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2024 (4) TMI 241 - HC - Insolvency and BankruptcyConstitutional Validity of Circular issued by issued by the Insolvency and Bankruptcy Board of India (IBBI). - clarification of usage of certain terms contained in Regulation 4(2)(b) of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 - illegal amendment in the LP Regulations by the circular - computation of the liquidator s fee before and after the 2019 Amendments. The challenge is primarily on the ground that in the garb of clarifying certain terms contained in Regulation 4(2)(b), the IBBI has effectively, by a back-door method, amended the LP Regulations by stipulating new substantial requirements, and that too, with retrospective effect. Whether the Impugned Circular simply clarifies Regulation 4(2)(b), or whether it effects substantive amendments to the term in the garb of clarification? HELD THAT - The Impugned Circular positively introduces a new position that an act of court would indeed prejudice the liquidator, unless he gets the court to confirm his fee computation, on a case to case basis. The liquidator may even have to approach different courts since according to Paragraph 2.5, only the forum that stayed a disposal of an asset can confirm if the suspension of the time can be availed of, and that too only for such asset as that court protected from being liquidated. Such a detailed and complicated matrix of regulatory requirements cannot constitute a guideline that merely clarifies the existing regulatory framework. The only way to make regulations towards this end would be to do so under Section 240 and comply with the Law-Making Regulations. That not having been done, Paragraph 2.5 of the Impugned Circular is indeed a substantive amendment masquerading as a clarification. There are no hesitation in striking it down as being ultra vires the LP Regulations and the IBC. A close review of the material on record also reveals that the IBBI has indeed issued a Discussion Paper on 20th October, 2023 on Strengthening the Liquidation Process and has proposed amendments to the LP Regulations in this regard. In the proposed amendment, it appears that the IBBI s desire is to empower the Stakeholders Committee to approve an adjustment to the liquidator s fees, on account of court-inflicted delays. Even while the standard sought to be introduced in the garb of clarification is different from the standard under active consideration for an amendment to the LP Regulations, what is clear is that Paragraph 2.5 can simply not be upheld as a clarification. Paragraph 2.1 and Paragraph 2.5 of the Impugned Circular are hereby struck down as being ultra vires the LP Regulations and the IBC. They introduce substantive amendments to statutory legislation even while purporting to be mere clarifications. The changes they seek to bring in are not even covered by the IBC and the LP Regulations. Due process by way of compliance with the statutory requirements of the Law-Making Regulations is missing. Therefore, in the course of conducting the quasi-judicial proceedings, the IBBI is prohibited from placing any reliance on Paragraph 2.1 and Paragraph 2.5 of the Impugned Circular in determining if any fee charged by the Petitioner in the liquidation assignments in question, was in excess of permissible thresholds. The IBBI must discharge the First Show Cause Notice since it evidently has been subsumed by the Second Show Cause Notice, in substance and content. Multiplicity of proceedings on the same cause of action before the same regulator against the same noticee on the same facts is inappropriate. The IBBI must issue a written communication reconciling the coverage of the two show cause notices and in any case dispose of the proceedings as expeditiously as possible and in accordance with law. Petition disposed off.
Issues Involved:
1. Validity of the Impugned Circular dated 28th September, 2023. 2. Interpretation of "amount realised," "other liquidation costs," and "amount distributed to stakeholders" under Regulation 4(2)(b) of the LP Regulations. 3. Retrospective application of the Impugned Circular. 4. Compliance with the Law-Making Regulations by the IBBI. 5. Impact of the Impugned Circular on ongoing and past liquidation assignments. Summary of Judgment: Issue 1: Validity of the Impugned Circular The Impugned Circular, issued by the Insolvency and Bankruptcy Board of India (IBBI), was challenged primarily on the grounds that it effectively amended the LP Regulations by introducing new substantive requirements with retrospective effect, making it ultra vires the LP Regulations and the IBC. Issue 2: Interpretation of "Amount Realised" Paragraph 2.1: The court found that Paragraph 2.1 of the Impugned Circular introduced new legal standards by stipulating that liquidation fees are payable only for liquidating illiquid assets, which was not backed by the IBC or the LP Regulations. This was deemed an overreach and was struck down as ultra vires. Issue 3: Interpretation of "Other Liquidation Costs" Paragraph 2.2: The court upheld Paragraph 2.2, which clarified that "other liquidation costs" include all liquidation costs except the liquidator's fee. This interpretation was consistent with the IBC and the LP Regulations, and did not introduce any new standards. Issue 4: Interpretation of "Amount Distributed to Stakeholders" Paragraph 2.3: The court upheld Paragraph 2.3, clarifying that payments made towards running the business as a going concern are not "distributions" to "stakeholders" but are "liquidation costs." This clarification was found to be consistent with the IBC and the LP Regulations. Issue 5: Calculation of Realisation/Distribution Amounts Paragraph 2.4: The court upheld Paragraph 2.4, which clarified that the cumulative amount realised or distributed must be bifurcated into various slabs and periods for fee calculation. This was found to be a reasonable clarification and not ultra vires. Issue 6: Period for Calculation of Fee Paragraph 2.5: The court struck down Paragraph 2.5, which required judicial approval for excluding time periods affected by court stays from fee calculations. This was deemed a new standard not supported by the IBC or the LP Regulations and therefore ultra vires. Conclusion: 1. Paragraphs 2.1 and 2.5 of the Impugned Circular were struck down as ultra vires the LP Regulations and the IBC. 2. Paragraphs 2.2, 2.3, and 2.4 were upheld as valid clarifications consistent with the existing legal framework. 3. The IBBI must discharge the First Show Cause Notice and proceed with the Second Show Cause Notice in accordance with the law declared in this judgment. 4. The court highlighted the serious implications of issuing a show cause notice on an Insolvency Professional (IP) and suggested that the IBBI review this situation. Final Disposition: The Writ Petition was disposed of with no order as to costs, and the rule was made absolute in the terms outlined above.
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