India – NCLT Clarifies That It Is Mandatory For The Management And Officers Of The Corporate Debtor To Cooperate With The IRP/RP During The Corporate Insolvency Resolution Process

The Hon'ble National Company Law Tribunal, Chandigarh(“NCLT”) , in the matter of “M/s Educomp Infrastructure & School Management Limited (Petitioner- Corporate Debtor)” and in the matter of “Mr. Ashwini Mehra, (Resolution Professional) vs. Mr. Vinod Kumar Dandona, Suspended Director & Ors (Respondents). CA No.335/ 2018 in CP (IB) No.10/ Chd/ Hry/ 2018”, held that Section 19 of Insolvency and Bankruptcy Code, 2016 (“Code”) casts an obligation on the Ex-Personnel of the Corporate Debtor, its promoter or any other person associated with the Ex-Management including ex-Directors to extend all assistance and cooperation to interim resolution professional to manage the affairs of the Corporate Debtor.

 

Originally, the Creditor Debtor had moved an application under Section 10 of the Code for initiation of Corporate Insolvency Resolution Process (“CIRP”) against itself under the Code. The said petition was admitted and accordingly Interim Resolution Professional was appointed. Subsequently, a Committee of Creditors was set up and a Resolution Professional (“RP”) was appointed. During the CIRP, the management of the Corporate Debtor failed to grant access to RP regarding list of assets and book of accounts etc. The said RP moved an application before the NCLT praying for the directions to the defaulting personnel to provide information and necessary documents.

 

The Hon'ble NCLT while partly allowing the application of the RP elaborated on the significance of the Section 19 of the Code. Section 19 of the Code which states:-

 

“19. (1) The personnel of the Corporate Debtor, its promoters or any other person associated with the management of the Corporate Debtor shall extend all assistance and cooperation to the interim resolution professional as may be required by him in managing the affairs of the Corporate Debtor.

 

(2) Where any personnel of the Corporate Debtor, its promoter or any other person required to assist or cooperate with the interim resolution professional does not assist or cooperate, the interim resolution professional may make an application to the Adjudicating Authority for necessary directions.

 

(3) The Adjudicating Authority, on receiving an application under sub-section (2), shall by an order, direct such personnel or other person to comply with the instructions of the resolution professional and cooperate with him in collection of information and management of the Corporate Debtor.”

 

NCLT observed that it is evident from Section 19 that besides ex-management, the ex-Directors, collectively or independently, must furnish information and further assist the RP in managing the affairs of the Corporate Debtor. The unrelated parties are out of the scope of the Section 19 of the Code and are not under any obligation to furnish information. It has further been held that the above mentioned provision are mandatory in order to enable the RP to complete the CIRP expeditiously and also manage the affairs of the Corporate Debtor, and therefore, the persons who can cooperate with the IRP/RP and persuade the other managerial personnel to supply the documents, cannot escape their obligation.

 

The Hon'ble NCLT further held that the Statutory Auditor in possession of the financial statements of the Corporate Debtor is under a statutory obligation to furnish the copies of the audited accounts along with schedules and annexures for the specified period to the RP. It was also held that if a Director has retired prior to CIRP, the same is not a good ground to grant exemption from non-submission of requisite details/ information, if any, in his possession, as he would certainly be answerable for any decision taken during his tenure which would have caused financial irregularities. The non-executive Director can persuade the other managerial personnel to supply the documents demanded.

 

Accordingly, the NCLT held that to implement the intention of the Code, the suspended Directors and managerial persons should extend full cooperation, simultaneously furnish information of their accounts and financial facilities availed from various Financial Creditors to the RP. NCLT has further observed that when information are in knowledge and possession of the Directors, they shall be held responsible for non- submission of the information as well as for non- cooperation with the RP as prescribed under Section 19 of the Code, and shall therefore be liable for punishment under Section 70 of the Code.

 

NCLT has also clarified that there is no judicial authority available to RP to seek financial information of a third party/ contractual counterparties of Corporate Debtor and that the inquiry should be limited to business transaction executed between Corporate Debtor and the said party.

 

In view of the above, the application by the RP was partly allowed in the facts and circumstances of the case.