Resolution Professional as the Occupier: A Recipe for Disaster?

[Tanish Arora is a 3^rd year B.B.A.LL.B. student at National Law University Odisha]

In December 2023, the Madras High Court in Subrata Monindranath Maity v The State, Represented by Deputy Director, Industrial Safety and Health-II stipulated that a person who is the resolution professional (“RP”) in respect of an establishment is also an occupier under the Factories Act, 1948. Hence, the RP would be liable for the violations and, as a result, proceedings may be instituted against such person in the capacity as an occupier. It was thus decided that the criminal complaints for non-compliance with the provisions of the Factories Act, 1948 were not to be quashed, and the case was sent to be heard by the trial court.

This post seeks to establish that the verdict suffers from the infirmity of not being consistent with the spirit of the Insolvency and Bankruptcy Code, 2016 (“IBC”) by showing the vast differences in the duties in both capacities – as a RP and as an occupier – and sets out the disadvantages of vesting both the responsibilities in one person. Lastly, it proffers a solution to address the question as to who should occupy the role of an occupier while the corporate insolvency resolution process (“CIRP”) is ongoing.

Facts, Contentions and the Subsequent Verdict

The brief factual position is that the petitioner was appointed as the RP and was nominated as an occupier of Bhatia Coke Energy Limited. The factory was inspected on 22 January 2021 and the omissions and defects were notified to the RP. Such violations had been occurring since long before his appointment. On 16 February 2021, a show cause notice was issued granting seven days for reporting compliance. The compliance report was sent after some delay as the RP was undergoing treatment for some health issue. In the meantime, sanction for prosecuting was obtained, but the seven complaints made under section 92 of the Factories Act, 1948 were filed after the compliance report was submitted, which the instant petitions sought be quashed.

The RP contended that he is not deemed to be an occupier as he is appointed by the orders of the National Company Law Tribunal. An argument was also advanced that section 233 of the IBC protects the RPs from being prosecuted criminally for acts done in good faith. Furthermore, there is the protection of moratorium under section 14 of the IBC. Another fact was also raised that there has been non-application of mind while filing the complaint since the submitted compliance report was not considered. On the other hand, the relevant authority  contended that the immunity from prosecution did not extend to criminal acts; rather it was limited to merely the debt-related proceedings, as section 14(3) and the subsequent explanation provides an exclusion for personal acts of the director or representatives of the corporate debtor. Further, it was submitted that the protection of section 233 would not be applicable in the present case as it does not extend to  inaction, which occurred in this case, as the defects and violations noted post-inspection were not rectified.

The Court decided that section 233 is applicable for acts done with the intent of good faith, and that the safety net cannot be extended to encompass inaction under its ambit as well. The control of the business and the property of the corporate debtor is transferred to the RP in terms of section 25 of the IBC. Moreover, section 17 of the IBC further states that the interim RP would manage the company’s affairs from his appointment and there is an automatic suspension of the board of directors. It was held, therefore, that the RP, upon appointment, gets into the shoes of an occupier for the company. Hence, the RP cannot evade the responsibilities and duties under the Factories Act for providing safety measures. Further, since the absolute control of the corporate debtor lies with the RP, he/she is responsible for omissions or violations occurring in his/her capacity as an occupier, and proceedings for the same are not subject to the exceptions under section 233 or Section 14 of the IBC.

