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TMI Blog2024 (4) TMI 241X X X X Extracts X X X X X X X X Extracts X X X X ..... India (Liquidation Process) Regulations, 2016 ("LP Regulations"). 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. Put differently, it is alleged that the Impugned Circular is ultra vires the LP Regulations, which it purports to clarify, and that far from being clarificatory, it is an instrument that illegally amends the LP Regulations. 3. The Petitioner is a Chartered Accountant by profession and is registered as an 'Insolvency Professional' ("IP") with the IBBI. In his capacity as an IP, the Petitioner has acted as a liquidator in respect of a number of companies ("Corporate Debtors") under the Insolvency and Bankruptcy Code, 2016 ("IBC"). 4. The IBBI issued to the Petitioner, a Show Cause Notice dated 14th March, 2023 ("First Show Cause Notice"), alleging that the Petitioner had charged excessive fees in the course of liquidating a company by the name Hindustan Dorr Oliver Limited ("HDOL"). The Petitioner replied to the First Show Cause Notice on 3r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Padmavati Wires and Cables Private Limited; (c) sale of stock without auction - in the case of Nimit Steels and Alloys Private Limited; and (d) engagement of one ANAROCK Capital Advisors Pvt. Ltd. for assistance in the sale of assets - in the case of HDOL. 9. This Writ Petition primarily relates to the allegation in sub-para (a) above since that is the allegation connected with the Impugned Circular, which is challenged in the Writ Petition. The Impugned Circular has no relevance to the other three allegations. The fulcrum of the Petitioner's grievance is that the fees for liquidation assignments charged well prior to the Impugned Circular, are being alleged to be violative, by relying upon the interpretation flowing from the Impugned Circular. In the context of the First Show Cause Notice being followed by the issuance of the Impugned Circular, reliance in the Second Show Cause Notice on the Impugned Circular, points to rules of the game being changed after the proceedings have commenced. Provisions of Law: 10. Before delving into the contents of the Impugned Circular and their import, it is necessary to have a bird's eye view of the issues involved, the legal framework, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 40 0.71 On the next 40 crore 1.25 0.94 0.47 On the next 50 crore 0.63 0.48 0.25 On further sums distributed 1.13 0.10 0.05 Clarification : For the purposes of clause (b), it is hereby clarified that where a liquidator realises any amount, but does not distribute the same, he shall be entitled to a fee corresponding to the amount realised by him. Where a liquidator distributes any amount, which is not realised by him, he shall be entitled to a fee corresponding to the amount distributed by him. (3) Where the fee is payable under clause (b) of sub-regulation (2), the liquidator shall be entitled to receive half of the fee payable on realisation only after such realised amount is distributed. Clarification : Regulation 4 of these regulations, as it stood before the commencement of the Insolvency and Bankruptcy Board of India (Liquidation Process) (Amendment) Regulations, 2019 shall continue to be applicable in relation to the liquidation processes already commenced before the coming into force of the said amendment Regulations. [Emphasis Supplied] 13. The aforesaid version of Regulation 4 was introduced as part of a larger scheme of amendments to the LP Regula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ealisation, and the distribution, is effected. These were: (i) the first six months; (ii) the next six months; (iii) the next one year; and (iv) thereafter. Such position changed with the 2019 Amendments. The time slabs for the period of realisation and distribution was reduced to three, namely, (i) the first six months; (ii) the next six months; and (iii) thereafter. 15. Depending on the amount realised or distributed over such periods of time, each of these structures enables computing the fee as a percentage of the amount realised, and as the case may be, distributed. The Impugned Circular does not even purport to deal with the incentive structures applicable prior to the 2019 Amendments. In clarifying the terms, it squarely extracts Regulation 4(2)(b) and sets out the three-slab incentive structure at the threshold, making it clear that it purports to clarify Regulation 4(2)(b), which came in with the 2019 Amendments. 