Filing Petition U/S 94 Of IBC By Guarantor Through RP Does Not Preclude Financial Creditors From Seeking Replacement Of RP: NCLAT

Brief Facts

This Appeal has been filed by Personal Guarantor of the Corporate Debtor challenging order dated 10.09.2024 passed by the NCLT. The Adjudicating Authority while passing order on application under Section 98 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the “IBC”) has partly allowed application – IA No.1904 of 2024 filed by the Financial Creditor for replacement of Resolution Professional (“RP”) – Mr. Prabhat Ranjan Singh. Prayer (B) made in the application was rejected.

The Appellant through Mr. Prabhat Ranjan Singh herein filed an application under Section 94 (1) of the IBC for insolvency resolution process of the Appellant. The NCLT issued notice to IBBI and after obtaining confirmation from the IBBI, the Adjudicating Authority appointed Prabhat Ranjan Singh as RP and by order dated 06.12.2023, directed the RP to submit a Report in terms of Section 99 of IBC. A Report was submitted by the RP on 14.02.2024.

IA No.1904 of 2024 was filed by the Financial Creditor on 28.02.2024 in which replacement of the RP was sought. The Adjudicating Authority allowed the application for replacement of the RP by the impugned order. Challenging the order passed by the Adjudicating Authority, this Appeal has been filed by the Personal Guarantor.

Contentions

The appellant submitted that Personal Guarantor has been granted a vested right to file a Section 94 petition through a RP and that there is no material to indicate that RP is not an independent or a biased. The RP, who was proposed by the Appellant and appointed by the NCLT is fully eligible in terms of Regulation 4 of IBBI (Insolvency Resolution Process for Personal Guarantors of Corporate Debtors) Regulations, 2019. The RP is not an associate of the guarantor, nor related party. Hence, no eligibility is attached to Respondent No.2.

That RP has only extended legal services to the Personal Guarantor and there is no material to indicate that RP has given advice, direction or instruction to Personal Guarantor, who is accustomed to act accordingly.

Per contra, the respondents submitted that the RP, has been representing the Corporate Debtor of which the Appellant is a Personal Guarantor in arbitration arising out of the same debt and is not an independent person to be entrusted with insolvency resolution process of the Appellant.

That the Adjudicating Authority in the impugned order, after noticing the order dated 25.01.2017 of High Court of Delhi, which indicated that Prabhat Ranjan Singh has appeared for judgment debtor, which reason was found to be valid for change or to replace the RP.

NCLAT's Analysis

The tribunal, at the outset, referred to the provisions related to replacement of the RP and observed that the order impugned has been passed by the Adjudicating Authority under Section 98 of the IBC. Section 98, sub-section (1) entitles both the debtor or the creditor to apply to the Adjudicating Authority for the replacement of such RP, where the debtor or creditor is of the opinion that RP appointed under Section 97 is required to be replaced. Section 98, sub-section (1) does not contain or enumerate grounds, on which replacement can be asked for.

The tribunal further noted that the statutory provision only requires “Where the debtor or the creditor is of the opinion…”. Although, the opinion to be formed under Section 98, sub-section (1) is subjective opinion of the debtor or the creditor, which may entitle them to make an application for replacement of RP, it goes without saying that opinion should be founded on rational basis and objective consideration.

Based on the above law, the tribunal observed that formation of opinion by the Financial Creditor on the ground that RP, who has represented the Corporate Debtor and the Personal Guarantor in the dispute between parties arising out of the same debt, cannot be said to be an irrational ground, to form an opinion under Section 98 therefore the Financial Creditor was right in filing an application for replacement of the RP. The scheme of Section 98, does not require that a particular ground has to be proved by debtor or creditor seeking replacement of the RP.

The tribunal further rejected the contention of the appellant that section 94 of the IBC provides a vested right to debtor to initiate insolvency resolution process therefore the replacement of the RP should not be allowed.

The tribunal observed that the debtor is fully entitled to initiate the insolvency resolution process, either personally or through RP. The Appellant, thus, was fully entitled to initiate the insolvency resolution process through RP, as was done in the present case. But, the stage under Section 98 sub-section (1) is subsequent to appointment of RP under Section 97.

The tribunal further noted that Prabhat Ranjan Singh, was appointed by the Adjudicating Authority by order dated 06.12.2023 as per Section 97 of the IBC. The fact that application was filed by the Appellant through RP under Section 94, does not give any indefensible right to the Appellant to claim that said RP cannot be replaced. Under the scheme of the IBC, replacement of RP is at a different stage, which comes subsequent to appointment of RP under Section 97. The fact that application was filed by the Appellant through RP is immaterial for the purpose of Section 98(1).

The tribunal concluded that Adjudicating Authority did not commit any error in allowing the application filed by the Financial Creditor for replacement of the RP. Accordingly, the present appeal was dismissed.

Case Title: Mr. Vinay Rai (Personal Guarantor) v. Technology Development Board and Ors.

Case Reference: Company Appeal (AT) (Insolvency) No. 1891 of 2024

Judgment Date: 08/11/2024

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