Analysis

The verdict of the Madras High Court indicates that the duties and responsibilities conferred on the RP also make him an occupier under the Factories Act. This decision does not mesh with the scheme of the IBC and is untenable if we consider the definition and the duties of both positions. Section 5(27) of the IBC defines the RP as a professional appointed to conduct the CIRP under Part I of the legislation, while under section 2(n) of the Factories Act, 1948 the occupier means a person having complete control over the factory’s affairs. In a corporate entity, the person who is the directing mind having the ultimate control over its affairs is the director of the company. According to the definition of occupier, it can be deduced that a director is to be the occupier, and section 2(n)(ii) of the Factories Act, 1948 provides for exactly the same. Further, the IBC only suspends the powers of the board, but the directors have to continue discharging their duties and obligations in accordance with the relevant laws applicable to the situations. Hence, the RP should not be deemed to be the occupier as he is not the director but instead is an officer of the court appointed by the adjudicating authority to carry out the CIRP. Moving on to the duties, the RP, under Section 25(1) of the IBC, has the “duty to preserve and protect the assets of the corporate debtor, including the continued business operations of the corporate debtor.” On the other hand, the duty of an occupier  is to ensure that “so far as is reasonably practicable, the health, safety and welfare of all workers while they are at work in the factory.” One role requires ensuring that the resolution process is being carried out within the stipulated timelines, while the other role requires a constant physical presence in the factory premises to ensure compliances and safety standards are being followed. Clearly, these two roles are poles apart and a single person cannot be reasonably expected to juggle between them.

Section 12(3) of the IBC states the target timeline for the completion of the CIRP to be 180 days, but the adjudicating authority can grant an extension of 90 days, bringing the total to 270 days. The proviso to this section further provides 330 days as the outer limit for completion of the CIRP, including the time taken for litigation relating to the same. Unfortunately, these timelines are already being exceeded significantly, as the recent June quarter shows, where the records of the past three years were sent tumbling as the average number of days required to reach the resolution reached new unfavourable heights of 643 days. Further, the latest data shows that 67 percent of the ongoing CIRPs missed the deadline of 270 days. Adding the responsibility of occupier on the shoulder of the RP would lead to overburdening and, hence, would actually backfire by further negatively affecting the critical task of manoeuvring the resolution process. In a system already plagued by delays, overburdening key insolvency personnel would worsen the matters, striking at the spirit of IBC, which was enacted with the objective of completing the revival of a company in a strict time bound manner to ensure continuity of business. It must also be considered that the RP is appointed for a temporary period in a defaulting company, which is in distress and is likely to have compliance issues. Hence, the RP would be punished for the acts of the erstwhile management under which the company became bankrupt, which is totally unjust.

Now, a possible solution to the problem of who should hold the post of an occupier during the CIRP is presented. Since the directors have to continue discharging their duties and obligations in accordance with the relevant laws applicable to the situations, the director who was appointed as the occupier should continue in that post and discharge his duties, for which he/she shall be liable. If the RP needs any assistance and cooperation from the concerned director, he will be duty-bound to provide the same. There is a safeguard available with the RPs as they can file applications under section 19(2) of the IBC to compel the resisting directors to assist them. However, if the pre-existing occupier does not inspire the confidence of the RP or repeatedly does not co-operate, the RP should be able to appoint an occupier himself/herself by using the power to appoint a professional under section 20(2)(a) of the IBC which provides that the RP can appoint professionals as the necessity arises for running the business as a going concern. Hence, the post of occupier would be held by a person having knowledge regarding the compliances and the necessary safety requirements, who will be liable for the omissions and violations arising out of the same.

Conclusion

The verdict of the Madras High Court enlarging the scope of the duties of a RP to include the duties of an occupier as well be deeming him/her to hold that position by the virtue of his appointment as the RP does not bode well with the intent behind the enactment of the IBC. It is no secret that time is of the essence while a corporate debtor is undergoing the CIRP. Following this position of law will be a recipe for disaster as it will unnecessarily overburden the RP, which will increase the delays in the completion of CIRP, hence undermining the very spirit behind the enactment of the Code. This decision should be reconsidered and the pre-existing occupier should be allowed to continue in his position, or if that person does not inspire confidence or is non-cooperative, the RP may then appoint a person well-versed with the role of an occupier to carry out the necessary compliances and bear the penal or civil consequences of his acts or omissions, while the RP focuses solely on his duty to resuscitate the corporate debtor.

– Tanish Arora