Madras HC Upholds Circular Allowing Creditor to Recommend Resolution Professional in Application u/s 95 of IBC [Read Order]

The Madras High Court stated that the circular issued by the Insolvency and Bankruptcy Board of India (IBBI) on December 21, 2023, under section 196 of the Insolvency and Bankruptcy Code, 2016 (Code), allowing the creditor to recommend a Resolution Professional in an application filed under Section 95 of the Code, could not be considered to be outside the purview of the Code, particularly Section 97, which states that the IBBI is in charge of selecting the insolvency professional in creditor-initiated insolvency proceedings. This circle increases the overall process's efficiency.

On December 21, 2023, the IBBI sent out a circular to all registered insolvency professionals, IP entities, and IP agencies in accordance with its authority under Section 196 of the Code. 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 circular made clear that the insolvency professional must submit specifics and declarations.

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Ashwani Kumar Bhatia, the petitioners' complaint relates to the circular's paragraph 3, which deals with petitions that are started by creditors. Creditors may suggest an insolvency professional for appointment, and the suggested professional must submit a declaration to the adjudicating authority for review in Part-IV of Form-C under the Personal Guarantors Rules.

The petitioner argued that the creditor lacked the authority to offer a recommendation. Nomination of the Resolution Professional is restricted to the IBBI. The statute is thereby superseded by the contested circular. Due to its inherent prejudice, the creditor's nomination undermines the process's fairness. It was also argued that the IBBI is not given the authority to overrule the IBC's own regulations by section 196 of the code. While acting under Section 196, the IBBI is not permitted to assign its powers to the creditor.

On the contrary, the Respondent argued that the circular only permits the creditor to suggest a Resolution Professional for appointment, and that the Adjudicating Authority alone has the authority to make the appointment. The Code contains no restrictions on the creditor's ability to suggest insolvency specialists.

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According to a single bench of Justice D.Bharatha Chakravarthy, a creditor does not have the authority to suggest an insolvency professional for appointment when they bring an application against a personal guarantor without consulting a resolution professional.

Further observed that in the event that the creditor decides to recommend such a course of action, the circular requires that the adjudicating authority review the information provided by the proposed Insolvency Professional and the declaration in Part-IV of Form-C under the Personal Guarantors Rules.

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. 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 ruled that any negative circumstances, such as possible conflicts of interest or other legitimate reasons that would prevent someone from acting as a facilitator, should be reported by the debtor to the adjudicating body. Section 97(5) of the IBC grants the adjudicating authority the last say, and its decision is appealable.

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While dismissing the petition, the court  concluded that no prejudice is caused to the petitioners or personal guarantors. Consequently, the impugned circular dated 21.12.2023 is neither ultra vires nor in violation of the provisions of the Code.

To Read the full text of the Order CLICK HERE

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