16. Regulation 4(2)(b) explicitly provides that the percentage fee must be computed on the amount realised net of other liquidation costs. The heading in the first part of the table of the incentive structure in Regulation 4(2)(b), deals with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assets, of the corporate debtor; (v) costs incurred by the liquidator in carrying on the business of the corporate debtor as a going concern; (vi) interest on interim finance for a period of twelve months or for the period from the liquidation commencement date till repayment of interim finance, whichever is lower; (vii) the amount repayable to under sub-regulation (3) of regulation 2A; (viii) any other cost incurred by the liquidator which is essential for completing the liquidation process: PROVIDED that the cost, if any, incurred by the liquidator in relation to compromise or arrangement under section 230 of the Companies Act, 2013 (18 of 2013), if any, shall not form part of liquidation cost. [Emphasis Supplied] 20. Sub-clauses (iv), (v), (vii) and (viii) of Regulation 2(1)(ea) were not found in the definition prior to the 2019 Amendments. The proviso to exclude costs incurred on a scheme of compromise or arrangement, too was not contained in the earlier version. However, the over-arching definition of "liquidation cost" provided in Section 5(16) of the IBC has remained unchanged since inception of the IBC. Between 1st December, 2016 (when the liquidation-related p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ghlighted above are being made by the liquidator which are being clarified below:-" [Emphasis in Original] 23. A plain reading of the foregoing preamble would show that what is sought to be clarified is the manner in which the terms "amount realised"; "other liquidation costs"; and "amount distributed" ought to be interpreted by all IPs in order to be compliant. In Paragraph 3, the Impugned Circular contains a directional stipulation in the following words: "3. The IPs who are currently handling or have handled in the past any liquidation assignment shall ensure that the fee charged by them under Regulation 4(2)(b) is in accordance with above clarifications and inform the same to the Board electronically on the website of IBBI. In cases, where excess liquidator's fee is returned and distributed on or before 31st October 2023 no disciplinary proceedings will be initiated on the ground that the excess fee was charged and has now been returned." [Emphasis Supplied] 24. In short, it is the IBBI's explicit intention that IPs who are currently handling or have handled liquidation assignments must adhere to the positions stipulated in the Impugned Circular. This would extend even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dinate legislation so made. The subordinate legislation would, upon expiry of the thirty-day tabling period, or upon completion of intervention by Parliament, become an integral element of law (subject of course, to judicial review on grounds of constitutional validity or a challenge to the vires). Regulations to govern Regulation-Making: 28. The IBBI, laudably, has subjected itself to a higher standard by making regulations to govern how it would make regulations in the form of the Insolvency and Bankruptcy Board of India (Mechanism for Issuing Regulations) Regulations, 2018 ("Law-Making Regulations"). These regulations entail a pre-legislative public consultation and economic analysis on the proposed draft regulations or draft amendments. The following provisions of the Law-Making Regulations are noteworthy:- 4. Public Consultation. (1) For the purpose of making regulations, the Board shall upload the following, with the approval of the Governing Board, on its website seeking comments from the public- (a) draft of proposed regulations; (b) the specific provision of the Code under which the Board proposes regulations; (c) a statement of the problem that the proposed re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ort to the back-door route of issuing circulars. On the other hand, should the IBBI be desirous of issuing only clarificatory guidelines, it is free to do so in terms of Section 196(1)(t), as noticed above. Regulation 4(5) of the Law-Making Regulations stipulates that ordinarily a deferred prospective date would be fixed for giving effect to regulations and their amendments. Regulation 8 provides for how to handle urgent situations. None of this would be complied with if substantive provisions are made in the garb of clarificatory circulars. 30. Indeed, regulators, particularly those exercising power to issue registrations and licenses to professionals in practice, must be given a reasonable play in the joints to explain their regulatory framework and throw greater light on the standards expected in the law. Towards this end, the power to issue guidelines is an important one and must not be interfered with lightly. Any judicial intervention into such exercise of power should be sensitive to the need for providing regulatory clarity to society even while being mindful to look for whether substantive stipulations of law are masquerading as clarificatory guidelines. Key Contentions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of over Rs. 6.29 crores, of which, a sum of Rs. 5.55 crores is attributable to the Petitioner not counting the cost of running businesses as a going concern, as "liquidation costs". Although the Petitioner has incurred and paid such costs in priority to all other costs, by showing them as liquidation costs, when complying with other provisions of the LP Regulations, he has not deducted them from the amounts realised from liquidation to compute his realisation fees; e) The Petitioner has treated payments made to contractual counter-parties in the course of running the business as a going concern, as "distributions" made to "stakeholders" (operational