REJECTION OF APPLICATION TO REGISTER AS INSOLVENCY PROFESSIONAL

[Mr. M. GOVINDARAJAN]

Insolvency Professional

Section 3(19) of the Insolvency and Bankruptcy Board Code, 2016 (‘Code’ for short) defines the expression ‘insolvency professional’ as  a person enrolled under section 206 with an insolvency professional agency as its member and registered with the Insolvency and Bankruptcy Board of India (‘Board’ for short)  as an insolvency professional under section 207.    Section 206 of the Code provides that no person shall render his services as insolvency professional under this Code without being enrolled as a member of an insolvency professional agency and registered with the Board.  Section 207 of the Code prescribes the requirement of registration by insolvency professional under the Code. 

Regulations

In exercise of the powers conferred under the Code, the Board has come up with the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016 (‘Regulation’ for short). Regulation 4 provides the eligibility criteria to become an insolvency professional.  According to this rule no individual shall be eligible to be registered as an insolvency professional if he-

• is a minor;
• is not  a person resident in India;
• does not have the qualification and experience specified in Regulation 5 and 9;
• has been convicted by any competent court for an offence punishable with imprisonment for a term exceeding 6 months or for an offence involving moral turpitude and a period of 5 years has not elapsed from the date of expiry of the sentence. If a person has been convicted of any offence and sentenced in respect thereof to imprisonment for a period of 7 years or more he shall not be eligible to be registered;
• he is undischarged insolvent or has applied to be adjudicated as an insolvent;
• he has been declared to be unsound mind; or
• he is not a fit and proper person.

The explanation to the said regulation provides that for determining whether an individual is fit and proper under these Regulations, the Board may take account of any consideration as it deems fit, including but not limited to the following criteria-

(i) integrity, reputation and character,

(ii) absence of convictions and restraint orders, and

(iii) competence, including financial solvency and net worth.

No insolvency professional entity, recognized by the Board under regulation 13, shall be eligible to be registered as insolvency professional, if the entity and/or any of its partner or director, as the case may be, are not fit and proper person.

Rejection of application

If, after considering an application, the Board is of the prima facie opinion that the registration ought not be granted, it shall communicate the reasons for forming such an opinion and give the applicant an opportunity to explain why its application should be accepted, within 15 days of the receipt of the communication from the Board, to enable it to form a final opinion.  The applicant is to give reply within 30 days from the receipt of communication from the Board.  After considering the explanation the Board may either accept or reject the application within 15 days from the date of receipt of explanation.

Case law

In POOJA MENGHANI VERSUS INSOLVENCY AND BANKRUPTCY BOARD OF INDIA & ANR. - 2023 (11) TMI 909 - DELHI HIGH COURT , the writ petitioner is a banker.  She passed the examination meant for enrolment as insolvency professional with the Insolvency and Bankruptcy Board of India.  She applied to the Board to register herself as an Insolvency Professional.  The Board found, while scrutinizing the application, that the petitioner  was in violation  of Regulation 3 (a), 3 (b),  3 (c), 3 (d) and 4(1) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003. It is stated that an enquiry was conducted and it was found that the petitioner had bought and sold equal quantities in large volume in four scrips with prior knowledge that certain entities have already placed buy orders for the above mentioned scrips and thereby the petitioner has done front running in the said scrips and violated the regulations.  A penalty of Rs.1 crore was imposed on the petitioner.  The petitioner filed appeal before Securities Appellate Tribunal against the order imposing penalty on him.  The Securities Appellate Tribunal affirmed the penalty.  The petitioner filed appeal before the Supreme Court which dismissed the appeal.   Failure on the part of the Petitioner to make the payments led to initiation of criminal proceedings against the Petitioner before the Sessions Court of Kolkata under Section 24 of the SEBI Act. It was challenged by the petitioner before the High Court and Supreme Court which dismissed the appeal.  The Board, considering the petitioner is not a fit and proper person and eligible for grant of registration, rejected the application of the petitioner.  The petitioner filed the present writ petition before High Court challenging the rejection order of the Board.

