'Facilitates Resolution Process': Madras HC Upholds Circular Allowing Creditor To Recommend Resolution Professional In Application U/S 95 Of IBC

The Madras High Court bench of Justice D.Bharatha Chakravarthy has held that the circular issued by Insolvency and Bankruptcy Board of India (IBBI) on 21.12.2023 under section 196 of the Insolvency and Bankruptcy Code, 2016 (Code), allowing the creditor to recommend the name of a Resolution Professional in an application filed under Section 95 of the Code cannot be deemed ultra vires the provisions of the Code, particularly Section 97, which states that in creditor-initiated insolvency proceedings, the insolvency professional is to be nominated by the IBBI. This circular enhances the efficiency of the entire process. Brief Facts: The IBBI, exercising its powers under Section 196 of the Code, issued a circular on 21.12.2023 to all registered Insolvency Professionals, IP entities, and IP agencies. The circular clarified the requirement for submitting particulars and declarations by the Insolvency Professional in Part-IV, Form-C of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019. The petitioners' grievance is with paragraph 3 of the circular, which applies to creditor-initiated applications. It allows creditors to recommend an Insolvency Professional for appointment and requires the proposed professional to submit a declaration in Part-IV of Form-C under the Personal Guarantors Rules for the Adjudicating Authority's consideration. Contentions: The Petitioner submitted that the creditor does not possess the right to make a recommendation. Only the IBBI is authorized to nominate the Resolution Professional. Therefore, the impugned circular overrides the law. Such a nomination by the creditor is inherently biased, compromising the fairness of the procedure. It was further submitted that a combined reading of Sections 97(3), 97(4), and 97(5) shows that the legislature did not grant the creditor the right to propose a Resolution Professional. Therefore, the circular violates the provisions of the IBC and contradicts the very scheme of the Code. It was also submitted that section 196 of the code does not grant the IBBI the power to override the very provisions of the IBC. The IBBI cannot delegate its power to the creditor while exercising the authority under Section 196 Per contra, the Respondent submitted that the circular only allows the creditor to recommend a Resolution Professional for appointment, while the decision to appoint rests solely with the Adjudicating Authority. There is no bar in the Code preventing the creditor from recommending insolvency professionals. Observations: The Court at the outset noted that in cases where a creditor files an application against a personal guarantor without involving a Resolution Professional, the creditor does not have the discretion to recommend an Insolvency Professional for appointment. It further added that however, if the creditor chooses to make such a recommendation, the circular mandates that the details of the proposed Insolvency Professional, along with the declaration in Part-IV of Form-C under the Personal Guarantors Rules, must be submitted for the adjudicating authority's consideration. The court referred to the judgment of the Supreme Court in Dilip B. Jiwrajka vs. Union of India and Ors where it was held that the Resolution Professional (RP) plays a facilitative role in gathering facts and submitting a recommendatory report to the adjudicating authority. Throughout the process, the debtor has the opportunity to participate. Judicial determination only occurs when the adjudicating authority makes a decision under Section 100. Based on the above, the court held that as the RP's role is to evaluate facts and submit a non-binding report, any claim of inherent bias is unfounded. The creditor's recommendation of an Insolvency Professional from the IBBI panel at the time of filing does not prejudice the debtor. It further said that the role is not that of a decision-making authority, but rather a facilitator. In that case, it is more appropriate for such a person to be someone who is chosen by the parties. In light of the above discussion, it held that there is no inherent illegality in the circular that enables the creditor to recommend the name of the Insolvency Professional to act as the Resolution Professional. Coming to the next issue, the court observed that allowing the creditor to recommend an Insolvency Professional at the outset helps mitigate potential conflicts of interest later, as the Resolution Professional's consent is obtained and their details are recorded in Part IV of the Form, saving time. The court observed that the main issue is whether the procedure outlined in the circular contradicts the intent of Section 97, especially since the statute mandates the adjudicating authority to request the IBBI, which is...

'Facilitates Resolution Process': Madras HC Upholds Circular Allowing Creditor To Recommend Resolution Professional In Application U/S 95 Of IBC

Mohd Malik Chauhan

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Mohd Malik Chauhan

'Facilitates Resolution Process': Madras HC Upholds Circular Allowing Creditor To Recommend Resolution Professional In Application U/S 95 Of IBC

Mohd Malik Chauhan

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Mohd Malik Chauhan

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