Introduction
The Hon’ble High Court of Bombay (‘BHC’) in its judgment of Amit Gupta v. Insolvency and Bankruptcy Board of India & Ors.[i] addressed an issue as to whether the Circular issued on 28.09.2023 (‘Impugned Circular’) by the Insolvency and Bankruptcy Board of India (‘IBBI/ Respondent No.1’). The BHC examined whether the circular merely clarifies regulations or introduces substantive amendments, impacting past and ongoing liquidation assignments. The Impugned Circular was intended to explain the specific terms in reg. 4(2)(b) of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (‘LP Regulations’). The contention before the BHC was whether the Impugned Circular exceeded the LP Regulations' scope and introduced amendments that were ultra vires.
Facts
The petitioner, a chartered accountant and registered as an insolvency professional (‘IP’) with IBBI. Petitioner acted as a liquidator for several companies undergoing the corporate insolvency resolution process (‘CIRP’) under the Insolvency and Bankruptcy Code, 2016 (‘IBC’).
IBBI issued a first show cause notice (‘SCN’) to the petitioner on 14.03.2023, alleging overcharging of fees during the liquidation of Hindustan Dorr Oliver Limited (‘HDOL’). The petitioner responded and subsequently attended a personal hearing. Rather than concluding the matter, the IBBI's Disciplinary Committee decided to conduct a broader inspection of the petitioner's assignments.
Thereafter, the IBBI issued the Impugned Circular, invoking s. 196 of the IBC. This circular aimed to clarify the interpretation of the terms ‘amount realised,’ ‘other liquidation costs,’ and ‘amount distributed to stakeholders’ as used in reg. 4(2)(b) of the LP Regulations, along with clarifying the calculation for determining fees related to realization and distribution.
After the Final Inspection Report, IBBI issued a second SCN on 04.12.2023, finding fault in eight liquidation assignments and alleging excessive fees in liquidating a company named HDOL. Despite the Impugned Circular being published after the Final Inspection Report and the questioned actions of the petitioner happening before its issuance, this notice used the circular to interpret reg. 4(2)(b) of the LP Regulations.
Aggrieved by these actions, the petitioner approached the BHC challenging the Impugned Circular on the grounds of whether it merely clarifies regulations or introduces substantive amendments, impacting past and ongoing liquidation assignments.
Held
The BHC struck down paragraphs 2.1 and 2.5 of the Impugned Circular as being ultra vires as they made significant changes under the guise of providing clarifications and introduced substantive amendments without following due process, contravening the IBC and LP Regulations. The BHC further held that the IBBI could not use these paragraphs during the quasi-judicial proceedings to determine if the fees charged by the petitioner were excessively high.
The BHC upheld Paragraph 2.2 of the Impugned Circular affirming it did not introduce any new rules and merely clarified the legal interpretation of ‘liquidation cost’ as stated in s. 5(16) of the IBC along with reg. 2(1) (ea) of the LP Regulations. It determined that the details in this regulation provided examples of what could be included under ‘liquidation cost’ as defined by the term ‘any cost incurred.’
The paragraphs 2.3 and 2.4 were also upheld by the BHC. The BHC observed that the payments made to those doing business with the corporate debtor to keep the company operational during liquidation did not count as a distribution to stakeholders from the proceeds of realisation. These payments were classified as ‘liquidation costs’ and were given priority over other claims.
The BHC explained that if a business counterparty had chosen to wait and be paid through the standard order of payment during liquidation (the waterfall mechanism), they may be considered an operational creditor who is a stakeholder entitled to a share of the liquidation proceeds. However, a counterparty receiving payments for services rendered while the business was still operational during liquidation, and prioritized over others because these were classified as ‘liquidation costs,’ would not be regarded as a ‘stakeholder’ awaiting distribution of the realized liquidation proceeds. Thus, any application of Paragraphs 2.3 and 2.4 in proceedings must align with this legal clarification.
The BHC expressed no opinion on how the petitioner managed the eight liquidation assignments and advised the petitioner to present his arguments and evidence before the IBBI, which acts in a quasi-judicial role. The IBBI will then consider the facts of the case and make decisions based on the law as stated in this judgment.
Additionally, the BHC found allegations in the second SCN unrelated to the Impugned Circular, holding they must be adjudicated on their own merit in accordance with the law.
Lastly, the BHC stated that IBBI must discharge the first SCN as it has essentially been subsumed with the second SCN in terms of substance and content. Having multiple proceedings on the same issue before the same regulator against the same party based on the same facts was inappropriate. The BHC directed IBBI to issue a written communication regarding the coverage of both the SCNs and aim to resolve the proceedings as expeditiously as possible and in compliance with the law.
Our Analysis
This judgement passed by the BHC underscores the importance of distinguishing between clarifications and substantive amendments in regulatory circulars. It highlights the necessity for regulatory bodies like the IBBI to follow due process and statutory requirements when introducing changes to regulations. The decision provides clarity on the treatment of liquidation costs and distribution of proceeds, ensuring consistency with the IBC and LP Regulations. By striking down certain provisions of the Impugned Circular, the BHC safeguards against arbitrary regulatory actions that could impact insolvency proceedings and IP practices. The ruling emphasizes the need for clear and precise drafting of regulatory guidelines to prevent confusion and ensure adherence to legal frameworks.
End Note
[i] 2024 SCC OnLine Bom 989 [04.04.2024]
Authored by Pratima Ajmera, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.