The petitioner submitted the following before the High Court-

• The petitioner cannot be condemned for life for the events that transpired in 2015.
• She has already paid the penalty and has suffered much.
•  Pursuant to the Order of the Apex Court there is no blemish in the career of the Petitioner and she has earned a good name for herself in the Banking Sector.
• The recovery proceeding initiated by the SEBI is a civil obligation and the Petitioner has not committed any criminal offence.
• The scheme of the SEBI Act of imposing penalty does not deal with criminal offences and the penalties levied by the SEBI are only in the nature of civil obligations under the SEBI Act and the Regulations made there under
• In the absence of any criminal liability, a civil obligation, which was imposed on the Petitioner 11 years ago and which has been closed, cannot be a reason not to consider the application of the Petitioner for grant of certificate of registration as an Insolvency Professional.
•  even assuming that the Petitioner has been found guilty of violation of the SEBI Act but since the Petitioner has undergone the punishment and a punishment/penalty had been imposed on the Petitioner, the Petitioner has absolved herself of the sin by undergoing the penalty then the Petitioner cannot be condemned forever and must be given a chance to reform herself.

The Board submitted the following before the High Court-

• an Insolvency Professional holds a very important position and has to perform important functions under the Scheme of the Code;
• Once an application for insolvency is made under the Code, the Insolvency Professional is vested with the responsibility of managing the affairs of the corporate debtor;
• an Insolvency Professional takes over the assets of the company during the pendency of the insolvency process and this necessitates that only people with unblemished reputation can alone be appointed as Insolvency Professionals;
• the decision of the Board in finding the Petitioner not a fit person to be appointed as an Insolvency Resolution Professional does not need interference.

The High Court considered the submissions made by the parties to the present writ petition.   The High Court analyzed the provisions of Section 208, section 17, section 18 and 25 of the Code.  From the above said provisions the High Court found that an Insolvency Professional performs very important functions in the insolvency resolution process of a company. An Insolvency Professional virtually takes over the company during the period it goes through the insolvency resolution process. An Insolvency Professional in fact becomes the heart and brain of the company under the insolvency resolution process and a person having slightest of disqualification cannot be permitted to be appointed as an Insolvency Professional otherwise the entire purpose of the Code will get vitiated.  The High Court also analyzed the Regulation 4 and found that Regulation 4 gives the power to the Board to take account of any consideration as it deems fit in selecting a candidate.  A reading of the Regulations indicates that the Board can take a decision that a person who has been involved in any kind of financial irregularity cannot be appointed as an Insolvency Professional.

The High Court observed that though the petitioner might be eligible to be considered to be appointed as an Insolvency Resolution Professional but the decision of the Board not to permit the Petitioner to function as an Insolvency Professional cannot be said to be arbitrary.  The allegations against the Petitioner were serious. It is well settled that the basis of considering as to whether a person is suitable for a job or not cannot be laid down in a straight jacket formula.   It is well settled that the basis of considering as to whether a person is suitable for a job or not cannot be laid down in a straight jacket formula. The question of adjudging as to whether a person is suitable for a particular job or not should be left to the appointing authority and more particularly when the appointing authority consists of experts.

Discretion has been given to the Board to ensure that the corporate insolvency process is clean and free. Good reputation and character of a person is very important for appointment as an Insolvency Professional. The decision to determine as to whether a person is fit and proper to be appointed as Insolvency Professional is based on the subjective satisfaction of the Board.  While judging as to whether a person is fit and proper to be appointed as an Insolvency Professional his past actions and conduct cannot be ignored and the fact that immediate past was clean does not give a clean chit to the person that his candidature will be considered.  The petitioner has been found guilty of fraudulent practices of violating market integrity and the decision of the Respondent Board to refuse the registration of the petitioner as an Insolvency Professional on the basis of the decision of the Apex Court cannot be said to be so perverse or irrational warranting interference under Article 226 of the Constitution of India.

The High Court was of the opinion that the decision taken by the Board does not suffer from any irregularity which requires interference by this Court under Article 226 of the Constitution of India.  The High Court dismissed the writ petition.