TaxTMI 
TaxTMI 
2024 (4) TMI 241
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....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 Petitioner had charged excessive fees in the course of liquidating a company by the name Hindustan Dorr Oliver Limited ("HDOL"). The Pet....
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.... (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. Before delving into the contents of the Impugned Circular and their ....
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....re 1.25 0.94 0.51 On further sums realized 0.25 0.19 0.10 Amount 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 ....
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....d in the erstwhile Regulation 4(3) of the LP Regulations. The manner of computation of the liquidator's fee before and after the 2019 Amendments varies. In both versions, the liquidator would be entitled to an incentive structure for the amounts realised and the amounts distributed, but prior to the 2019 Amendments, there were four time slabs with varying percentage fee rates, for the period over which the realisation, 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 term....
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....ect from 25th July, 2019, Regulation 2(1)(ea) was substituted by the following: (ea) "liquidation cost" under clause (16) of section 5 means-- (i) fee payable to the liquidator under regulation 4; (ii) remuneration payable by the liquidator under sub-regulation (1) of regulation 7; (iii) costs incurred by the liquidator under sub-regulation (2) of regulation 24; (iv) costs incurred by the liquidator for preserving and protecting the assets, properties, effects and actionable claims, including secured 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 ....
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....he case may be. If liquidators' fee is not fixed under sub-regulation (1) and (1A), clause (b) of sub-regulation (2) of Regulation 4 provides that the liquidator shall be entitled to a fee as a percentage of the amount realised net of other liquidation costs, and of the amount distributed, for the balance period of liquidation, as under: [*****]^1 [1. For convenience, the table as contained in Regulation 4(2)(b) is not repeated here.] 2. Based on records examined during the inspections and investigations and interaction with stakeholders, it has been observed that different interpretations of terms highlighted 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....
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....res the LP Regulations, would, in our view, constitute validly made "guidelines" to enable the world at large to appreciate matters of insolvency and bankruptcy. That said, such guidelines must necessarily be consistent with, and within the parameters stipulated in the IBC, or regulations made under the IBC. 27. As with any subordinate legislation created by an entity to which the Parliament has delegated power to legislate, the regulations made by the IBBI too are required to be tabled in Parliament (under Section 241 of the IBC), for thirty days when Parliament is in session. During such period, Parliament would have the power to modify or annul the subordinate 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 Ind....
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....e Board, both directly and indirectly on account of the proposed regulation; and (b) how the proposed regulations further strengthen the objectives of the Code. 6. Amendment of Regulations. An amendment to any regulations shall be made in compliance with the provisions of regulations 4 and 5. 8. Urgent regulations. Where the Board is of the opinion that certain regulations are required to be made or existing regulations are required to be amended urgently, it may make regulations or amend the existing regulations, as the case may be, with the approval of Governing Board, without following the provisions of regulations 4 and 5. [Emphasis Supplied] 29. Should the IBBI be desirous of amending the LP Regulations, it would have to comply with the Law-Making Regulations and not resort 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 the....
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....ntentions of the IBBI may be summarised thus:- a) The Impugned Circular is a clarification aimed to remedy the unconscionable enrichment of liquidators who are not deducting liquidation costs incurred, particularly those relating to running of the business of Corporate Debtors as a going concern; b) When assets of the Corporate Debtor are already liquid, there is no effort involved in liquidating them, and therefore, the term "amount realised" should only relate to amounts realised in liquidating illiquid assets; c) In 111 cases, liquidators have realised their mistake after reading the Impugned Circular and have refunded excess fees to the tune of Rs. 5.75 crores, while 630 liquidators have confirmed that their understanding was consistent with the IBBI's interpretation of Regulation 4(2)(b); d) In contrast, the Petitioner has helped himself to an excess fee 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 li....
