2024 (8) TMI 1154 - HC - Insolvency and Bankruptcy

Suspension of AFA pending adjudication of the show cause notices - Restoration of Authorization for Assignment -validity of Clause 23A provided in the Schedule to the Insolvency and Bankruptcy Board of India (Model Bye-Laws and Governing Board of Insolvency Professional Agencies) Regulations, 2016 - Clause 23A of the Bye-Laws of ICSI Institute of Insolvency Professionals - HELD THAT - Clause 23A provides for suspension of the AFA on initiation of disciplinary proceedings by the agency or by IBBI as the case may be. The Explanation to Clause 23A states that the date of issuance of a show cause notice till its disposal would amount to pendency of a disciplinary proceeding. In other words, issuance of a show cause notice amounts to initiation of such disciplinary proceedings. The validity of Clause 23A was questioned before the Madras High Court in CA V. Venkata Sivakumar 2024 (1) TMI 1284 - MADRAS HIGH COURT . After considering the challenge in detail, the Division Bench held that Clause 23A of the 2016 Regulations was valid and there was no illegality in providing for suspension of an AFA on initiation of disciplinary proceedings. It is found that (a) the 2016 and 2017 Regulations have been framed pursuant to the power conferred by the provisions of the Code and especially Sections 196 and 217 to 220 read with Section 240 of the Code. The same having been laid before both the Houses of the Parliament, they have got statutory force thus empowering the IBBI to take necessary action in accordance therewith. The power includes issuance of a show cause notice by the IBBI for taking any action under Section 220 of the Code. (b) the show cause notices dated 26th October 2023 and 10th April 2024 were preceded by reports of the investigating authority which undertook investigation after being duly authorised by orders passed under Section 218 of the Code. (c) Clause 23A of the 2016 Regulations as well as Clause 23A of the Bye-laws framed by the ICSI Institute of Insolvency Professionals are valid. The suspension of the petitioner s AFA is legal as it is the consequence of initiation of disciplinary proceedings against him. The same is duly provided by Clause 23A of the 2016 Regulations and the Bye-Laws in that regard. Thus, no exceptional case is made out to interfere with the issuance of show cause notices dated 23rd October 2023 and 10th April 2024. The same do not suffer from any jurisdictional infirmity. It is clarified that the observations made in the judgment are only for the purposes of considering the validity of the show cause notices.

Summary

Issues Involved:
1. Validity of the show cause notices dated 26th October 2023 and 10th April 2024.
2. Validity of Clause 23A of the 2016 Regulations and Clause 23A of the Bye-Laws of ICSI Institute of Insolvency Professionals.
3. Jurisdiction of the Insolvency & Bankruptcy Board of India (IBBI) in issuing the show cause notices.
4. Suspension of the Authorization for Assignment (AFA) pending adjudication of the show cause notices.

Issue-Wise Detailed Analysis:

1. Validity of the Show Cause Notices:
The petitioner challenged the show cause notices dated 26th October 2023 and 10th April 2024 issued by the IBBI on the grounds of jurisdictional infirmity, arguing that no order in writing was issued by the IBBI to undertake the investigation, and the requirements of Regulation 12 of the 2017 Regulations were not satisfied. The court noted that the show cause notices were preceded by investigation reports submitted pursuant to orders passed under Section 218 of the Code. The court found that office notings dated 26th September 2023 and similar notings for the second notice indicated that the Deputy General Manager, Mr. Mayank Mehta, was appointed as the Investigating Authority. Therefore, the court held that the show cause notices did not suffer from any jurisdictional infirmity and were validly issued.

2. Validity of Clause 23A of the 2016 Regulations and Bye-Laws:
The petitioner argued that Clause 23A of the 2016 Regulations and Clause 23A of the Bye-Laws were ultra vires the Code, as they allowed for the suspension of AFA pending disciplinary proceedings without statutory sanction. The court referred to the decision of the Madras High Court in CA V. Venkata Sivakumar, which upheld the validity of Clause 23A, stating that suspension is an ad-interim measure and not a penalty. The court agreed with this view, stating that Clause 23A did not travel beyond the powers conferred by the Code and was thus valid. The court also noted that the 2016 Regulations and 2017 Regulations were placed before each House of Parliament as required by Section 241 of the Code, thus giving them statutory force.

3. Jurisdiction of the IBBI:
The petitioner contended that the IBBI lacked jurisdiction to issue the show cause notices as there was no written order directing the investigation. The court found that the IBBI had complied with the statutory requirements by issuing orders in writing to appoint the Investigating Authority. Therefore, the court held that the IBBI had the jurisdiction to issue the show cause notices.

4. Suspension of the AFA:
The petitioner argued that the suspension of the AFA was without jurisdiction and violated principles of natural justice. The court noted that Clause 23A of the 2016 Regulations provided for the suspension of the AFA on initiation of disciplinary proceedings, which includes the issuance of a show cause notice. The court held that suspension is an ad-interim measure and not a penalty, and thus does not attract the principles of natural justice. The court also noted that the suspension would not bar the petitioner from continuing with pending assignments but only from accepting new ones. Therefore, the court found that the suspension of the AFA was legal and valid.

Conclusion:
The court concluded that:
1. The show cause notices dated 26th October 2023 and 10th April 2024 were validly issued and did not suffer from any jurisdictional infirmity.
2. Clause 23A of the 2016 Regulations and Clause 23A of the Bye-Laws of ICSI Institute of Insolvency Professionals were valid and not ultra vires the Code.
3. The IBBI had the jurisdiction to issue the show cause notices.
4. The suspension of the petitioner's AFA was legal and valid as per Clause 23A of the 2016 Regulations and the Bye-Laws.

The court discharged the rule with no order as to costs, clarifying that the observations made were only for the purposes of considering the validity of the show cause notices and not on the merits of the petitioner's defense.