2025 (9) TMI 1096 - HC - IBC

Insolvency professional suspended two years for related-party engagement, excessive liquidator fees, and failure to file under Regulation 35A

HC dismissed the petition and upheld the Disciplinary Committee's findings against the insolvency professional for engaging a related party, excessive ... Disciplinary action against the Insolvency Professional - Withdrawal of Excess remuneration - Engaging related party to assist him - Failure of Petitioner (IP) to file avoidance application in contravention of Regulation 35A of the CIRP Regulations. - Suspension of registration of the Petitioner for a period of two years from 18.08.2022 (effective from 16.09.2022) and directing refund of half of the fees paid to the Deloitte Touche Tohmatsu India LLP - Inspection Order was issued by Assistant General Manger instead of requisite/competent authority, i.e., the Executive Director, IBBI as per the Delegation Order - HELD THAT:- As per Liquidation Regulations, a liquidator can engage services of professionals to assist him in discharge of his duties, obligations and functions. As per regulations, he can take help of professionals for discharge of his duties, however, those services should fall within the domain of a professional, for example, accounting professional, auditing professional, marketing professional, valuation professional, legal professional. The liquidator can seek assistance of professionals for services which are not in his domain exclusively. Services such as claim verification, taking custody or control of assets, evaluating the assets, inviting and settling claims of creditors, etc. will fall in these services where the liquidator has the expertise and they do not fall in the domain of another professional. The fee of a Liquidator can be fixed in two ways. Either the Liquidator can negotiate the fee with the CoC and get it fixed as per his terms and conditions; or the same can be fixed as per Regulation 4(3) of the Liquidation Regulations. Once, it is fixed as per Regulation 4(3), the fee is for all the role and functions of the liquidator which are performed by the liquidator when the liquidator is for a small case. But in a complicated case like the current one, the performance of all such duties will require a team and, the fees will accordingly be higher - The DC in the Impugned Order, has rightly held that the fee paid to DTTILLP to the extent they have been paid for performing the role and functions of liquidator cannot be said to be reasonable which cannot be said to be perverse. From the material on record, it is evident that it was only after the aforesaid submissions were made on behalf of the Petitioner that the Disciplinary Committee proceeded to conclude that DTTILLP has been paid an enormous fee for tasks which, under the statutory scheme, were required to be performed by the Liquidator himself, and for which he was already in receipt of due remuneration. The DTTILLP has thus been paid an excessive fee, in clear contravention of the Liquidation Regulations. This Court does not find any infirmity with the afore-stated findings of the DC in the Impugned Order with respect to contraventions committed by the Petitioner during the liquidation of Lanco and declines to interfere with the said findings. The purpose of the IBC is revival of a company. A Resolution Professional takes complete charge of the company when the company is undergoing through resolution process. His role is to see whether the company can be revived or not. The function of IRP is to ensure that proper steps are taken to set aside such of transactions which are fraudulent in nature - The Insolvency Professional itself cannot become a predator of a company which itself is in the dire financial strains. Such professionals who act more like scavengers of a dead body for their own ulterior motives have to be dealt with severely as they strike at the heart rather the very object of the IBC. The Resolution Professional is therefore obliged to maintain the highest standard of professional ethics and even a single act of negligence, omission, or commission is sufficient for the Board to take action against the Resolution Professional/ Liquidator under Section 217-220 of the IBC after following the due procedure. The purpose of the IBBI is to look into the conduct of the Resolution Professional in the nature and manner of the performance of their duty. The Impugned Order of the Disciplinary Committee shows that all the objections of the Petitioner were duly considered after affording the Petitioner with personal hearings. This Court has gone through the material on record and is of the opinion that the procedure under law has been followed by the Respondent before passing the Impugned Order suspending the Petitioner, and directing the refund of half of the fees paid to DTTILLP. The attempt of the Petitioner has been to persuade this Court to substitute its conclusion to the one arrived at by the Board, which is outside the scope of Article 226 of the Constitution of India. This Court, therefore, does not find any reason to interfere with the Order passed by the Respondent - Petition dismissed. 