Interpreting Bias in the IBC: Lessons from SBI v. Metenere Ltd.

[Eeshan Mohapatra and Shubhaankar Ray are IV year students at NALSAR University of Law Hyderabad] 

The National Company Law Appellate Tribunal (‘NCLAT’) in the recent decision of SBI v. Metenere Limited held that the substitution of an interim resolution professional (‘IRP’) under the Insolvency and Bankruptcy Code, 2016 was valid for the fact that the appointment of the IRP, who was an ex-employee of State Bank of India (‘SBI’), one of the financial creditors in the corporate insolvency resolution process (‘CIRP’), would result in an unfair and biased insolvency procedure.

The issue in the present case arose with respect to the appointment of a proposed IRP by one of the financial creditors in the CIRP, i.e., the SBI. The complaint took its basis on the fact that the proposed IRP, Mr. Shailesh Mishra, was a pensioner of very creditor itself. Therefore, the corporate debtor alleged that the element of bias would creep in if the concerned person was allowed to handle the CIRP.

Based upon such complaints, the NCLAT went on to hold that:

… the apprehension of bias expressed by the ‘Corporate Debtor’… cannot be dismissed offhand and the Adjudicating Authority was perfectly justified in seeking substitution of Mr. Shailesh Verma to ensure that the ‘Corporate Insolvency Resolution Process’ was conducted in a fair and unbiased manner

The NCLAT, in arriving at the above decision, relied upon the rules of interpretation of statutes and read in the element of bias.

An Inconsistent Interpretation

The NCLAT in the present case, dealt with regulation 3(1) of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (‘Regulations’).  The Regulations deal with the eligibility criteria for a prospective IRP and provides:

(1) An insolvency professional shall be eligible to be appointed as a resolution professional for a corporate insolvency resolution process of a corporate debtor if he, and all partners and directors of the insolvency professional entity of which he is a partner or director, are independent of the corporate debtor.

The regulation states that an insolvency professional would be eligible to be appointed for the post of an IRP if they are independent of any ties with the corporate debtor in the relevant CIRP. In the present case, however, the NCLAT inhibited the appointment of Mr. Shailesh Mishra as the proposed IRP on the pretext of the presence of bias for having a potential ‘employer-employee’ relationship with the ‘financial creditor’ in the CIRP. The said finding of the NCLAT was heavily dependent on the interpretation of the Regulations, which appears to be inconsistent with the rules of interpretation as has been established by multiple Supreme Court decisions.

The general rule with respect to the interpretation of the provision of the statutes, as laid down by the Supreme Court in Kanai Lal Sur v. Paramnidhi Sadhukhan, propagates the need for a literal interpretation of provisions. In the said case, the Court stated: “If the words used are capable of one construction only then it would not be open to the courts to adopt any other hypothetical construction on the ground that such hypothetical construction is more consistent with the alleged object and policy of the Act.” The Supreme Court , further, in Union Of India v. Deoki Nandan Aggarwal stated that even if there is a “defect or an omission in the words used by the legislature the Court could not go to its aid to correct or make up the deficiency. Courts shall decide what the law is and not what it should be.”

As mentioned earlier, the Regulations provided that an insolvency professional shall be eligible for the post of IRP if such an individual is independent of any relationship with the ‘corporate debtor.’ A bare reading of the Regulations showcases that they do not prohibit the appointment of an insolvency professional related to parties, other than the Corporate Debtor, in the CIRP. The NCLAT, in its 2018 decision in State Bank of India v. Ram Dev International Ltd., dealt with the eligibility of the appointment of a resolution professional (‘RP’), who was appearing in the panel of one of the members of the committee of creditors (‘CoC’). The NCLAT, in the said case, observed that merely because an IRP has business with the ‘financial creditor,’ like being an advocate or company secretary or chartered accountant, the said qualification cannot be a ground to reject the proposal of his appointment.

The Supreme Court has further stated that, with regards to economic regulations, judicial deference should be given towards the judgment of the legislature. The NCLAT, in the present case, in arriving at its decision, chose a path in excess of its adjudicatory authority. The NCLAT trod upon a route in contravention to Deoki Nandan when it tried to read into the text and make up for the perceived deficiency in the Regulations. In carrying out such an exercise, the NCLAT interpreted the Regulations to decide what the ‘law should be,’ a rulemaking function, instead of interpreting the law as it is. The NCLAT, therefore, on the pretext of bias, took a path inconsistent with the law and established judicial position.

