THE INSOLVENCY AND BANKRUPTCY BOARD OF INDIA (INSPECTION AND INVESTIGATION) REGULATIONS, 2017

[Mr. M. GOVINDARAJAN]

Introduction

Chapter VI of the Insolvency and Bankruptcy Code, 2016 (‘Code’) deals with the inspection and investigation. Section 196 (t) gives powers to the Insolvency and Bankruptcy Board of India (‘Board) to make regulations and guidelines on matters relating to insolvency and bankruptcy as may be required under the code, including mechanism for time bound disposal of assets of the corporate debtor or debtor.

By virtue of the powers conferred under section 196, 217, 218, 219, 220 read with section 240 of the Code the Board made the regulation called as ‘The Insolvency and Bankruptcy Board of India (Inspection and Investigation) Regulations, 2017 (‘Regulations’ for short) vide Notification No. IBBI/2017-18/GN/REG011, dated 12.06.2017.  These regulations shall come into force with effect from 12.06.2017.  The regulation contains 5 Chapters and 14 regulations and Form A. 

Chapter I – Preliminary – Regulation 1 and 2;

Chapter II – Inspection – Regulation 3 to 6;

Chapter III – Investigation – Regulation 7 to 10;

Chapter IV – Consideration of Report – Regulation 11 to 13;

Chapter V – Restitution.

Service provider

  Regulation 2(1)(j) defines the expression ‘service provider’ as-

• Insolvency professional agency;
• Insolvency professional;
• Insolvency professional entity; or
• Information utility.

Inspection of service providers

Section 218(1) of the Code provides that Where the Board, on receipt of a complaint under section 217 or has reasonable grounds to believe that any insolvency professional agency or insolvency professional or an information utility has contravened any of the provisions of the Code or the rules or regulations made or directions issued by the Board there under, it may, at any time by an order in writing, direct any person or persons to act as an investigating authority to conduct an inspection or investigation of the insolvency professional agency or insolvency professional or an information utility.

Regulation 3(1) provides that the Board shall conduct inspection of such number of services providers every year as may be decided by the Board from time to time.  The Board may, by an order, direct an Inspecting Authority to conduct an inspection of records of a service provider.

Purpose of inspection

Regulation 3(4) provides that the purposes for inspection include-

• to ensure that the records are being maintained by a service provider in the manner required under the relevant regulation;
• to ascertain whether adequate internal control system, procedures and safeguards have been established and are being followed by a service provider to fulfill its obligations under the relevant regulations;
• to ascertain whether any circumstance exists which would render a service provider unfit or ineligible;
• to ascertain whether the provisions of the Code, or the rules, regulations and guidelines made there under and the directions issued by the Board, if any, are being complied with;
• to inquire into the complaints received from clients or any other person on any matter having a bearing on the activities of a service provider; and
• such other purpose as may be deemed fit by the Board in furtherance of the objectives of the Code.

Order of inspection

Regulation 3(5) provides that the order issued by the Board for inspection of a service provider shall contain-

• scope of inspection;
• composition of Inspecting Authority;
• timelines for conducting the inspection;
• reporting of progress in inspection;
• submission of interim inspection report;
• submission of inspection report.

Procedure for inspection

Regulation 4 provides the procedure for conducting of inspection.  The following is the procedure involved in inspection-