1. ISSUES PRESENTED AND CONSIDERED a) Whether the Respondent/Board had jurisdiction to initiate and direct an inspection and thereafter issue a Show Cause Notice and constitute a Disciplinary Committee under Sections 196, 218, 219 and 220 of the Code read with the IBBI Inspection Regulations, when inspection was ordered under Regulation 3(1) of the Inspection Regulations. b) Whether procedural requirements and principles of natural justice were complied with in (i) supplying the Final Inspection Report and addendum, (ii) issuance of the SCN by the delegated officer, and (iii) affordal of opportunity of personal hearing prior to passing the disciplinary order. c) Whether the Disciplinary Committee's findings that the insolvency professional had withdrawn excess liquidator's fee in liquidation (contravening Regulation 4 and fiduciary duties) and that refund after detection did not absolve liability (including interplay with Board circulars and Section 233 protection) were sustainable. d) Whether engaging a related professional entity to perform tasks falling within the statutory domain of the liquidator (and paying substantial fees on vague terms without CoC approval) contravened Liquidation Regulations, IP Regulations and Code of Conduct. e) Whether failure/delay in initiating and filing avoidance proceedings (transaction audit and avoidance application) under Regulation 35A of the CIRP Regulations and related duties (including use of Section 19(2) where management did not cooperate) constituted actionable contravention. f) Scope and standard of judicial review applicable to administrative/quasi-judicial disciplinary orders - whether the impugned order is vitiated by perversity, arbitrariness, mala fides or error of law apparent on the face of the record. 2. ISSUE-WISE DETAILED ANALYSIS Issue (a): Jurisdiction to inspect and initiate disciplinary proceedings - legal framework - Legal framework: Sections 196(1)(f) & (g) empower the Board to carry out inspections/investigations and monitor performance; Section 218 prescribes inspection/investigation procedure when there is a complaint or reasonable grounds to believe contravention; Regulation 3(1) of Inspection Regulations permits Board to conduct periodic inspections; Regulation 11(2) permits issuance of SCN on prima facie opinion. - Precedent Treatment: Court applied established principles that delegated regulations must conform to statute and that inspection/regulatory powers are exercisable within the statutory scheme; reliance on administrative law standards of jurisdictional facts. - Interpretation and reasoning: The Court held Regulation 3(1) inspections (routine) are expressly without prejudice to inspections under Section 218 and that Regulation 11(2) allows the Board to issue SCN on the basis of inspection report or other material when prima facie sufficient cause exists; hence inspection under Regulation 3(1) can validly lead to disciplinary action under Section 220 provided statutory procedures are followed. - Ratio vs. Obiter: Ratio - Board's power to conduct routine inspections under Regulation 3(1) is compatible with statutory scheme and can lead to SCN/disciplinary action under Section 220 where Regulation 11(2) conditions satisfied. Obiter - discussion on limits of Section 196 function vs power language. - Conclusion: No jurisdictional infirmity in initiating inspection under Regulation 3(1) or in issuing SCN and constituting Disciplinary Committee pursuant to Regulation 11(2) and Section 220. Issue (b): Delegation and compliance with procedural & natural justice requirements - Legal framework: Delegation Order permits designated officers to exercise delegated powers, with clause allowing next-lower grade to act where grade absent; Inspection Regulations and Section 218/219 prescribe notice, report supply, opportunity to respond and hearing. - Precedent Treatment: Court relied on supervisory principles that failure to supply material vitiates process; remanded earlier order for compliance; S.L. Kapoor and other authorities on futility of ordering natural justice where outcome unchanged were referenced. - Interpretation and reasoning: The Court noted prior remand had been complied with - Final Inspection Report and addendum were supplied; substituted response filed; fresh personal hearings were granted; the AGM's issuance of the Order was authorised via competent authority and file note under Delegation Order clause 3(3). The Court concluded procedural fairness was observed and no breach of natural justice remained. - Ratio vs. Obiter: Ratio - procedural compliance (supply of report, opportunity to respond, personal hearings) rendered disciplinary process valid. Obiter - discussion of Delegation Order clause 3(3) as enabling communication by lower grade where authorised. - Conclusion: No procedural illegality; issuance of inspection/SCN by AGM was within delegated authority and principles of natural justice were satisfied. Issue (c): Withdrawal of excess liquidator's fee - fiduciary duty, Regulation 4 and effect of refund/circulars; Section 233 protection - Legal framework: Section 36 (liquidation estate fiduciary), Section 208(2)(a) (IP to take reasonable care and diligence), Regulation 4 (liquidator's fee computation and entitlement), Liquidation Regulations and Board circulars clarifying fee computations; Section 233 (protection from proceedings for acts done in good faith). - Precedent Treatment: Board circulars clarify that where excess fee is returned voluntarily prior to detection some proceedings will not be initiated; but where excess is returned after detection/SCN the Board may still proceed. Administrative deference to disciplinary discretion was invoked. - Interpretation and reasoning: The Court accepted that the admitted withdrawal of excess fee and the refund