Madras High Court: The Successful Working Of IBC Rests On Diligence And Integrity Of IRP And RP

The single Judge Bench of Justice N. Seshasayee held:

“It is time the IRPs and the RPs realized that their office is not an office of comfort, but an onerous one for it is on their diligence and integrity the successful working of the IBC rests.”

The bench noted that the obligation to act fairly does not begin with the Committee of Creditors ('CoC), rather it commences when the IRP or RP prepare their statement or the Information Memorandum.

It also emphasized that the interests of all the stakeholders, particularly the operational creditors should be secured. It observed that the operational creditors should have the same access to information as the CoC. While the IBC has taken away the operational creditors' right to decide on their claims, it has not deprived them of their right to be informed.

Background Facts:

National Sewing Thread Co. Ltd. (Petitioner), a public limited company registered under the MSME Act, 2006, was under the Corporate Insolvency Resolution Process under Section 7 of Insolvency and Bankruptcy Code, 2016 ('IBC') due to its failure to service the loan obtained from the Indian Overseas Bank.

From June 2019, the petitioner also failed to pay the electricity charges due to Tamil Nadu Generation and Distribution Corporation Limited ('TANGEDCO'). On 19.01.2022, TANGEDCO issued a Demand Notice claiming Rs. 32 Lakhs as unpaid electricity charges.

The petitioner contended that since the CoC under its commercial wisdom passed the Resolution Plan which also received the NCLT approval, all the outstanding claims or liabilities, not covered by the Plan are extinguished.

The petitioner filed the writ of certiorari and mandamus to quash the Demand Notice issued by TANGEDCO and to further direct it to provide the electricity connection.

Observations by the High Court:

The Madras High Court dismissed the writ petition and stressed the role and responsibilities of the IRP and RP to act fairly and transparently to secure the interests of all the stakeholders, particularly operational creditors.

The Court noted that the IRP and RP must understand the gravity of their responsibilities, as their diligence and integrity are crucial for the effective functioning of the IBC. It held that though the roles of IRP or RP are temporary and filled by freelancing professionals from registered agencies approved by the Insolvency and Bankruptcy Board of India ('IBBI'), they are central to the insolvency process as the quality of information provided by them significantly impacts the decisions of the CoC.

The High Court observed that under the mechanism of IBC, the IRP and RP are tasked with crucial responsibilities at different stages of the insolvency proceedings such as the preparation of a statement of assets and liabilities of the corporate debtor. The said statement is then compiled as an Information Memorandum, vital for both the CoC and the Resolution Applicant to prepare the Resolution Plan.

The High Court observed it is the duty of the IRP or RP to diligently access and utilize information from the suspended Board of the corporate debtor, previous financial statements, and claims submitted following the public notice issued under Sections 13 and 15 to determine the outstanding liabilities of a corporate debtor. Their failure to perform these tasks demonstrates a lack of professionalism and due diligence and can severely impact operational creditors, especially those from MSMEs.

The High Court remarked that fairness in the IBC process starts with the IRP and RP and extends to how the CoC treats operational creditors. It observed that fairness is not determined by the RP or CoC's perceptions but by an impartial assessment by the Adjudicating Authority. Therefore, the act of transparency guided by the assessment of Adjudicating Authority shall not only promote fairness but also act as a safeguard against collusion among the RP, CoC, and the corporate debtor, protecting the rights of operational creditors.

In conclusion, the Madras High Court observed that the CoC, IRP, and RP, as statutory actors, have a duty to maintain transparency in their roles.

Case Title: National Sewing Thread Co. Ltd. vs. Superintending Engineer, TANGEDCO and Anr.

Case No.: W.P. No.29845 of 2022 and WMP.No.29233 of 2022

Counsel for Petitioner: Mr. E. Omprakash, Senior Counsel assisted by Mr.Imayavaramban for M/s.Ramalingam & Associates

Counsel for Respondents: Ms.Keerthana R.Shenoi for Mr.V.Venkata Seshaiya, Standing Counsel for TANGEDCO

Date of Judgment: 07^th June, 2024

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