IBBI liquidator fee computation circular struck down for exceeding Section 240 clarification powers without proper law-making procedures

Bombay HC struck down paragraphs 2.1 and 2.5 of IBBI's circular on liquidator fee computation as ultra vires the Insolvency and Bankruptcy Code and LP Regulations. The court held that the circular introduced substantive amendments disguised as clarifications, particularly regarding court-inflicted delays affecting liquidator fees, without following proper law-making procedures under Section 240. The circular created new regulatory requirements mandating court confirmation for fee computation on case-by-case basis, which exceeded IBBI's clarification powers. IBBI was prohibited from relying on these provisions in quasi-judicial proceedings and directed to consolidate duplicate show cause notices against the petitioner while disposing proceedings expeditiously.

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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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