Can An Insolvency Professional Be Replaced After Appointment?

An Insolvency Professional (IP) plays a crucial role in the insolvency resolution process, particularly as a Resolution Professional (RP) in the Corporate Insolvency Resolution Process (CIRP). While an IP is appointed to oversee the process, there are circumstances under which an IP can be replaced after their appointment. The process for replacing an IP is governed by provisions under the Insolvency and Bankruptcy Code (IBC) to ensure fairness and transparency during insolvency proceedings.

Can an Insolvency Professional Be Replaced After Appointment?

Circumstances for Replacement:

An IP may be replaced during the insolvency proceedings if certain conditions are met:

• Conflict of Interest: If an IP is found to have a conflict of interest or is biased towards a particular party involved in the insolvency proceedings.
• Non-Performance or Incompetence: If the IP fails to perform their duties effectively or does not act in accordance with the legal requirements of the Insolvency and Bankruptcy Code (IBC).
• Inability to Act: If the IP is unable to continue with their duties due to reasons such as illness, conflict of interest, or other personal or professional reasons.
• Breach of Code of Conduct: If the IP violates the ethical standards or the code of conduct prescribed by the Insolvency and Bankruptcy Board of India (IBBI), they may be removed from their position.
• Lack of Compliance with IBC: Failure to comply with the rules, regulations, or timelines set out in the IBC may also result in the replacement of the IP.

Procedure for Replacement:

The process for replacing an IP in insolvency proceedings involves several key steps:

• Committee of Creditors (CoC) Approval: The Committee of Creditors (CoC) plays a significant role in the appointment and removal of the IP. If the CoC decides that the IP needs to be replaced, a majority vote is required for the decision.
• NCLT Approval: Once the CoC reaches a decision to replace the IP, the decision must be approved by the National Company Law Tribunal (NCLT). The NCLT will assess whether the removal is justified and in the best interest of the insolvency resolution process.
• Appointment of a New IP: After the NCLT’s approval, a new IP will be appointed to take over the responsibilities of the previous IP. This may require the submission of credentials and qualifications of the new IP for approval by the NCLT.

Role of the Insolvency Professional (IP) in the Transition:

The transition process between the old and new IP must be managed carefully to ensure continuity in the resolution process. Key steps include:

• Handing Over of Documents: The outgoing IP is required to hand over all records, documents, and information related to the insolvency proceedings to the new IP.
• Communication to Stakeholders: All stakeholders, including creditors, debtors, and employees, must be informed about the change in the IP.
• Continuity of Proceedings: The new IP must ensure that the insolvency proceedings continue smoothly and that no disruption occurs during the transition period.

Challenges and Legal Safeguards:

Replacing an IP during insolvency proceedings can lead to challenges, including delays in the resolution process and disputes among creditors. To minimize these risks, the IBC lays down clear provisions to protect the integrity of the process. Any change in the IP must be transparent, justified, and carried out in compliance with the prescribed procedures.

Legal Actions and Protections:

• Insolvency and Bankruptcy Code (IBC): The IBC outlines the grounds for removal of an IP and establishes the process for their replacement, ensuring that the interests of all stakeholders are protected. The Committee of Creditors (CoC) and NCLT are the key authorities involved in the process.
• Insolvency and Bankruptcy Board of India (IBBI): The IBBI sets the ethical standards, code of conduct, and qualifications for insolvency professionals. If the IP violates these guidelines, the IBBI has the authority to take action, including disqualifying the IP from acting in insolvency cases.
• Judicial Oversight: The NCLT serves as the judicial body to approve the replacement of an IP. The NCLT ensures that the replacement is in line with the provisions of the IBC and does not disrupt the insolvency resolution process.

Example:

Suppose a company enters insolvency, and the appointed Resolution Professional (RP) has been unable to secure a resolution plan within the stipulated time frame. The creditors feel that the RP has not been diligent in their duties, and there are also concerns about a potential conflict of interest due to their prior relationship with one of the company’s major creditors.

• The Committee of Creditors (CoC), after deliberations, votes in favor of replacing the RP, and a majority vote (at least 66%) is obtained.
• The CoC then submits a request for the change to the NCLT. After reviewing the request and confirming the grounds for removal, the NCLT approves the replacement.
• A new RP is appointed, and the transition is managed by ensuring the smooth transfer of all relevant documents and information to the new RP, allowing the insolvency resolution process to continue without significant disruption.