after IBBI detection does not absolve liability; petitioner failed to demonstrate bona fide reliance or good faith under Section 233; the DC's finding that the erroneous calculation was unexplained and amounted to breach of fiduciary duty and Code obligations was held to be supported by record and not perverse. Board's differential treatment of cases was held fact-specific and not violative of equality. - Ratio vs. Obiter: Ratio - refund after detection does not automatically negate disciplinary consequences; Section 233 protection unavailable absent proof of good faith. Obiter - analysis of June/September/October circulars' scope distinguishing CIRP vs liquidation contexts and timing of refund. - Conclusion: DC's finding of contravention for excess fee withdrawal is sustainable; refund post-detection insufficient to negate liability or invoke Section 233 protection. Issue (d): Engagement of related-party professional for liquidator functions, vague terms and CoC approval - Legal framework: Regulation 7(1) allows appointment of professionals to assist for functions outside liquidator's domain; Regulation 4(3) fixes fee entitlement for liquidator's statutory functions; Sections 35 and 36 enumerate liquidator duties and fiduciary obligations; IP Regulations/Code of Conduct require reasonable care and avoidance of conflicts. - Precedent Treatment: Administrative practice and regulatory clarifications were considered; Court recognised limits on delegation of liquidator's core functions to external professionals where such work is remunerated already under liquidator's fee. - Interpretation and reasoning: The Court analysed the scope of work performed by the external firm and the admitted scope (claim verification, auction planning, asset evaluation, marketing, stakeholder interaction etc.) and concluded majority of tasks corresponded to liquidator's statutory duties. Engaging a related-party firm on vague terms and paying large fees for tasks within liquidator domain violated Regulation 7(1)'s intent and Regulation 4(3) economics; the DC's penalty (refund of half fees paid to the external firm) was not perverse. - Ratio vs. Obiter: Ratio - a liquidator may engage professionals for domain-specific assistance, but cannot outsource core statutory functions (for which his fee accounts) to a related-party on vague terms and thereby cause unjustified expense to liquidation estate. Obiter - observations on role of CoC consultation vs final responsibility of liquidator. - Conclusion: DC's finding that related-party engagement and payment for liquidator-domain tasks contravened Regulations is justified; penalty for part of fees upheld. Issue (e): Delay/failure to file avoidance application under Regulation 35A and duty to use Section 19(2) to secure cooperation - Legal framework: Regulation 35A prescribes timelines/obligations to form opinion and file avoidance applications in CIRP; Section 19(2) and Section 35/208 obligations require RP to investigate and seek cooperation; Code and pandemic-related extensions recognised. - Precedent Treatment: The Court treated timelines as important and observed disciplinary decisions in similar contexts; noted that timelines may be indicative but prompt action is critical to protect stakeholders. - Interpretation and reasoning: The Court found record evidence (CoC minutes where RP stated TRA was completed) inconsistent with later pleas of non-cooperation; the DC reasonably concluded that the RP failed to follow up and could have invoked Section 19(2) to secure cooperation; Covid-19 delays and extensions were considered but did not vitiate finding of culpable delay. No mala fide was alleged but lack of devotion to duty justified regulatory action. - Ratio vs. Obiter: Ratio - RP's failure to timely initiate avoidance proceedings and to use statutory recourse to secure information constitutes a breach of Regulation 35A and related obligations when record shows inaction despite available remedies. Obiter - discussion on indicativeness of timelines. - Conclusion: DC's conclusion on contravention for delayed avoidance application is sustainable on facts; relief not interfered with. Issue (f): Standard of judicial review and overall conclusion on perversity/arbitrariness - Legal framework: Wednesbury/unreasonableness standard, limits of certiorari: review confined to jurisdictional errors, arbitrariness, mala fides or perversity; High Court not to reweigh evidence or substitute its own view where reasoned administrative decision exists. - Precedent Treatment: Authorities cited emphasise restraint in commercial/technical matters and deference to regulatory expertise absent arbitrariness. - Interpretation and reasoning: Applying the limited scope of judicial review, the Court held that the Disciplinary Committee followed mandated procedure, considered material and afforded hearings; findings on excess fee, related-party engagement and delay in avoidance proceedings were based on record admissions and not perverse. Differential treatment of other professionals was fact-specific and did not demonstrate mala fide or arbitrariness. - Ratio vs. Obiter: Ratio - absent perversity, arbitrariness, mala fides or jurisdictional error, the writ court will not interfere with regulatory disciplinary findings; factual findings based on record admissions are not re-opened. - Conclusion: The Impugned Order is not vitiated by legal error or procedural defect and does not shock conscience; judicial interference unwarranted.