Bombay High Court held that the Circular dated 28th September 2023, issued by the IBBI, is partly ultra vires as it introduced new standards not supported by existing law.
The Division Bench of Bombay High Court comprising Justice B.P. Colabawalla and Justice Somasekhar Sundaresan was hearing a petition filed by the Insolvency Professional and observed that the Circular dated 28th September 2023, issued by the Insolvency and Bankruptcy Board of India (IBBI), was partly ultra vires as it introduced new standards not supported by existing law, violating the principle against retrospective amendments without following due legislative process, while portions clarifying existing regulations were upheld as consistent with the Insolvency and Bankruptcy Code (IBC) and Liquidation Process Regulations (LP Regulations).
In a significant judgment, the High Court addressed a Writ Petition challenging a Circular dated 28th September 2023, issued by the Insolvency and Bankruptcy Board of India (IBBI). The Circular aimed to clarify terms in Regulation 4(2)(b) of the Liquidation Process Regulations (LP Regulations), 2016. The Petitioner, a Chartered Accountant and registered Insolvency Professional (IP) with the IBBI, contended that the Circular effectively amended the LP Regulations retrospectively, making it ultra vires.
The Petitioner had been acting as a liquidator for multiple companies under the Insolvency and Bankruptcy Code (IBC). On 14th March 2023, the IBBI issued a Show Cause Notice for allegedly charging excessive fees during the liquidation of Hindustan Dorr Oliver Limited (HDOL). Following the Petitioner’s response, the IBBI directed a wider inspection of his assignments, leading to another Show Cause Notice on 4th December 2023, based on findings from the inspection report and the challenged Circular. The second notice highlighted faults in eight liquidation assignments, including excessive fees and procedural irregularities. The primary grievance in the Writ Petition was the retrospective application of the Circular concerning fee structures.
The High Court analyzed the legal framework governing the liquidation process under the IBC, particularly Regulation 4, which specifies the liquidator's fees. The main issue was whether the Circular clarified Regulation 4(2)(b) or introduced substantive amendments retrospectively. While acknowledging the IBBI's authority to issue regulations and guidelines under Section 196 of the IBC, the Court emphasized that such guidelines must align with the IBC and its regulations.
The Circular intended to ensure consistent interpretations of terms like "amount realised," "other liquidation costs," and "amount distributed," requiring IPs to adjust past fees accordingly or face disciplinary actions. The Petitioner argued that this amounted to an illegal amendment. The Court reviewed whether the Circular was a valid clarification or an illegal amendment, underscoring the necessity for regulatory consistency with existing laws.
In its analysis, the Court noted the IBBI's adherence to high standards in regulation-making, including pre-legislative public consultations and economic analysis as mandated by the Insolvency and Bankruptcy Board of India (Mechanism for Issuing Regulations) Regulations, 2018. These procedures aim to ensure transparency and public participation in the regulation-making process.
Ultimately, the Court struck down Paragraph 2.1 of the Circular, which introduced new standards not backed by existing law, as ultra vires the LP Regulations and the IBC. However, Paragraph 2.2, which clarified that liquidation costs must be deducted before calculating the liquidator's fee, was upheld as it aligned with the IBC and the LP Regulations. The Court emphasized the importance of following due process in regulation-making to avoid arbitrary or retrospective rule changes.
The judgment underscored the necessity for regulatory agencies to follow due process, engage in public consultation, and perform thorough economic analyses before enacting or amending regulations. While the IBBI's attempt to clarify liquidation fee calculations was partly validated, the introduction of new standards without following the mandated procedures was deemed unconstitutional. This decision highlighted the broader need for regulatory consistency and adherence to legislative governance frameworks.
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