2025 (12) TMI 240 - AT - IBC

CoC Alone Can Choose Liquidator Under IBC Sections 34(1), 34(4)(c) and 27, Adjudicator Only Confirms

Omkara Asset Reconstruction Private Limited Versus Amit Vijay Karia Erstwhile Resolution Professional of Chinar Realty Private Limited and Mohd. Raees Sheikh and The Committee of Creditors of Chinar Retails and Infrastructure Private Limited through Omkara Asset Reconstruction Private Limited Versus Amit Vijay Karia and Mayuri Daga

The Appellate Tribunal held that under Sec. 34(1) read with Sec. 34(4)(c) of the IBC, only the CoC is competent to select the replacement RP to act as ... Authority of CoC and the Adjudicating Authority to appoint the liquidator - HELD THAT:- In terms of Sec. 34(1), the RP, who may either be the IRP originally appointed or replaced under Sec. 22 or the one who may have stepped in under Sec. 27 IBC, will be the liquidator provided the RP has given his/its consent to be the liquidator. The point is, merely because a certain RP did not give his consent to be the liquidator, implies that the Adjudicating Authority should have the exclusive authority to replace an unwilling resolution professional with the one of it’s choice? Now, if the second part of Sec. 34(1) and Sec. 34(4)(c) is read carefully, it only has authorised the Adjudicating Authority to replace the resolution professional and not to appoint a liquidator. But, the authority to replace the resolution professional is left to the CoC under Sec. 27 as per the procedure contemplated therein. Even in terms of Sec. 27, the Adjudicating Authority appoints only that RP whom the CoC has chosen, subject only to the confirmation by the Board. Therefore, replacement of RP within the meaning of Sec. 34(1) read with Sec. 34(4)(c) can be done only as per the procedure contemplated in Sec. 27. There is little hesitation in holding that only CoC has the authority to select the candidate for replacing the RP for the purposes of Sec. 34(4)(c) of the IBC, even though the authority to formally appoint such RP as selected by the procedure contemplated in Sec. 27 IBC rests with the Adjudicating Authority. Turning to the facts of the present case, the CoC has chosen to appoint a new liquidator without reference to the willingness or unwillingness of the RP - On facts, the Minutes of the Meetings of the CoC in which the RP was replaced, neither speaks of any unwillingness of the erstwhile RP nor about the need to comply with the circular of the IBBI dated 18.07.2023. This however, need not halt this tribunal from approving the choice of M/s Stress Credit Resolution Pvt Ltd (SCRIL) which the CoC has made for being the liquidator. It has been held earlier that the right to replace the for the purposes of Sec. 34(1) rests with the CoC and that Sec. 27 is required to be followed. Therefore, the only requirement is that one whom the CoC has now named as a liquidator (M/s Stress Credit Resolution Pvt Ltd (SCRIL), can only be a RP and its nomination must now be confirmed by the Board. And once the Board approves it, M/s Stress Credit Resolution Pvt Ltd (SCRIL) is required to be appointed as a liquidator by the Adjudicating Authority. The Orders of the Adjudicating Authority (National Company Law Tribunal, Indore Bench) are set aside - appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether, under the statutory scheme of the Insolvency and Bankruptcy Code, the authority to select and appoint a liquidator upon commencement of liquidation lies with the committee of creditors or with the Adjudicating Authority. 1.2 How Sections 7, 9, 10, 16, 22, 27 and 34 of the Insolvency and Bankruptcy Code, read with Regulation 31A(11) of the IBBI (Liquidation Process) Regulations, 2016, allocate roles between the committee of creditors, the Board and the Adjudicating Authority in the appointment or replacement of the interim resolution professional, resolution professional and liquidator. 1.3 Whether the Adjudicating Authority possesses any independent or residual power to appoint or replace a resolution professional or liquidator in situations involving fraud, gross misconduct or collusion between the resolution professional/liquidator and the committee of creditors or stakeholders. 1.4 On the facts of the case, whether the Adjudicating Authority was justified in appointing liquidators of its own choice, disregarding the candidate proposed by the committee of creditors, and what directions ought to follow for appointment of the liquidator. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2: Allocation of authority between CoC and Adjudicating Authority for appointment/replacement of IRP, RP and liquidator under the IBC framework Legal framework as discussed 2.1 The Court examined the scheme of the Insolvency and Bankruptcy Code from the stage of appointment of an interim resolution professional, referring specifically to Sections 7(3)(b), 9(4), 10, 16, 22, 27 and 34 of the Code, and to Regulation 31A(11) of the IBBI (Liquidation Process) Regulations, 2016. 2.2 Under Sections 7(3)(b), 9(4) and 10, the petitioner (financial creditor, operational creditor or corporate debtor, as the case may be) has the choice to recommend an interim resolution professional. Section 16 governs appointment of the interim resolution professional by the Adjudicating Authority, including cases where no interim resolution professional is proposed (Section 16(3)). 2.3 Section 22 empowers the committee of creditors to (a) confirm the interim resolution professional as resolution professional or (b) replace the interim resolution professional with another resolution professional of its choice, subject to written consent and confirmation by the Board. 2.4 Section 27 enables the committee of creditors to replace the resolution professional at any stage, by forwarding the name of another resolution professional with his written consent to the Adjudicating Authority for appointment, subject to confirmation by the Board; no reasons are required to be furnished for such replacement. 