• The Inspecting Authority shall serve a notice of inspection to the service provider at least 10 days before the commencement of the inspection;
• Where the Inspecting Authority is satisfied that the notice will cause undue delay in inspection or there is apprehension that records of the service provider may be destroyed, mutilated, altered, falsified or secreted, after the notice is served, it may, for reasons to be recorded in writing, dispense with such notice;
• The Inspection Authority may require the service provider or an associated person(a proprietor, partner, director, officer, or an employee of a service provider, a professional or a valuer engaged by a service provider or any other person acting for or on behalf of a service provider under inspection or investigation) to submit the required records before the commencement of inspection;
• The Inspecting Authority may visit the officers of the service provider for conducting the on-site inspection;
• The service provider and an associated person is under obligation to produce before the Inspecting Authority such records in his custody or control and to furnish them such statements and information relating to its activities within such time as the Inspecting Authority may require;
• The service provider shall allow the Inspecting Authority to have access to the premises occupied by such service provider or by any other person on its behalf and extend facility for examination of any records in the possession of the service provider or any other such person and provide copies of records or other material relevant for the inspection;
• The Inspecting Authority shall examine and record statements of any associated person of the service provider in relation to the affairs of his business;
• The service providerand an associated person shall bound to give to the Inspecting Authority all assistance that may require in connection with the inspection;
• The Inspecting Authority may submit an interim report to the Board, if it considers appropriate, keeping in view the nature and progress of inspection or if required by the Board;
• The interim order shall lapse on expiry of 90 days;
• The Inspecting Authority shall send a copy of the draft inspection report to the service provider requiring comments of the service provider within 15 days from the receipt of the draft inspection report;
• A copy of the draft inspection report shall be submitted by the Inspecting Authority to the Board;
• The Board shall examine the draft inspection report as to whether inspection is complete and satisfactory or requires further inspection and advise the Authority accordingly within 15 days of receipt of draft inspection report;
• After considering the comments of the service provider and taking into account advised of the Board, the Inspecting Authority shall prepare the inspection report and submit it to the Board.

Investigation

Order for investigation

The procedure for investigation of a service provider is as detailed below-

• The Board by an order may direct an Investigating Authority to conduct an investigation of the affairs of the service provider and to report thereon to the Board;
• The order shall contain shall contain the following particulars-

• scope of investigation in terms of records, activities, places and person;
• composition of Investigating Authority;
• timeliness for conducting investigation;
• reporting of progress in investigation;
• submission of interim investigation report, if any, and
• submission of investigation report;

• The Board may modify the order to enlarge the scope of investigation or other terms of investigation for reasons to be recorded in writing.

Procedure of Investigation

Regulation 8 provides the procedure of conducting investigation as detailed below-

• The Investigating Authority shall serve a notice of investigation to the service provider at least 10 days before the commencement of investigation;
• Where the Investigating Authority is satisfied that the notice will cause undue delay in investigation or there is an apprehension that records of the service provider may be destroyed, mutilated, altered, falsified or secreted, after the notice is served, it may, for reasons to be recorded in writing, dispose with such notice;
• The Authority may require the service provider or an associated person to submit records before the commencement of registration;
• The Authority may visit the offices of the service provider for conducting the on-site investigation;
• The service provider and an associated person shall produce before the Authority such records in his custody or control and furnish such statements and information relating to its activities with such time as the Investigating Authority may require;
• The service provider shall allow the Authority to have access to the premises occupied by such service provider or by any other person on its behalf and extend facility for examination of any records in the possession of the service provider or any such other person and provide copies of records or other material which in the opinion of the Authority are relevant for the investigation;
• The Authority may examine and record statements of any associated person of the service provider in relation to the affairs of his business and for that purpose may require any of those persons to appear before it personally;
• Notes of any examination shall be recorded and shall be read over to, or by, and signed by, the person examined;
• The service provider and an associated person shall give to the Authority all assistance which the Authority may reasonably require in connection with the investigation;
• The Authority may keep in its custody any record produced to it up to 6 months and thereafter return the same to the person by whom the records were produced;
• Where in the course of investigation, the Authority has reasonable grounds to believe that the records may be destroyed, mutilated, altered, falsified or secreted, the Authority may make an application to the competent court having jurisdiction for an order for the seizure of such records;
• After considering the applications and hearing the Authority, if necessary, the competent court may, by order, authorize the Investigating Authority-

• To enter, with such assistance, as may be required, the place or places where such records are kept;
• To search that place or those places in the manner specifiedin the order; and
• To seize record, if considers necessary, for the purposes of investigation;

