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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 ..... itively 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt No. 1, the Insolvency and Bankruptcy Board of India ( IBBI ), purporting to clarify the usage of certain terms contained in Regulation 4(2)(b) of the Insolvency and Bankruptcy Board of 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 Pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the case of eight liquidation assignments handled by the Petitioner, including the liquidation of HDOL; (b) reduction in reserve price during liquidation in the case 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. Be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount Distributed to Stakeholders On the first 1 crore 2.50 1.88 0.94 On the next 9 crore 1.88 1.40 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Amount of Realisation (exclusive of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 provisions of the IBC were brought into force) through 15th December, 2016 (when the LP Regulations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 to past assignments already handled by them. Where the interpretation stipulated in the Impugned Circular leads to a conclusion tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 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 regulation seeks to address ; (d) an economic analysis of the proposed regulations under regulation 5; (e) a statement carrying norms advocated by inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of the Parties: 31. The crux of the Petitioner s grounds of challenge (nearly 40 grounds, copiously arguing case law) can be broadly summarised thus:- That the Impugned Circular is beyond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of an asset, or a secured creditor may have delayed relinquishment of the asset, and computing the percentage applicable under the time slabs to their benefit. Any exclusion of time should only be with the stamp of judic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 process after exploring compromise and arrangement, if any. [Emphasis Supplied] 37. Even a plain reading of the contents of Paragraph 2.1 would show that they introduce completely new legal standards. Nowhere in the IBC or in the LP Regulations, is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, has been carried out. 41. As a result of the foregoing discussion, Paragraph 2.1 of the Impugned Circular is hereby struck down as being ultra vires the LP Regulations and the IBC. 42. We may note here that regulatory agencies (such as the IBBI) are clothed with powers of all thr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... )(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 definition and meaning of the term liquidation cost . The term is primarily defined in Section 5(16) of the IBC. The LP Regulations are merely iterative of types of liquidation costs that flow from the over-arching definition in the IBC (any cost incurred by the liquidator during the liquidation period). The initial version of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 operate in a vacuum. The IBC and the LP Regulations regulate what costs can be incurred by the liquidator. Section 53 of the IBC, which sets out the priority of distribution of the proceeds of realisation from assets liquidated, lists CIRP costs and liquidation costs as the very first permitted outflow (under Section 53(1)(a) of the IBC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 brighter light on the generic (and expansive) definition provided in Section 5(16) of the IBC. Regulation 2(1)(ea), therefore, is an elaboration and illustration of the conceptual definition in Section 5(16) and not one meant to curtail the meaning. In any case, it is trite law that subordinate law cannot circumscribe the parent statute. Any delegation of power ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 means can be construed liberally and treated to be inclusive but not completely exhaustive of the scope of the definition , of course, depending upon the facts of a given case and the provisions governing that law. 60. The expressions means , means and includes and does not include are expressions of different connotation and significance. When the legislature has used a particular expression out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, solely for purposes of computing the liquidator s fees, such costs, despite having been paid in priority, would be added back to the amounts realised on liquidation, to present a wider base on which the liquidator s percentage fee would be computed. 55. We, therefore, have no hesitation in rejecting the first two arguments against Paragraph 2.2, as canvassed by Mr. Jagtiani. 56. The third argument needs consideration only because ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 distributed to stakeholders: Section 53 provides for order of priority for making distribution out of proceeds from sale of assets. Further, Regulation 42 provides that: Distribution . (1) . (2) The liquidator shall distribute the proceeds from realization within ninety days from the receipt of the amount to the stakeholders. (3) The insolvency resolution process costs, if any, and the liquidation costs shall be deducted before such distri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 percentage is to be computed on the proceeds distributed. The liquidator has to assess claims of various stakeholders and determine the payments due to them, in compliance with Section 53 of the IBC, read with Regulation 42 of the LP Regulations. Once the amounts are realised, the liquidator s fees are computed as a percentage after deducting the liquidation costs. That amount realised, net of liquidation costs, is the amount to be distributed, after assessment of claims. The dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 as per column 3; and for the amount realised thereafter, % of fees will be as per column 4. Illustration : [*****] 2 [2. In the interest of brevity, the illustrations are not extracted.] In the above illustrations, the liquidator is getting more fee if he realises the assets within 12 months in comparison to realisation of the assets within 6 months which is against the spirit of the regulation. Thus, it is clear that the cumulative value of amount realised/ distributed is to be bifurcated in v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 liquidator s fees is a matter of self-compliance. Any liquidator helping himself to a non-compliant fee would be amenable to the wrath of disciplinary proceedings that could lead to even cancellation of the registration as an IP. There is no provision in the current legal framework for the liquidator applying to the NCLT or the NCLAT for approval of the liquidator s fees. Therefore, indeed, Paragraph 2.5 of the Impugned Circular, introduces a completely new standard by providing that the NCLT or the NCLAT or any other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 Regulations, what is clear is that Paragraph 2.5 can simply not be upheld as a clarification. The stipulations in it are new standards that create new legal requirements, which apart from being ultra vires the IBC and the LP Regulations, cannot be explained away as clarifications. 79. For all the aforesaid reasons, the contents of Paragraph 2.5 are hereby struck down. Summary of Conclusions: 80. To summarise:- a) Paragraph 2.1 and Paragraph 2.5 of the Impugned Circular are hereby struck down as being ultra vires the LP Regulatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts. 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 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. An End Note: 81. Before we part with the matter, we would be remiss if we did not highlight to the IBBI that it must examine the serious effect of the issuance of a show cause notice to any IP. The very issuance of a show cause notice has the effect of stopping the IP from taking up new work by r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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