down in Section 16. Interpretation and reasoning: The Court held that, in its strict sense, Section 27 mandates that replacement of a resolution professional can only be effected by a decision of the Committee of Creditors with the requisite majority and prior consent of the proposed resolution professional. In the present matter, the impugned order directed replacement directly, without first placing the agenda before the Committee of Creditors and having the CoC resolve on such replacement in terms of Section 27(2). This constituted a procedural flaw. However, the Court noted that nothing in law restrained the Adjudicating Authority from formulating the agenda on its own and directing the CoC to consider replacement in accordance with Section 27 when apprised that the resolution professional was refusing to place such agenda. Conclusion: The Court held that the impugned order suffered from a legal lacuna in that the mandatory process under Section 27 was not followed, specifically the prior placement of an agenda and decision by the Committee of Creditors. On this ground, the impugned order, insofar as it related to the application seeking replacement of the resolution professional, was quashed, with directions to follow the Section 27 procedure. 2.3 Maintainability of an application under Section 60(5) for replacement of resolution professional Interpretation and reasoning: The resolution professional argued that replacement must be pursued only under Section 27 and that an application under Section 60(5) of the Insolvency and Bankruptcy Code, 2016, was not tenable. The Court observed that the financial creditor had consistently requested that the second CoC meeting be convened to consider an agenda under Section 27 for replacement. Despite directions from the Adjudicating Authority to convene the CoC and place the agenda of change of resolution professional, the resolution professional failed to do so and did not convene the meeting as directed. The Court reasoned that the statute does not impose a bar that, where the financial creditor seeks replacement due to misconduct or misbehaviour, recourse cannot be taken under Section 60(5) when the resolution professional is obstructing the process under Section 27. If the statute is silent as to the forum or modality when faced with such inaction, an aggrieved party cannot be left remediless; Section 60(5) can be invoked to bring the grievance before the Adjudicating Authority. Conclusion: The Court held that the application under Section 60(5) seeking replacement of the resolution professional, in the circumstances where the resolution professional persisted in not placing the agenda before the Committee of Creditors, was maintainable and tenable in law. 2.4 Conduct of the resolution professional and his ability to rely on non-compliance with Section 27 Interpretation and reasoning: The Court found that the financial creditor had, by email communication, requested that the agenda for replacement of the resolution professional be placed before the Committee of Creditors under Section 27. The responsibility to formulate and place the agenda lay with the resolution professional. The Court noted that the resolution professional, knowing that the proposed agenda threatened his continuance, deliberately omitted it from the second CoC meeting agenda while including other items. This amounted to circumventing the provisions of Section 27. In such circumstances, the Court posed the question whether the resolution professional, having failed to discharge his duty to place the agenda, could take advantage of this non-compliance to challenge the impugned order. The Court held that the resolution professional was expected to act fairly and was obliged to place the agenda even when it contained a prayer for his replacement. Having failed to do so, he could not legitimately invoke the very non-compliance he caused as a ground to contend that the replacement order violated Section 27. Conclusion: The Court concluded that the resolution professional, by his own deliberate inaction in not placing the replacement agenda, could not successfully challenge the impugned order on the ground of non-compliance with Section 27, though the Court independently found and rectified the procedural flaw for other legal reasons. 2.5 Power of the Adjudicating Authority/Appellate Tribunal to formulate and direct placement of agenda for replacement of resolution professional Interpretation and reasoning: The Court held that when the Adjudicating Authority is made aware, through an application, that the resolution professional is deliberately not placing the agenda for his replacement under Section 27, nothing in law restrains the Adjudicating Authority from formulating the agenda on its own and directing the Committee of Creditors to consider it in accordance with Section 27 of the Code. The Court extended this reasoning to the Appellate Tribunal, stating that there is no legal bar on either forum formulating the agenda for replacement and ensuring that it is considered by the CoC, so as to give effect to the statutory scheme under Section 27. Considering the peculiar facts and expressly without treating the course adopted as a precedent for other matters, the Court directed the Adjudicating Authority to (i) formulate an agenda for consideration of replacement of the resolution professional in light of the allegations in the relevant interlocutory application, (ii) place it before the Committee of Creditors for consideration under Section 27(2), and (iii) do so within specified timelines using its inherent powers. Conclusion: The Court held that the Adjudicating Authority is empowered, in the circumstances of deliberate inaction by the resolution professional, to itself formulate an agenda for replacement and direct its placement before the Committee of Creditors for decision under Section 27. The impugned order was quashed limited to the procedural defect, and the matter was remitted with directions to follow this course.