NCLT Ousts Resolution Professional Citing ‘Complete Loss of Faith’ Amid Conflict of Interest Allegations

Jaipur, India – In a significant ruling that underscores the judiciary's tightening grip on professional conduct within insolvency proceedings, the Jaipur Bench of the National Company Law Tribunal (NCLT) has ordered the replacement of a Resolution Professional (RP), citing a "complete loss of faith and confidence" due to non-transparent conduct, failure to disclose material relationships, and a manifest conflict of interest. The decision, delivered in the corporate insolvency resolution process (CIRP) of M/s U. N. Automobile Private Limited, serves as a stark reminder of the exacting standards of independence and integrity demanded of insolvency professionals under the Insolvency and Bankruptcy Code, 2016 (IBC).

The Tribunal replaced Mr. Satyendra Prasad Khorania with a new RP, Mr. Arvind Kaushik, and directed the Insolvency & Bankruptcy Board of India (IBBI) to investigate Mr. Khorania's conduct. This move came after the suspended director of the corporate debtor alleged that the RP was acting in collusion with the sole financial creditor, Bank of Baroda, effectively turning the resolution process into a recovery mechanism.

The Core of the Controversy: A Web of Undisclosed Relationships

The application for removal, filed by the erstwhile director of U. N. Automobile, presented a compelling case against the RP's impartiality. The central allegations revolved around Mr. Khorania's deep-rooted professional ties with the Bank of Baroda, which were either concealed or only partially disclosed.

The NCLT's findings revealed that Mr. Khorania was not merely an empanelled professional with the bank, a fact he had partially disclosed. More critically, he was a promoter and director of Enforcement Affiliates Private Limited (EAPL), a company empanelled by the Bank of Baroda as a recovery agent. The Tribunal noted that the RP's registered office and email address were identical to that of EAPL, where he conducted Committee of Creditors (CoC) meetings.

In its detailed analysis, the NCLT bench observed, "The conduct of the present RP in the instant CIRP proceeding seems to be non-transparent by not making complete disclosure of its relationship is in clear violation of the core objectives and principles of the Code, which seeks to ensure fair and transparent insolvency proceedings."

The Tribunal highlighted the inherent contradiction in the RP's position, stating:

"The RP/ IRP wearing different hats before and the CIRP process. He was safeguarding the interest of the Financial Creditor and after the initiation of CIRP process he is expected to act in the best interest of the resolution of the Corporate Debtor as an independent officer of the Court."

This dual role, the NCLT concluded, created an irreconcilable conflict of interest, compromising the integrity of the CIRP. The judgment emphasized that on one hand, an RP must act as a neutral officer of the court to maximize the value of the corporate debtor for all stakeholders; on the other, a recovery agent's sole focus is to secure maximum benefit for the creditor.

A Pattern of Non-Disclosure and Collusion

The Tribunal found that the RP failed to make complete disclosures on multiple occasions as mandated by the IBBI (Insolvency Professionals) Regulations, 2016: first, in his written consent to act as RP (Form-AA); second, during the first CoC meeting; and third, even in his initial reply to the application seeking his removal. A purported disclosure letter dated October 15, 2022, was produced by the RP only in an additional affidavit, which the Tribunal viewed with skepticism, suggesting it was an "ante-dated document" created as an "afterthought to protect the self-interest."

Adding to the evidence of collusion, the NCLT pointed out that the RP had engaged the very same legal counsel who represented the Bank of Baroda in initiating the CIRP and continued to represent the bank in other forums like the DRT and the High Court. "The conduct of Non-Applicant Nos. 1 and 2, including their use of common legal counsel, reflects a clear lack of independence and collusion, undermining the integrity of the CIRP," the order stated.

Ultimately, the Tribunal exercised its inherent powers under Rule 11 of the NCLT Rules, 2016, to replace Mr. Khorania, declaring, "this bench has lost complete faith and confidence in his working... as the Resolution Professional has miserably failed to follow the due process of law." The new RP has been directed to conduct the CIRP afresh, starting with a new public announcement, to ensure the process adheres strictly to the IBC's principles.

Broader Judicial Scrutiny: Supreme Court Rebukes DRT for Delays

The NCLT's robust action in Jaipur aligns with a broader trend of heightened judicial scrutiny over the functioning of tribunals and professionals in financial law. In a separate but thematically related development, the Supreme Court of India recently censured the Debt Recovery Tribunal (DRT) in Dehradun for its failure to adhere to statutory timelines under the SARFAESI Act, 2002.

In the case of Indian Overseas Bank vs. M/s Radhey Infra Solutions (Pvt.) Ltd. & Ors. , a bench of Justices Sanjay Kumar and Alok Aradhe admonished the DRT for indefinitely pending a securitisation application, thereby frustrating the bank's recovery proceedings. The apex court highlighted Section 17(5) of the SARFAESI Act, which mandates the disposal of such applications within 60 days, extendable to a maximum of four months with recorded reasons.

The Supreme Court observed that the DRT had not respected this statutory direction, failing to either decide the matter in time or record reasons for the delay. The Court stated emphatically:

“Once the statute itself mandates that the DRT should dispose of the matter within the stipulated time, it is incumbent upon the DRT, Dehradun, to abide thereby. Further, in the event it fails to do so, the proviso to Section 17(5) ordains that reasons need to be recorded.”

Setting aside a High Court order that had merely noted the statutory provision without issuing a firm directive, the Supreme Court directed the DRT, Dehradun, to "take note of the statutory mandate... and act accordingly without further delay."

Implications for Legal Practitioners and Insolvency Professionals

Together, these two rulings send an unequivocal message to tribunals and professionals operating within India's financial legal framework: adherence to statutory duties, procedural timelines, and ethical codes of conduct is non-negotiable.

For insolvency professionals, the NCLT's order is a critical precedent. It reinforces that even an apprehension of bias can be grounds for removal and that partial or belated disclosures will not be tolerated. The judgment meticulously breaks down the Code of Conduct under the First Schedule of the IBBI (Insolvency Professionals) Regulations, 2016, re-emphasizing the paramount importance of independence, objectivity, and transparency. Professionals must proactively disclose all pecuniary, personal, and professional relationships with any stakeholder at the earliest possible stage, leaving no room for doubt about their impartiality.

For legal counsel, the case serves as a cautionary tale about representing both the RP and a financial creditor in the same CIRP, a practice that tribunals may now view as prima facie evidence of collusion.

The Supreme Court's order, meanwhile, strengthens the hands of financial institutions battling procedural delays at DRTs. It reiterates that the timelines prescribed under specialized statutes like the SARFAESI Act are not merely directory but are meant to be strictly enforced to achieve the legislative intent of speedy resolution. This directive can be cited by litigants to press for expeditious disposal of matters and hold tribunals accountable for delays.

In essence, the judiciary is actively working to fortify the institutional integrity of the insolvency and debt recovery ecosystem, ensuring that these specialized legal processes serve their intended purpose of efficient resolution rather than becoming tools for recovery or endless litigation.