Resolution professional can’t act on behalf of corporate debtor beyond CIRP: Delhi HC

Can a resolution professional (RP) continue to act on behalf of the corporate debtor once the plan is approved and the new management takes over?

The Delhi High Court in a recent order has said that the role of a resolution professional is finite in nature, and that he or she cannot continue to act on behalf of the Corporate Debtor once the Plan is approved and the new management takes over.

“To continue as a resolution professional indefinitely even beyond the approval of the resolution plan would be contrary to the purpose and intent behind appointment of an RP. The RP as the name itself suggests has to be a person who would enable the resolution. The role of the RP is not adjudicatory but administrative in nature. Thus, the RP cannot continue beyond an order under Section 31 of the IBC, as the CIRP comes to an end with a successful resolution plan having been approved,” said the high court in the order.

Facts of the case

This question on RP’s continuity after CIRP is over was posed by a petitioner – Venus Recruiters Private Ltd, a manpower contractor to corporate debtor Bhushan Steel – to the Delhi High Court. Forensic audit by Deloitte Touche Tohmatsu India LLP into the books of Bhushan Steel had found that 10% service charge paid to Venus Recruiters for manpower supply ‘could have been preferential in nature.’

The forensic audit report was submitted to the resolution professional on 3 April 2018, and the RP filed an avoidance application on 9 April, two days before the NCLT reserved its judgment on the resolution plan filed by Tate Steel. On 15 May 2018, the NCLT approved the resolution plan.

The avoidance application, filed on 9 April 2018, was taken up for the first time on 24 July 2018, by the NCLT. A fresh memo of parties was filed in the application by the counsel claiming to be appointed by the ‘Former RP’ on 14 August, 2018. Notice was issued in the avoidance application to the non-applicants. Venus Recruiters was thereafter impleaded and notice was issued to it on 25 October, 2018, upon an application by the RP.

Venus Recruiters then filed a writ petition against the avoidance notice served to it by the NCLT. Arguing in favour of the petitioner, Kapil Sibal made the submission that under the scheme of the Insolvency and Bankruptcy Code (IBC), once the CIRP has reached finality, the RP’s mandate expires and he can no longer file or pursue any application on behalf of the company.

He also argued that the jurisdiction of NCLT cannot extend beyond the approval of the resolution plan. “The NCLT, having disposed of all the pending applications when it delivered the judgment on 15 May 2018, and the new management having come in control of the erstwhile Corporate Debtor, the order issuing notice in an application filed prior to the acceptance of the resolution plan is completely void,” he contended.

Representing the government of India against the petition, Anurag Ahluwalia argued that the NCLT could not have disposed of the entire petition, without dealing with the avoidance application. The application does not come to an end and the timelines to adjudicate on the avoidance transactions can in fact be extended.

Counsel of Tata Steel, the new owner of Bhushan steel, while arguing against the petition submitted that in the Bhushan Steel case, the total recoveries under the resolution plan was only Rs 35,200 crore against the total debt of Rs 59,501 crores. Therefore, he argued that whatever further recoveries are made through vulnerable transactions, the same could also go to the creditors.

Dismissing the pleas made against the petition, the high court, however, said that if an avoidance application for preferential transactions is permitted to be adjudicated beyond the period after the resolution plan is approved, the NCLT would, in effect, be stepping into the shoes of the new management to decide what is good or bad for the Company.

“Once the plan is approved and the new management takes over, it is completely up to the new management to decide whether to continue a transaction or agreement or not. Thus, if the CoC or the RP are of the view that there are any transactions which are objectionable in nature, the order in respect thereof would have to be passed prior to the approval of the resolution plan,” the court said.

It further said that the RP cannot wear the hat of the `Former RP’ and pursue an avoidance application in respect of preferential transactions after the hat of the Corporate Debtor has changed and it no longer remains a Corporate Debtor. This would be wholly impermissible in law as the mandate of the RP has come to an end.