creditors), and thereby claimed fees as a percentage of such "distribution" in the course of liquidation; f) The four components of liquidation costs added to the definition of the term in Regulation 2(1)(ea) have always been components that are paid in priority to all other stakeholders under Section 53 of the IBC and therefore, these were not new additions to the definition, but were merely clarificatory additions; and g) Liquidators have been unilaterally excluding periods of time for which a court may have stayed the disposal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... understood in a manner that would render such content legal and constitutional. Paragraph 2.1 - Amount Realised: 36. The contents of Paragraph 2.1 of the Impugned Circular are extracted below:- 2.1 Amount realised: Regulation 4(2)(b) provides that the fee shall be "as a percentage of the amount realised net of other liquidation costs, and of the amount distributed, for the balance period of liquidation...." "Amount realised" means an amount that is being realised from the sale of an asset where the asset changes form. Where the asset is already liquid such as cash and bank balance including term deposits, mutual funds, and quoted shares, there is no 'realisation', and funds are readily available for distribution. The amount realised, thus, implies the proceeds from the sale/realization from the liquidation of assets which are not liquid. Therefore, the liquidator is not entitled to a fee on realisation for these liquid assets and is entitled to a fee only on distribution. Clarification: "Amount realised" shall mean amount realised from assets other than liquid assets such as cash and bank balance including term deposit, mutual fund, quoted share available on start of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... slations. Such classification is introduced for the first time in the Impugned Circular, without any backing in the legislation. Therefore, to inflict the wrath of disciplinary proceedings, be it penal or remedial in nature, by introducing Paragraph 2.1 of the Impugned Circular in the midst of ongoing regulatory proceedings, without any backing for it either in the IBC or the LP Regulations, is manifestly arbitrary and unconstitutional. We have no hesitation in striking down Paragraph 2.1 of the Impugned Circular as being ultra vires the IBC and the LP Regulations. 40. We hasten to add that it would indeed be feasible for the IBBI, in its legislative wisdom, to propose the contents of Paragraph 2.1 as an amendment to the LP Regulations, in compliance with the Law-Making Regulations. Such an amendment would evidently take prospective effect, and would not be available to punish past actions. The pre-legislative consultation could present to the IBBI, propositions of how its thinking is misconceived. The IBBI would then be able to mould its proposal and mould its proposed legislative intervention appropriately. No such exercise, despite being mandated in the Law-Making Regulations, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to not be considered as the liquidation cost in respect of all those cases where the liquidation process commenced before the aforesaid amendment. Since these four components are paid in priority to payment to stakeholders as per section 53 of the Code by virtue of it being liquidation cost under section 53(1)(a), these newly added components were always part of the liquidation cost irrespective of the date of commencement of liquidation process. Any other interpretation would create uncertainty about the priority of payment of these components of liquidation cost over payment to stakeholders. Furthermore, the term "other liquidation cost" existed right from the inception of liquidation regulations and thus could not have meant to exclude certain components of liquidation costs from "liquidation costs" which were added by a subsequent amendment in 2019. Clarification: The "other liquidation cost" in regulation 4(2)(b) shall mean liquidation cost paid in priority under section 53(1)(a), after excluding the liquidator's fee. [Emphasis Supplied] 44. We have already set out the legislative history and overall scheme of the IBC and the LP Regulations in connection with the definit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itioner, in connection with Paragraph 2.2 of the Impugned Circular, presented three legal arguments to buttress his submission that the Impugned Circular gives retrospective effect to the 2019 Amendments, and is thereby unconstitutional. First, he would submit that the 2019 Amendments were introduced on 25th July, 2019, and therefore, only liquidation assignments that commenced after that date should have to comply with the new definition contained in Regulation 2(1)(ea) of the LP Regulations. Second, he would submit, the definition of "liquidation cost" in Regulation 2(1)(ea) uses the term "means" and it is therefore an exhaustive definition. The IBBI has consciously not chosen to use "includes" in the definition, and therefore, he would argue, any addition to the term as made in the 2019 Amendments cannot be regarded as clarificatory amendments. Third, Mr. Jagtiani alluded to a circular dated 26th August, 2019 issued by the IBBI after the 2019 Amendments, which purported to clarify that the 2019 Amendments would take prospective effect. 