2.5 Section 34(1) provides that, upon passing an order for liquidation, 'the resolution professional appointed for the corporate insolvency resolution process ... shall, subject to submission of a written consent ... act as the liquidator ... unless replaced by the Adjudicating Authority under sub-section (4).' Section 34(4)(c) refers, inter alia, to a situation where 'the resolution professional fails to submit written consent under sub-section (1).' 2.6 Regulation 31A(11) of the IBBI (Liquidation Process) Regulations, 2016 provides that the consultation committee may, by majority, propose to replace the liquidator and shall apply to the Adjudicating Authority for such replacement after obtaining the written consent of the proposed liquidator. Interpretation and reasoning 2.7 The Court drew a distinction between (i) selection of an insolvency professional (IRP/RP/liquidator) and (ii) formal appointment by the Adjudicating Authority. It held that the Code consciously separates the selection process from the act of appointment: selection is entrusted to the petitioning creditor/debtor or the committee of creditors (and in some cases to the Board), while the Adjudicating Authority is confined to making the formal appointment of the person so selected. 2.8 Analysing Sections 7, 9, 10 and 16, the Court observed that the Adjudicating Authority is nowhere given an independent authority to select an interim resolution professional of its own choice. Even when the recommended interim resolution professional faces disciplinary proceedings, the Code mandates dismissal of the petition or recourse to a recommendation from the Board, but does not authorise the Adjudicating Authority to choose an interim resolution professional independently. 2.9 From this scheme, the Court inferred a legislative intent to exclude the Adjudicating Authority from the selection process for the interim resolution professional and to deny it any veto over the petitioner's or the Board's choice, limiting its role to formal appointment of the professional so selected and approved. 2.10 At the next stage, under Section 22, the committee of creditors has the exclusive choice to either retain the interim resolution professional as resolution professional or to replace him with another resolution professional. The requirement of written consent of the proposed resolution professional and confirmation by the Board was characterised as procedural; the Adjudicating Authority neither participates in the selection nor overrides the committee of creditors' decision, save for an interim arrangement where the Board's confirmation is delayed. 2.11 Section 27 continues the same pattern: the committee of creditors alone chooses the replacement resolution professional; the Adjudicating Authority only appoints the professional so chosen, subject to confirmation by the Board. The Code does not require the committee of creditors to provide reasons for replacement, underscoring its primacy in the selection process. 2.12 Turning to Section 34(1) and Section 34(4)(c), the Court rejected the construction that the Adjudicating Authority has an exclusive power to select a liquidator whenever the existing resolution professional does not consent to act as liquidator. The Court emphasised that Section 34(1) merely provides that the resolution professional 'shall ... act as the liquidator ... unless replaced by the Adjudicating Authority under sub-section (4)'; this language confers on the Adjudicating Authority a power of replacement, but not a power of initial selection contrary to the statutory scheme. 2.13 The Court held that 'replacement of the resolution professional' in Section 34(1) read with Section 34(4)(c) must be understood in light of Section 27: the authority to select the replacement resolution professional (who may then act as liquidator) rests with the committee of creditors, while the Adjudicating Authority's role remains to formally appoint the person so selected after Board confirmation. 2.14 Any interpretation that would allow the Adjudicating Authority, in the specific situation where the existing resolution professional refuses consent to act as liquidator, to appoint a liquidator of its own choice, was considered anomalous and inconsistent with the broader legislative design which, at all other stages, denies the Adjudicating Authority an independent selecting role. 2.15 The Court accordingly read Section 34 harmoniously with Sections 22 and 27, holding that the Code does not carve out an exception at the liquidation stage to confer upon the Adjudicating Authority an overarching power to choose a liquidator in preference to the committee of creditors' nominee. Conclusions on Issues 1 & 2 2.16 The authority to select and propose the person who will act as liquidator upon liquidation lies with the committee of creditors (by application of Section 27 procedures), and not with the Adjudicating Authority. 2.17 The Adjudicating Authority's power under Section 34(1) read with Section 34(4)(c) is confined to formally replacing and appointing the resolution professional/liquidator chosen in accordance with the statutory procedure; it does not include an independent power to select a liquidator of its own choice. 2.18 Regulation 31A(11) reinforces the position that stakeholder bodies (consultation committee/CoC) may propose replacement of a liquidator and that the Adjudicating Authority acts on such proposal; it does not vest any original power of selection in the Adjudicating Authority. Issue 3: Residual or inherent power of Adjudicating Authority in cases of fraud, misconduct or collusion Legal framework as discussed 3.1 The Court did not identify an express Code provision authorising the Adjudicating Authority to independently select a resolution professional or liquidator in situations of fraud or collusion. However, it considered the general principles flowing from the constitutional role of judicial fora and referred incidentally to Rule 11 of the NCLT and NCLAT Rules as reflecting inherent powers. Interpretation and reasoning 3.2 The Court recognised that the IBC assigns a minimal and largely formal role to the Adjudicating Authority in the selection and appointment of insolvency professionals, but held that this does not denude the tribunal of its core judicial function to prevent abuse of process and 'fraud on the statute.' 