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....ew stipulations in the law, would necessarily circumvent compliance with the due process mandated in the Law-Making Regulations. 35. As a result, Paragraph 2.1 and Paragraph 2.5 have been struck down, as being ultra vires the LP Regulations and the IBC. They introduce completely new elements that are not found in the current legal framework. Where we have found that the contents of the Impugned Circular are only clarificatory and not new substantive stipulations, we have upheld the validity of such contents. Paragraph 2.2, therefore, withstands the scrutiny of judicial review. Where we have found that the Impugned Circular, despite the intention to clarify matters, may in fact create new confusion, we have interpreted such content of the Impugned Circular in the context of the LP Regulations, to save them from being struck down. As a result, Paragraph 2.3 and Paragraph 2.4, are interpreted and explained so that they are 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) provi....
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....includes "quoted shares" and "mutual fund" units. Such a stance is misconceived. Even for "quoted shares", significant effort and skill may be required to offload a substantial holding without eroding value. Merely because a share is quoted, it would not follow that it is a liquid asset. That is why securities regulations differentiate between "frequently traded" shares and "infrequently traded" shares. It is unreasonable and arbitrary to read into the term "amount realised", requirements of considering the "form" of the asset and the "effort" involved to liquidate the asset. Such a stipulation cannot be held to be merely clarificatory. 39. Using the term "liquid" as an adjective for an asset in the context of "liquidation" can at best be a word play. If it had been the intention of either Parliament (in making the IBC) or the IBBI (in making the LP Regulations) to make such a distribution, such a classification would have been found in the provisions of these legislations. 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 n....
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.... on other liquidation costs i.e., liquidator's fee. Including the same in "other liquidation cost" would entail a circular reference to the liquidator fee for the calculation of liquidator fee making the calculation very tedious and impractical. Hence, all other components of liquidation cost apart from liquidator's fee shall be part of the "other liquidation cost". In few cases, liquidators are only considering process cost as "other liquidation cost" and thereby, exclude the cost incurred in preserving and protecting the assets of the CD, and running the CD as a going concern to calculate "other liquidation cost". Before amendment dated 25th July, 2019 to the Liquidation Regulations, the liquidation cost under Regulation 2(1)(ea) had four components. To clarify the liquidation cost, through aforesaid amendment four new components of liquidation cost were added. In some cases, it is being wrongly interpreted that these newly added four components, inter-alia, such as going concern costs etc., are 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....
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....d must be reduced by the liquidation costs to arrive at the base amount on which, the liquidator's percentage fee would be payable. Therefore, there is no doubt in our mind that liquidation costs, as defined in Section 5(16) of the IBC, would bring such costs within its sweep. The amount of such costs must necessarily be excluded from the liquidation proceeds realised, and the liquidator's fees would need to be computed on that net amount. 46. We say this because but for such a framework, the fee structure in the LP Regulations would not incentivise the liquidator to keep a firm control over the costs incurred during liquidation. A liquidator may then recklessly incur costs, with no implications on his own fees. On the other hand, a common-sensical application of Section 5(16) of the IBC to the situation, would lead to the logical inference that the liquidator is incentivised to keep costs down. The more frugal he is with costs in running the business, the higher his fee would be. 47. Mr. Sharan Jagtiani on behalf of the Petitioner, in connection with Paragraph 2.2 of the Impugned Circular, presented three legal arguments to buttress his submission that the Impugned Circular ....
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.... of being legitimately paid out. Those transacting with the Corporate Debtor (say, a supplier of electricity) would have to wait in queue in line with the priority stipulated in the IBC, and not be paid despite dealing with the Corporate Debtor in the course of its running as a going concern during the liquidation process. In such a scenario, no right-minded person would deal with the Corporate Debtors during liquidation, and running the Corporate Debtors as a going concern would be rendered impossible. 49. Mr. Jagtiani would accept that the Petitioner indeed treated such costs incurred and paid for running the business as a going concern as a "liquidation cost" for purposes of priority in payments for the simple reason that they were paid out in priority to all other stakeholders. However, for purposes of computing the liquidator's fee under Regulation 4(2)(b), he would argue, prior to 25th July, 2019, such costs not being listed in the definition in Regulation 2(1)(ea), a liquidator would be entitled to compute the fee on liquidation proceeds, without deducting such costs. The argument has to only be stated to be rejected. As seen above, the IBC defines the term "liquidation c....
