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Replacement of a Liquidator under the IBC: The End of Independence?

[Sannah Mudbidri is a 3rd year BA LLB (Hons.) student at National Law School of India University, Bangalore]

The landscape of liquidator replacements under the Insolvency and Bankruptcy Code, 2016 (IBC) has witnessed a transformative journey, marked by the historical authority vested in the adjudicating authority and amendments to the Insolvency and Bankruptcy Board of India (IBBI) regulations. This post explores the evolution of the National Company Law Tribunal’s (NCLT) approach to such replacements, from a pre-amendment era characterized by hesitancy to replace a liquidator to a post-amendment phase empowering the Stakeholders Consultation Committee (SCC). By scrutinizing landmark cases and regulatory changes, this post argues for a balanced framework that preserves the independence of the liquidation process.

NCLT Approach Prior to the Amendment Regulations

The NCLT has derived the power to replace a liquidator from section 16 of the General Clauses Act. Since the power to appoint a liquidator is vested in the adjudicating authority under sections 33 and 34 of the IBC, it follows that the power of appointment extends to a power of removal. The tribunal utilised this power to do “substantial justice”. In SBI v. Hanumanta Engineering (P) Ltd., the NCLT took the liberty of replacing the liquidator because an FIR was filed against him. Similarly, in Subrata Moindranath Maity v. UCO Bank, the National Company Law Appellate Tribunal (NCLAT) considered the validity of the removal of the liquidator by the NCLT because he was facing criminal prosecution and deemed such removal valid.

Prior to the IBBI (Liquidation process) (Second Amendment) Regulations, 2021 (Amendment Regulations), the NCLT displayed a clear hesitancy towards allowing a liquidator to be replaced and allowing the erstwhile committee of creditors to interfere with the decision. In BDR Builders & Developers (P) Ltd. v. Mohan Lal Jain, the tribunal denied replacement due to a lack of “exceptional circumstances” or “irregularities” that would have otherwise warranted it. Judgements such as IFCI Limited v. BS Limited and Punjab National Bank v. Kiran Shah have unequivocally stated that the committee of creditors have “no role to play” and cannot move an application for removal of liquidator in the absence of any legal provision allowing the same.

The IBC is silent on conditions under which a liquidator can be replaced. Therefore, the NCLT in IDBI Bank Ltd. v. V. Venkata Sivakumar resorted to section 276 of the Companies Act, 2013. The tribunal outlines five conditions on which the liquidator can be replaced: “(a) misconduct; (b) fraud or misfeasance; (c) professional incompetence or failure to exercise due care and diligence in performance of the powers and functions; (d) inability to act as provisional liquidator or as the case may be, Company Liquidator; (e) conflict of interest or lack of independence during the term of his appointment that would justify removal”. To reiterate, this determination would be made by the adjudicating authority, and the erstwhile committee of creditors (CoC) would have no locus standi to remove the liquidator. This decision was appealed to the NCLAT which upheld the impugned order

The IBBI Liquidation Regulations

The amendment in 2021 to the Liquidation Process Regulations put forward by the IBBI makes changes to the provisions regarding the SCC in regulation 31A. According to the regulations, a liquidator is required to constitute an SCC comprising the creditors of the corporate debtor. In effect, the SCC is a continuation of the CoC. In fact, under the Notification dated 16 September 2022, the CoC functions as the SCC with the same voting rights until the SCC is constituted. Regulation 31A (11) empowers the SCC to propose to replace the liquidator with a 66% majority and file an application for the same with the adjudicating authority with written reasons for the request. This clearly nullifies the NCLT position prior to the regulation and provides the erstwhile CoC in the form of the SCC a recourse through law to replace the liquidator. Thus, NCLT orders prior to 30 September 2021 no longer reflect the correct position of law. The question remains how much discretion should be given to the adjudicating authority to reject such an application. The SCC is required to give written reasons for replacement of a liquidator, but neither the IBC nor the Liquidation Regulations elucidate which reasons would be considered valid and which would be superfluous or deficient.    

The Way Forward

The replacement of a liquidator cannot be treated similarly to the replacement of a resolution professional (RP) during the corporate insolvency resolution process (CIRP). This much is clear even from the provisions themselves. According to section 27 of the IBC, the CoC may propose to replace an RP with a 75% majority after which the adjudicating authority forwards the application to the IBBI for confirmation. In contrast, regulation 31A(11) requires reasons to be recorded, clearly indicating that the decision must not be arbitrary and is subject to scrutiny. Even historically speaking, the liquidator has remained independent from the creditors of a corporate debtor. In terms of the Companies Act, 1956, an Official Liquidator appointed by the Central Government was attached to each High Court to handle the winding up process of companies in liquidation. Such independence is necessary even in the present liquidation process under the IBC because the liquidator is required to act for the benefit of the creditors as a whole. They cannot be held accountable only at the whims of the majority of the stakeholders.

Another key point supporting this assertion is that the final decision of a liquidator is not subject to approval by the CoC (or the SCC as the case may be) whereas the RP still needs the resolution plan to be passed by the CoC before it can be implemented. Clearly, the intent of the IBC was not to have the terms of the liquidation dictated by the creditors. Additionally, if the CoC were allowed to influence the terms of the outcome of liquidation, it would incentivise them to bypass the CIRP and directly wind up the company. The IBC is a beneficial legislation and its goal, as explicitly enunciated in Swiss Ribbon Pvt. Ltd. v. Union of India, is to get the corporate debtor “back on its feet”. It is not merely a recovery mechanism for the creditors.

The same safeguards envisaged in IDBI Bank Ltd. v. V. Venkata Sivakumar should be carried forward even after the liquidation regulations. In fact, the NCLAT upheld the order in Venkata Sivakumar on 20 December 2022 after the implementation of the Liquidation Regulations, thereby bringing the judgement within the present scope. The regulations should be interpreted to allow the SCC to bring any irregularities or divergence from the expected conduct of the liquidator to the notice of the adjudicating authority (through the mandated written reasons), but the final decision should remain with the NCLT to be made within the parameters of the conditions for removal set out in section 276 of the Companies Act. Theoretically, even if the SCC unanimously votes to replace the liquidator, the NCLT should not be bound by this decision or even at liberty to remove the liquidator if not for one of the five conditions set out in V Venkata Sivakumar.

Conclusion

In all, the dynamism of the legal landscape governing the replacement of a liquidator under the IBC reflects the nuanced evolution of regulatory frameworks. The pre-amendment era, characterized by judicial hesitancy and a stringent adherence to exceptional circumstances, gave way to a more participatory role for creditors through the SCC post-Amendment Regulations. However, this blog post posits that the fundamental principles enshrined in V Venkata Sivakumar should endure, ensuring that the final decision lies within the purview of the NCLT.

The delicate balance between creditor involvement and the imperative to maintain the liquidator’s independence, crucial for the equitable distribution of assets, requires meticulous consideration. As the IBC strives to resuscitate corporate debtors and not merely serve as a creditor recovery mechanism, preserving the integrity of the liquidation process remains paramount. This post contends that, despite the newfound powers vested in the SCC, the NCLT should retain the authority to replace a liquidator based on the stipulated conditions, thereby upholding the original spirit of the IBC and ensuring the independence of the liquidator.

Sannah Mudbidri

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