48. We find that each of the aforesaid contentions is misconceived. The definition of term "liquidation cost" in the LP Regulations does not ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion proceeds, without deducting such costs. The argument has to only be stated to be rejected. As seen above, the IBC defines the term "liquidation cost" as "any cost incurred by the liquidator" during liquidation. The costs of running the business as a going concern would evidently fall within its sweep. Besides, as stated above, Section 53 of the IBC read with Regulation 42 of the LP Regulations provide the basis for incurring and paying of such costs in priority over all else during liquidation. If the definition in Regulation 2(1)(ea) would impact Regulation 4(2)(b), so would it impact Regulation 42. It would mean that the liquidator was violating Regulation 42 by wrongly paying amounts in priority to all other payments. 50. Section 5(16) indeed uses the word "means" to define "liquidation cost". The definition in Regulation 2(1)(ea) too adopted the term "means" and not the term "includes" to provide the definition. Such a construct would not axiomatically make the definition in the LP Regulations an exhaustive one. In fact, Regulation 2(1)(ea) uses the phrase "liquidation cost under clause (16) of section 5 means". Therefore, this definition necessarily seeks to throw bright ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... planation (b) of Section 126 alone, then it shall defeat the very purpose of the 2003 Act, inasmuch as the different cases of breach of the terms and conditions of the contract of supply, Regulations and the provisions of the 2003 Act would escape the liability sought to be imposed upon them by the legislature under the provisions of Section 126 of the 2003 Act. Thus, it will not be appropriate for the courts to adopt such an approach. 51. The primary object of the expression "means" is intended to explain the term "unauthorised use of electricity" which, even from the plain reading of the provisions of the 2003 Act or on a common sense view cannot be restricted to the examples given in the Explanation. The legislature has intentionally omitted to use the word "includes" and has only used the word "means" with an intention to explain inter alia what an unauthorised use of electricity would be. 52. The expression " means" would not always be open to such a strict construction that the terms mentioned in a definition clause under such expression would have to be inevitably treated as being exhaustive. There can be a large number of cases and examples where even the expression "me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6), by resort to the plain and commonsensical meaning of the term. No need was felt to provide any examples in the LP Regulations that initially took effect on 15th December, 2016. Evidently, Regulation 2(1) (ea) was introduced only with effect from 1st April, 2018 for illustrative clarity, with examples. Before and after this introduction, any costs incurred by the liquidator during the period of liquidation (including costs incurred to run the business as a going concern) would eminently fit within the meaning of the term "liquidation costs" as defined in Section 5(16) of the IBC. As a consequence, such costs were capable of being paid in priority to any distribution of liquidation proceeds. With the 2019 Amendments, the IBBI expanded the illustrations of the term "liquidation cost". After the 2019 Amendments, any such costs (including costs incurred to run the business as a going concern) continued to be treated as liquidation costs. 54. Any other reading would make a mockery of the legal framework inasmuch as payments towards liquidation costs would need to be made in priority over all others under Section 53 of the IBC (and Regulation 42 of the LP Regulations), and yet, solel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... islate any new standard in the garb of a clarification. 59. We make it clear that we have restricted ourselves to ruling on the constitutional and legal validity of Paragraph 2.2 of the Impugned Circular. We have refrained from expressing our opinion on the application of the said contents to the specific facts of the Petitioner's case and the assignments handled by him. We also do not wish to foreclose the scope for the Petitioner to explain his bona fides in understanding the law and how he applied it in his assignments. We do not wish to foreclose the IBBI's regulatory response on what would represent the most appropriate regulatory reaction to such submissions on merits in the facts of the case. Therefore, we are not expressing our views on whether the doctrine of doubtful penalization would be available, although the same was canvassed on behalf of the Petitioner. The Petitioner is free to make such submissions to the IBBI, as advised. The IBBI is free to formulate its regulatory response, in discharge of its quasi-judicial role in accordance with law. Paragraph 2.3 - Amount Distributed to Stakeholders: 60. The contents of Paragraph 2.3 are extracted below:- 2.3 Amount di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commercial counter-parties in the course of running the business as a going concern have been treated by liquidators as payments to "stakeholders". The premise of treating the payees when incurring these costs as "stakeholders" is that those providing goods and services to the Corporate Debtor are "operational creditors". 