3.3 It identified a 'solitary circumstance' where the Adjudicating Authority may have to act independently of the committee of creditors or the stakeholders' consultation committee: where it has reason to believe, on the basis of tangible and incontrovertible facts, that the resolution professional or liquidator has committed gross misconduct, in connivance or collusion with the committee of creditors or consultation committee, thereby compromising the integrity of the resolution or liquidation process. 3.4 In such a scenario, the Court reasoned that it would be futile and contrary to the public interest for the Adjudicating Authority to rely on the same compromised bodies (CoC/SCC) to propose replacement, since their collusion is part of the mischief. To insist on their initiative would, in effect, compel the tribunal to remain a 'mute spectator' to a fraud on the statute. 3.5 Drawing on constitutional and jurisprudential principles, and illustrative dicta from other jurisdictions and contexts, the Court affirmed that no judicial forum can justifiably abdicate its duty to intervene where procedural actors subvert statutory purpose through collusion or misconduct. The power to arrest statutory frauds is inherent in the judicial system and does not depend on express statutory conferment. Conclusions on Issue 3 3.6 As a rule, the Adjudicating Authority has no original role in selecting a resolution professional or liquidator and must respect the choices made by the committee of creditors and confirmed by the Board, appointing them in terms of the Code. 3.7 Exceptionally, where there is credible and incontrovertible material of gross misconduct or fraud by the resolution professional or liquidator in collusion with the committee of creditors or consultation committee, the Adjudicating Authority may, in exercise of its inherent judicial powers, intervene independently to seek or effect replacement to safeguard the integrity of the process. 3.8 This exceptional power does not dilute the general statutory scheme; it operates only to prevent fraud on the statute and preserve public confidence in the insolvency framework. Issue 4: Validity of the Adjudicating Authority's appointment of its own liquidators in the present case and consequential directions Interpretation and reasoning 4.1 On the facts, the committee of creditors in both matters had resolved that the corporate debtor be liquidated and had proposed a particular entity as liquidator, which was not the then acting resolution professional. 4.2 The Adjudicating Authority nevertheless appointed, as liquidator, a different person (the second respondent in each appeal), who was neither the resolution professional appointed during the corporate insolvency resolution process nor the candidate chosen by the committee of creditors. 4.3 The liquidators appointed by the Adjudicating Authority argued that because the existing resolution professionals had not given written consent to act as liquidators under Section 34(1), the Adjudicating Authority had exclusive authority to appoint replacements under Section 34(4)(c), and that neither the committee of creditors nor the stakeholders' consultation committee had any role in appointing a liquidator. 4.4 Applying its interpretation of Sections 27 and 34, the Court rejected this contention. It held that even where the existing resolution professional does not consent to act as liquidator, the selection of a replacement resolution professional (who will function as liquidator) remains with the committee of creditors; the Adjudicating Authority cannot bypass the committee's choice and unilaterally appoint a liquidator of its own preference. 4.5 The Court noted the appellant's explanation that the committee of creditors had initially chosen a person other than the then resolution professional as liquidator in the backdrop of an IBBI circular dated 18.07.2023, which required that the resolution professional and liquidator not be the same. Subsequent to the Tribunal's decision in another matter holding that the IBBI could not override Section 34 by such a circular, the basis for insisting on a different liquidator no longer persisted. 4.6 Although the minutes of the meetings in which the resolution professional was replaced did not explicitly record the IBBI circular or the unwillingness of the erstwhile resolution professional, the Court held that this omission did not bar it from recognising the committee of creditors' present choice of liquidator. It reiterated that the right to replace, for the purposes of Section 34(1), lies with the committee of creditors and that the procedure under Section 27 must be followed. 4.7 The Court clarified that the entity chosen by the committee of creditors as liquidator must first be appointed (or recognised) as resolution professional in the manner contemplated by Section 27 and its nomination confirmed by the Board. Upon such confirmation, that entity would then, under Section 34(1), act as liquidator, and the Adjudicating Authority would be obliged to appoint it as such. Conclusions on Issue 4 4.8 The Adjudicating Authority acted beyond its jurisdiction in appointing liquidators of its own choice and in disregarding the candidate nominated by the committee of creditors; it misapplied Section 34(1) read with Section 34(4)(c) by treating itself as the primary selecting authority for the liquidator. 4.9 The authority to select the replacement resolution professional, who would then act as liquidator under Section 34(1), rests with the committee of creditors, and the Adjudicating Authority's role is limited to formal appointment of that person after confirmation by the Board. 4.10 The orders of the Adjudicating Authority appointing its own nominees as liquidators stand set aside. Upon confirmation by the Board of the entity chosen by the committee of creditors, the Adjudicating Authority is required to appoint that entity as the liquidator in accordance with the Code.