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....- (i) by any artificial means; or (ii) by a means not authorised by the person or authority or licensee concerned; or (iii) through a tampered meter; or (iv) for the purpose other than for which the usage of electricity was authorised; or (v) for the premises or areas other than those for which the supply of electricity was authorised.'' [Emphasis Supplied] 52. The Hon'ble Supreme Court repelled arguments that any usage of electricity that is not covered by the definition of "unauthorised use of electricity" (that definition used the phrase "means") would fall outside the meaning of the term. The following extracts are instructive: 50. In other words, the purpose sought to be achieved is to ensure stoppage of misuse/unauthorised use of the electricity as well as to ensure prevention of revenue loss. It is in this background that the scope of the expression "means" has to be construed. If we hold that the expression "means" is exhaustive and cases of unauthorised use of electricity are restricted to the ones stated under Explanation (b) of Section 126 alone, then it shall defeat the very purpose of the 2003 Ac....
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....nauthorised use of electricity" itself is an expression which would, on its plain reading, take within its scope all the misuse of the electricity or even malpractices adopted while using electricity. It is difficult to restrict this expression and limit its application by the categories stated in the Explanation. It is indisputable that the electricity supply to a consumer is restricted and controlled by the terms and conditions of supply, the Regulations framed and the provisions of the 2003 Act. [Emphasis Supplied] 53. SOUTHCO presents precisely the framework in which to read the meaning of the term "liquidation cost" factoring in Section 5(16) of the IBC and Regulation 2(1)(ea) of the LP Regulations. While in SOUTHCO, the Hon'ble Supreme Court used the common English meaning of the term "unauthorised use of electricity", the present case stands on an even superior footing, with the common meaning of the term "liquidation cost" actually being statutorily contained in Section 5(16) of the IBC as meaning "any cost" incurred by the liquidator. What "liquidation costs" are, is defined in an expansive manner in Section 5(16), by resort to the plain and commonsensical meaning of....
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....ided. However, such clumsiness would not present any estoppel in the IBBI's ability to correct its mistakes. In any event, none of this can be of consequence to a constitutional court's judicial review of an instrument of law. We have analysed and explained above, our reasons for interpreting the term "liquidation cost" for purposes of all provisions of the LP Regulations, in a manner consistent with Section 5(16) of the IBC. Such reasoning would not stand varied or altered by the IBBI's issuance of the aforesaid two circulars. 58. Therefore, to conclude on Paragraph 2.2 of the Impugned Circular, we find that there is nothing objectionable or contrary to the IBC or the LP Regulations, in the IBBI's assertion in the Impugned Circular, that the 2019 Amendments were clarificatory. We find no reason to interfere with the contents of Paragraph 2.2, which are not ultra vires the IBC and the LP Regulations. In fact, Paragraph 2.2 as read in the Impugned Circular is consistent with the scope and scheme of the IBC and the LP Regulations. Unlike Paragraph 2.1 of the Impugned Circular, Paragraph 2.2 of the Impugned Circular does not seek to legislate any new standard in the garb of a clari....
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....ication: "Amount distributed to stakeholders" shall mean distributions made to the stakeholders, after deducting CIRP and liquidation cost. [Emphasis Supplied] 61. The primary attack against Paragraph 2.3 is that it lends itself to a potential double count of liquidation costs in the course of computing the liquidator's fees. Liquidation costs are deductible from the liquidation proceeds realised, to compute the realisation fee. Paragraph 2.3 can be read to suggest that the same costs can be deducted again, and therefore, Mr. Jagtiani argued, it presents a scope for abuse and misuse. Therefore, he would argue, this portion of the Impugned Circular, ought to be struck down as being arbitrary. 62. While at first blush, it appeared that the language in Paragraph 2.3 could potentially lead to a double deduction of the same liquidation costs, on a closer review of the record, the mischief sought to be addressed by the clarification becomes apparent. When one reviews Paragraph 2.3 in the context of the facts dealt with by it and the material on record, to discern what it is meant to cover, the import of Paragraph 2.3 becomes clear. The IBBI has pointed out in its reply affidavit....