63. It is settled law that mere apprehension that an instrument of law may be abused or misinterpreted cannot lead to the provision being declared unconstitutional. Indeed, the Impugned Circular could have been more elegantly worded to bring out what it sought to clarify, but it is quite clear to us that Paragraph 2.3 seeks to make it clear that payments made to operational creditors in the course of running the business as a going concern is not a "distribution" to "stakeholders" for the liquidator to become entitled to a percentage-based distribution fee on the amount of liquidation costs. 64. Under the second part of the table in Regulation 4(2)(b), liquidators are incentivised to distribute the liquidation proceeds speedily. The distribution fee incentivises efficiency in distribution by paying a higher percentage rate for faster distribution. Such percenta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence. Paragraph 2.4 (Amount of Realisation / Distribution): 67. The contents of Paragraph 2.4 are extracted below:- 2.4 Amount of Realisation /Distribution: It is observed that different interpretations are being made for the words "Amount of Realisation /Distribution" used in table in the Regulation 4(2)(b). Though, most of them are interpreting it correctly to mean the cumulative value of assets realised till date, few are interpreting it to mean the value of assets realised during the first six months and then next six months and so on. The words "Amount of Realisation /Distribution" are mentioned in column 1 only. Other columns are for percentage of fees on such realisation/distribution. Thus, the cumulative value of amount realised/ distributed is to be bifurcated in various slabs as per column 1. Only after that, liquidator has to divide the amount realised in a particular slab based on the tenure in which it was realised such as in first six months, next six months or thereafter. Out of the total amount pertaining to that slab, for the amount realised in first six months, % of fees will be as per column 2; for the amount realised in next six months, % of fees will be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as of confusion. 71. Therefore, in these aforesaid terms, we refrain from interfering with Paragraph 2.4 of the Impugned Circular. Paragraph 2.5 (Period for calculation of fee): 72. The contents of Paragraph 2.5 are extracted below:- 2.5 Period for calculation of fee: It has been observed that the liquidators are suo-moto excluding various time periods such as stay by court on sale of a particular asset, delay in relinquishment by secured creditor, for the purpose of calculating the fee. However, since the liquidator works under the overall guidance of the Adjudicating Authority, any such exclusion should have stamp of judicial authority and should be only for the asset for which such exclusion has been granted. Clarification: Exclusion for purpose of fee calculation is to be allowed only when the same has been explicitly provided by the Hon'ble NCLT/ NCLAT or any other court of law and will operate only for the asset which could not have been realised during the excluded period. [Emphasis Supplied] 73. Even a plain reading would show that Paragraph 2.5, akin to Paragraph 2.1, indeed imposes a new standard. It is noteworthy the parties are ad idem that computation of liq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 77. 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. We have no hesitation in striking it down as being ultra vires the LP Regulations and the IBC. 78. 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 Reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ors is running as a going concern during liquidation, and that too ahead of all others (only possible because such payment is a "liquidation cost") would not be a "stakeholder" waiting for "distribution" of the liquidation proceeds realised. Any reliance on Paragraph 2.3 and Paragraph 2.4 of the Impugned Circular in the proceedings, must be in accordance with the declaration of the law on the respective subjects as articulated above; d) We have expressed no opinion on the facts relating to the Petitioner's handling of the eight liquidation assignments. The Petitioner is free to address his arguments and submissions before IBBI in its quasi-judicial capacity. The IBBI shall apply its mind to the facts of the case in accordance with the law declared in this judgment; e) The allegations in the Second Show Cause Notice, insofar as they do not relate to the effect of the Impugned Circular, must be adjudicated on their own merit in accordance with law; and f) 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 regula ..... X X X X Extracts X X X X X X X X Extracts X X X X
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