• The Authority may require the services of any Police officer or any officer of the Central Government, or of both, to assist him in search and seizure and it shall be the duty of every such officer to comply with such requisition;
• The Authority may submit an interim investigation report to the Board, if it considers appropriate, keeping in view the nature and progress of investigation or if required by the Board;
• The interim order shall lapse on expiry of 90 days;
• The Authority shall submit a copy of the draft investigation report to the Board;
• The Board shall examine the draft report as to whether investigation is complete and satisfactory or requires further investigation and advise the Authority within 15 days of receipt of the draft report;
• After taking into account advice of the Board the Authority shall prepare the Investigation report and submit it to the Board.

Action on interim report

If the Board is satisfied from the interim report of the inspection or investigation that prima facie, there is a gross violation of the provisions of the Code, or the rules or regulations made there under, by the service provider and an immediate action is warranted the Board shall refer the matter to the Disciplinary Committee for an appropriate action.  The Disciplinary Committee may pass an interim order with appropriate directions to the service provider.

Confidentiality

The Board and the Inspecting/Investigation Authority shall make every effort to keep the inspection/investigation confidential and to cause the least burden on or disruption to, the business of the service provider under inspection/investigation.

Action on final report

The Board shall consider the report of inspection/investigation of the concerned Authority.  If the Board is of the prima facie, opinion that sufficient cause exist to take action it shall issue a show cause notice  to the service provider or an associated person and in any other case, close the inspection or investigation.

  The show cause shall be in writing and shall state-

• the provisions of the Code under which it has been issued;
• the details of the alleged acts;
• the details of the evidence in support of the alleged facts;
• the provisions of the Code, rules, regulations or guidelines made there under, allegedly violated;
• the actions or directions that the Board proposes to take or issue, if the allegations are established and
• the time within the noticee may make written submission.

The show cause notice will provide at least 21 days to the noticee to make a written submission.  The show cause notice shall also state, if the noticee fails to respond within the given time, it shall be disposed of based on the material available on record.  The show cause notice also contain the copies of relevant documents and extracts of relevant portions from the report of investigation or inspection, or other records.

A show cause notice shall be served on the noticee by sending by registered post with acknowledgement due and by an appropriate electronic form to the email address provided by the service provider to the Board.  The Board shall refer the show cause notice to the Disciplinary Committee along with all the relevant records including the written submission, if any, made by the noticee in the matter.

The Disciplinary Committee, after providing an opportunity of being heard to the parties shall dispose of the notice by a reasoned order within 180 days of the issue of the show cause notice.  The order may provide for closure of show cause notice without any direction or warning or may impose penalty-

• three times  the amount of the loss caused, or likely to have been caused, to persons concerned on account of such contravention; or
• three times three times the amount of the unlawful gain made on account of such contravention,

whichever is higher.  This order will be effective only after thirty days have elapsed from the date of issue of the order, unless otherwise it is stated in the order along with the reasons for the same.  The order shall be issued to the noticee immediately and be published in the website of the Board. 

  If the order suspends or cancels the registration of a service provider, the Disciplinary Committee may, if it considers fit, require the service provider to-

• discharge pending obligations, if any;
• continue its functions till such time as may be directed, only to enable clients to shift to another service provider; and
• comply with any other directions.

Restitution

  Regulation 14 provides that where a direction has been issued to any person to disgorge the amount equivalent to such unlawful gain or aversion of loss, the Board shall try to realize the amount of disgorgement expeditiously.  The Board shall, on realization of the said amount, may invite claims by a public announcement from persons, who have suffered loss on account of the contraventions, to submit a claim in Form A within 30 days of the public announcement.  The Board shall scrutinize the claims and prepare a list of valid claims within 30 days of the receipt of claims.  The Board shall issue such amount proportionately among the claimants within 30 days of the preparation of the valid claims.