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.... are not satisfied that Paragraph 2.3 lends itself to being struck down. It is also common-sensical and logical that the same liquidation costs cannot be reduced twice over to compute the fees of the liquidator (once when computing the fees linked to liquidation, and again, when computing fees linked to distribution). Mr. Pankaj Vijayan, on behalf of the IBBI also clarified during arguments that a double count of the same liquidation costs was not the intent of the IBBI. The example contained in the reply affidavit of the IBBI too does not show any double deduction. 66. Since the Impugned Circular explains that the IBBI has observed liquidators charging their distribution fee even on payments made towards expenses incurred in running the business, the objective of the clarification is apparent. Therefore, we refrain from interfering with Paragraph 2.3. We hold that the contents of Paragraph 2.3 would work towards clarifying that payments of amounts towards running the business as a going concern cannot be regarded as a "distribution" to "stakeholders" but would be "liquidation costs". With that declaration of the law, we dispose of the challenge to Paragraph 2.3 of the Impugned ....
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....d then corresponding fee rate from the table is to be taken. [Emphasis Supplied] 68. Paragraph 2.4 too is not an epitome of elegance in drafting, in its stated intent to be a clarification. However, it is also not arbitrary or ultra vires the IBC and the LP Regulations inasmuch as it does not introduce any new standard. Suffice it to say that all Paragraph 2.4 means is that the cumulative amount realised or distributed must be computed. Thereafter, the time period in which such amounts were realised or, as the case may be, distributed, must be determined. The applicable percentage rates based on such matrix must be applied. 69. Mr. Jagtiani fairly stated that the Writ Petition does not contain any pleading assailing Paragraph 2.4 of the Impugned Circular. His generic grievance is that circulars ought not to be issued in the absence of any confusion, and the LP Regulations must be allowed to run their course. 70. This component of the Impugned Circular need not detain our attention. Suffice it so say, regulators of professionals must indeed make their mind known and issue practice notes and clarifications, to make their policy thinking well known to the communities they ....
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....ve been made by amending the LP Regulations, in compliance with the Law-Making Regulations. Without that process being followed, Paragraph 2.5 indeed deserves to be struck down. 75. As a matter of law too, Paragraph 2.5 is problematic. It is a fundamental Indian legal principle that acts of court can prejudice no one. However, Paragraph 2.5 turns the principle on its head. Although the LP Regulations are silent on ignoring the effect of the sheer inability to dispose an asset due to a stay order, Paragraph 2.5 introduces a new requirement of the liquidator approaching the forum that stayed the disposal, to also review his fee computation, and approve it. Put differently, the Impugned Circular purports to confer a new jurisdiction that is not in existence, and that too by way of a circular. Strangely, Paragraph 2.5 deals with the effect of a stay on liquidation but is silent about any stay on distribution. 76. 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 accord....
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....g if any fee charged by the Petitioner in the liquidation assignments in question, was in excess of permissible thresholds; b) Paragraph 2.2 is upheld in its terms since it does not stipulate any new standard and rightly clarifies the legal position under Section 5(16) of the IBC read with Regulation 2(1)(ea) of the LP Regulations in discerning the meaning of the term "liquidation cost". The definitional content of Regulation 2(1) (ea) of the LP Regulations is only illustrative of the types of "liquidation cost" that are covered by the term "any cost incurred" under Section 5(16) of the IBC; c) Paragraph 2.3 and Paragraph 2.4 are upheld. Payments to those doing business with the Corporate Debtor in the course of keeping the business running as a going concern pending liquidation, would not constitute a "distribution" to "stakeholders" from the proceeds of realisation, if they are paid in priority as "liquidation costs". If any business counter-party is willing to wait in queue to be paid as part of the eventual waterfall mechanism (potentially, in itself, a theoretical and impractical proposition), then such counter-party may be an operational creditor who is a st....