The Insolvency and Bankruptcy Code, enacted in 2016, revolutionized India's approach to corporate insolvency. It established a time-bound process aimed at either reviving financially troubled companies or ensuring an orderly liquidation. This efficient and transparent framework benefits all stakeholders by creating a streamlined approach to resolving financial distress. However, the success of this process hinges on complete information and cooperation by the Corporate Debtor and associated persons. S. 19 of the IBC addresses this critical need by mandating cooperation from key personnel associated with the corporate debtor.
Introduction
The Insolvency and Bankruptcy Code, 2016 (‘IBC’) provides a structured approach to corporate financial distress through the corporate insolvency resolution process (‘CIRP’). Creditors or the company itself can initiate CIRP by filing an application with the adjudicating authority (‘AA’). Upon approval, the next step is the appointment of the interim resolution professional (‘IRP’) under s. 16 of the IBC.
To effectively manage the CIRP, several sections of the IBC are instrumental. S. 18 of the IBC outlines the IRP's duties, which include gathering crucial information about the company's financial health and past operations. This information is vital for determining the company's viability and formulating the resolution plan (‘Plan’). S. 17 of the IBC emphasizes the IRP's role in taking control of the company's affairs from the date of appointment., overseeing the existing management, who are then required to report to the IRP and provide access to necessary documents and records.
S. 19 of the IBC imposes an obligation on former employees, promoters, and anyone who previously held management positions including ex-directors to assist the IRP in managing the affairs of the corporate debtor (‘CD’) during the insolvency proceedings. If cooperation is not forthcoming, s. 19(2) of the IBC empowers the resolution professional (‘RP’) to seek intervention from the AA i.e., the National Company Law Tribunal (‘NCLT’). The NCLT can then issue an order compelling these individuals to comply with the RP's requests.
A successful insolvency resolution hinges on the RP’s ability to fulfil multiple tasks simultaneously. For the RP to achieve this, cooperation from former directors and management personnel is critical, including providing complete access to their accounts, details, and information related to the company in the CIRP. By working together, the RP and those involved with the company can navigate the CIRP more efficiently and pave the way for a successful resolution.
Scope of S. 19 of the IBC
S. 19(1) of the IBC imposes a duty on every worker, employee, and personnel of the CD, including its promoters and all persons associated with the CD's management, to provide all possible cooperation and assistance to the RP in their efforts to manage the operations of the company. When such cooperation and assistance, as required by s. 19(1) of the IBC, are not provided to the RP, the RP has the power under s. 19(2) of the IBC to file an application to the AA for appropriate directions against such erring personnel of the CD to render cooperation and assistance. Further, where an application under s. 19(2) of the IBC is filed before the AA, the AA is required under s. 19(3) of the IBC to issue a direction to such erring officials to cooperate with the RP.
The word ‘personnel’ is used in s. 19 of the IBC includes the directors, managers, key managerial personnel, designated partners, and any other person associated with the management of the CD, i.e., the obligated parties. However, the provision for cooperation to the RP is not limited to the personnel or the promoters of the CD only but also includes ‘any other person’ which is open to interpretation as needed. The NCLT in the case of Ashwini Mehra v. Vinod Kumar Dandona[i] observed that the statutory auditor of the CD is also under an obligation as per s. 19 of the IBC to furnish the documents/information as required by the RP.
Therefore, a plain reading of these provisions clearly defines a well-established mechanism available to the RP that, if used effectively, can ensure cooperation from the obligated parties. The absence of timely and complete cooperation is, without any doubt, one of the key root causes adversely affecting the CIRP of the CD, which can be prevented by timely and effective steps taken by the RP.
In view of the above, a duty is cast upon every officer and personnel of the CD to cooperate with the RP, and the IBC confers powers on the AA to enforce, and even compel the performance of such a duty by passing orders under s. 19(3) of the IBC.
Meaning of Cooperation
The word ‘cooperation’ as contemplated in s. 19 of the IBC is not explicitly defined within the IBC itself, which may lead to interpretative challenges regarding the extent of cooperation required by the RP in performing their duties. Various decisions including Ashwini Mehra (supra), have made it clear that all the obligated parties of the CD are mandated to cooperate with the RP.
However, it is arguable that the meaning of ‘cooperation’ does not necessarily include the sufficiency of information/documents submitted to the RP. A view can be taken that the expression ‘cooperation’ in the context of s. 19 of the IBC refers to the avoidance of deliberate withholding of information or active interference with the RP’s access to information/documents by the personnel of the CD. However, it is also reasonable to argue that the obligated parties cannot be expected to do the impossible; true cooperation is considered to be met when the parties have provided all the documents and information that are available to them, and no further information can be furnished.
The NCLAT took a similar view in the case of Venugopal Dhoot v. Pravin R. Navandar[ii], where the cooperation required by the RP was observed not to include situations when the RP itself could get the information, instead of relying on the obligated parties of the CD.
The word ‘cooperation’ can also be understood in its general sense as acting or operating jointly with others, working together towards the same end. The underlying idea of cooperation can thus be construed to mean working together with a common goal to achieve. Further, it is observed under various decisions that the word cooperation as used in a particular act or scheme should be read and interpreted in the context of the act or scheme.
Given the above, the extent or scope of cooperation as stipulated under the provisions of the IBC can be said to be an inclusive meaning, where the obligated parties are required to cooperate with the RP to complete the CIRP in due time i.e., achieving the common objective of both parties. However, the RP cannot demand cooperation regarding the sufficiency of information or documents already available to them and should act prudently while demanding information from the obligated parties. The RPs are required to function within the provisions of IBC, and therefore should not use the mandating provisions of the s. 19(2) of the IBC to demand cooperation from the obligated parties when they already extend the information or documents. Applications to the AA cannot be used when the RPs deem the information insufficient, but only when the information is not provided, or incomplete.