A New Threshold of Bias

The NCLAT ruled that the appointment of Mr. Shailesh Verma as an IRP created a presumption of presence of vested interest towards his ex-employer, i.e., the financial creditor and, therefore, an apprehension of bias on the part of the corporate debtor, Metenere Ltd., could not be ruled out. The NCLAT, in its decision, stated that even though an IRP does not accept or reject any claims, he still needs to carry out his statutory duties in a fair manner. In light of this, his current position as a pension recipient sheds doubt on the fact that he would have no extraneous considerations.

The statutory duties of an IRP, as laid down in section 18 of the Code, range from collecting information of all assets, operations, and finances of the corporate debtor to constituting the CoC. The IRP’s role is to monitor and take control over the assets over which the corporate debtor has ownership rights and also manage the operations of the debtor’s enterprise until an RP is appointed.

The NCLAT relied on Ranjit Thakur v. Union of India to showcase that while evaluating bias, the presence of bias has to be assessed concerning the “mind of the party” involved, in this case the corporate debtor. It is to be noted that the decision of the NCLAT created a new-found basis for evaluating bias in the case of a CIRP under the Code.

While evaluating the presence of bias, the Indian courts have adopted the test of ‘real danger‘ derived from English jurisprudence. The ‘real danger‘ test was formulated, for the first time, in R. v. Gough in which the House of Lords propounded that the test of bias should be one of ‘possibility‘ and not ‘probability.’ The test, as stated by Lord Goff, requires an analysis of all available material as well as ascertainment of the relevant circumstances in any particular case. Following this, the Court would then enquire and evaluate whether the person in question faces any ‘real danger’ in light of the circumstances at hand. The test was further elaborated in Locabail (UK) Ltd. v. Bayfield Properties Ltd. The judgment, placing reliance on Gough, laid down that the test would be applied on a case by case basis and no list of factors which constituted real danger could be devised. 

The Indian judiciary adopted the above principle in Kumaon Mandal Vikas Nigam Ltd. v. Girja Shankar. In the said case, the Supreme Court, while dealing with a question of bias, recorded its concurrence with Locabail. The Court stated that if the conclusion (of bias) is “inescapable that there is existing a real danger of bias, the administrative action cannot be sustained: If on the other hand, the allegations pertaining to bias is rather fanciful and otherwise to avoid a particular Court, Tribunal or authority, question of declaring them to be unsustainable would not arise.”

If one were to assess the factual matrix of the current case with respect to the ‘real danger‘ test to evaluate the presence of bias or not, then the result would be different. Firstly, if one were to evaluate the relevant circumstances surrounding the case, then one needs to acknowledge, as argued by the appellant, that the IRP does not possess the power to decide claims and is, therefore, not an ‘independent umpire’ between the creditors and the corporate debtor. The IRP cannot influence the CIRP substantially but only ensure unhindered facilitation of such a process.

The individual, in the present case, was indeed a pension recipient from SBI. However, he possessed no decision-making powers as he did not sit on any panel of SBI, nor did he handle portfolios and was not on any other decision-making committees either.

Moreover, even at a later stage of the process, if the proposed IRP were to be made the RP, even then his duties, as laid down under section 25 of the Code, would be to ensure facilitation only. Section 28 of the Code puts in place certain limitations on the powers of the RP by listing out a set of actions for which they require prior approval of the CoC. These actions include aspects such as recording of any change in the ownership interest of the corporate debtor.

Secondly, after ascertaining these relevant circumstances, there appears to be no apparent, significant danger of bias to the corporate debtor if the individual in question was to be appointed as an IRP. The individual was only a pension recipient, and not one actively engaged in the day to day activities of SBI. It is to be kept in mind that SBI did not direct the manner of the working of the individual, whether as an insolvency professional or even in his capacity as an IRP for the CIRP. Also, as pointed out in the judgment, there exists no statutory requirement forbidding an ex-employee from becoming an IRP. Moreover, the IRP is only a temporary position, and the individual is subsequently replaced by appointing a different RP if there is any visible discrepancy in the discharge of his duties. Therefore, he cannot make any decisions that may be detrimental to the corporate debtor.

The NCLAT based its decision entirely on the ‘apprehension of bias expressed by the Corporate Debtor’, without evaluating the actual possibility of bias.  Therefore, through this decision, the NCLAT seems to have adopted a rather low threshold towards determining bias in a CIRP, by not evaluating any proper evidence with regard to a potential bias existing.

Concluding Remarks

To conclude, one can say that in arriving at a decision, the NCLAT has transcended its adjudicatory authority and has propounded an interpretation of a regulation inconsistent with the rules of statutory interpretation. Further, the NCLAT has made the approach regarding bias narrower in the Indian context and also allowed the apprehension of bias to formulate a construction of a statutory provision that appears inconsistent with its initial legislative intent.

Eeshan Mohapatra & Shubhaankar Ray

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