The Extent of Cooperation Contemplated from the Obligated Parties Under S. 19(2) of the IBC
It is logical to consider that immediately after the commencement of the CIRP, the RP would require cooperation from the obligated parties. It has been observed in various cases that RP, after their appointment requires cooperation from the necessary personnel in verifying claims, as well as in valuation, and preparing information memorandum which later provides a baseline to the Committee of Creditors (‘CoC’) for their decision making. This becomes particularly critical when the CoC decides to replace the RP with the appointment of a new RP and to smoothen this transition, the information and documents sought by the outgoing RP should be provided effectively to save time and money.
The right of the RP/IRP to collect information from the obligated parties of the CD is not limited to time-barring provisions of the IBC having a fixed look-back period. Instead, the scope of s. 19 of the IBC application is broad, thus any information pertaining to any number of years as required must be provided. This point was discussed by the NCLT in the case of In re Oasis Agro Infra Ltd.[iii], where it was held that the time limit of two years imposed on the RP under s. 18 of the IBC creates no right in ex-management to deny any information pertaining prior to two years.
Further, in cases where the cooperation is extended as per the provisions, but the documents sought are incomplete or do not adequately address the requirements of the RP, then an application under s. 19(2) of the IBC can still be filed by the RP. The RP has the right to directly communicate with the obligated parties for any clarification or approach the AA and seek direction as required. It is upon the AA to review the merits of the application under s. 19(2) of the IBC and decide whether the cooperation, as used in the provision, is fulfilled or not.
Notwithstanding the above, the application of s. 19(2) of the IBC cannot be initiated against the personnel of the CD for not assisting the RP in taking any action for recovery of dues from debtors, as this falls outside the scope of the provision of s. 19 of the IBC. This point was reiterated in the decision of NCLT in Mahesh Sureka v. Minesh Prints Limited[iv], where the RP had filed an application for assistance from the suspended directors in the recovery of dues from the debtors. The NCLT observed that the recovery of dues does not fall under the extent of cooperation as provided under the provision of s. 19(2) of the IBC.
Consequence of Non-Compliance
From the above discussion, it is clear that the obligated parties of the CD are duty-bound to cooperate with the RP, and in cases of non-compliance, the RP can file an application under s. 19(2) of the IBC before the AA. Further, if the non-cooperation persists after the order of the AA, then the operation of s. 70 of the IBC is applicable.
S. 70 of the IBC prescribes that if obligated parties of the CD do not cooperate with the RP, then such persons are subject to punishment, which includes imprisonment for at least three years that may extend up to five years, or a fine ranging from Rs. 1 lakh to Rs. 1 crore, or both. Additionally, it is also prescribed that if the information or document provided is incomplete, i.e., if there is partial compliance with the provisions of the IBC, then the application of the provision of s. 70 of the IBC is also permitted.
In the case of Ashwini Mehra (supra), the tribunal had observed that in the absence of cooperation, powers have been conferred on the AA to take appropriate action. It was further observed that once non-cooperation is established, the operation of the provisions of s. 70 of the IBC is almost automatic.
However, a distinguishing view was taken by the NCLAT in the case of Venugopal Dhoot (supra), wherein it was observed that ex-directors of the CD cannot be held responsible for the non-availability of documents when the RP itself could have obtained information sought from the relevant parties of the CD under his control.
Conclusion
The provisions of s. 19 of the IBC are extremely crucial for the CD as well as its stakeholders with their efficacy greatly dependent on the level of cooperation extended by the obligated parties to the RP. Any non-cooperation can adversely affect not only the efficacy of the provision of the IBC but also the CIRP impacting all parties involved. Further, the COC and other stakeholders must monitor whether the RP is receiving timely and full cooperation from the obligated parties and whether effective and timely steps are being taken by the RP in the CIRP.
S. 19 of the IBC serves as a vital cog in the CIRP. By mandating cooperation, it fosters transparency, facilitates restructuring, and protects creditor rights. However, there is scope for further refinement to enhance its effectiveness and address potential shortcomings. The scope of ‘cooperation’ as per s. 19(2) of the IBC is not clearly defined under the IBC and could be further delineated to provide clarity to both the RP and the obligated parties in performing their duties. Nevertheless, there is a need for balance between ensuring cooperation and protecting the rights of the individuals associated with the CD.
The provision of s. 19 of the IBC should not be misused by the RP, or even the obligated parties of the CD, and should be interpreted in a way that does not defeat its purpose, which is broad, including complete access to all the information yet reasonably restricted. The reasonable restrictions can only be imposed through clarification or precedents, which may vary on a case-to-case basis. Applications under s.19 of the IBC should be filed only in cases of non-compliance or partial compliance from the obligated parties, and not when full access to information is provided and the RP still deems there to be non-cooperation from the obligated parties. The purpose of the CIRP process should not be undermined by such applications, and thus the powers and scope of s. 19 of the IBC should not be misused or even abused by the parties, including the RP and the obligated parties of the CD.
End Notes
[i] 2019 SCC OnLine NCLT 10445
[ii] 2021 SCC OnLine NCLAT 1562
[iii] 2018 SCC OnLine NCLT 2244
[iv] 2024 SCC OnLine NCLT 13
Authored by Maarij Ahmad, Associate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion