Brief facts – Amit Gupta v. IBBI
In March of last year, a show cause notice was served upon the petitioner alleging that he had charged excessive fees, as a liquidator, in the course of liquidating a company. After a reply to the same was submitted and a personal hearing was conducted, a decision to carry out a wider inspection of the petitioner’s assignments was taken. In this regard, the final Inspection Report was prepared in mid-September, after the petitioner provided his response to the draft report shared earlier.
Days after the final Inspection Report was prepared, the impugned circular came to be issued, on September 28, 2023. This circular sought to provide clarification with respect to certain terms that appear in Regulation 4(2)(b) of the LP Regulations. The second show cause notice, issued in December, relied on the said circular. Through this, eight of the petitioner’s assignments were pulled up wherein excess fees were said to have been charged. The other allegations contained in the second show cause notice bear no relation to the impugned circular.
The petitioner approached the Bombay High Court, challenging the said circular. It was asserted that substantive amendments were made to the LP Regulations through the impugned circular i.e., by circumventing the pre-legislative public consultation and economic analysis for draft amendments as envisaged under the IBBI (Mechanism for Issuing Regulations) Regulations, 2018. Moreover, the petitioner assailed the retrospective effect given to clarifications under the circular.
Liquidator’s fee and clarifications provided under IBBI’s circular
As per Regulation 4 of the LP Regulations, the fee payable to the liquidator has to be decided by the Committee of Creditors (“CoC”) under sub-regulation (1) or the Stakeholders’ Consultation Committee (“SCC”) under sub-regulation (1A), as the case may be. If the fee is not so fixed, the formula prescribed under Regulation 4(2)(b) would come into play.
After it came to IBBI’s notice that certain terms appearing in Regulation 4(2)(b) were being interpreted differently by the liquidators, it was considered necessary to shed light on the meaning of the terms. Consequently, the IBBI came out with the circular dated September 28, 2023.
The clarifications provided under the said circular are summarised below:
Amount realised vis-à-vis liquidity or form of assets
For fee calculation, the term “amount realised” refers to the proceeds of sale or realisation from liquidation of assets which are not liquid. The rationale behind this is that if assets are already liquid, there is no realisation, with funds being readily available for distribution. Consequently, fees cannot be charged on the realisation for liquid assets.
Other liquidation costs – Only component of liquidation cost to be excluded is liquidator’s fee
The “other liquidation cost”, which is to be deducted from the realisation amount, would mean liquidation cost paid in priority as per the waterfall mechanism under Section 53(1)(a) of the IBC, after excluding the liquidator’s fee. I.e., the only component of liquidation cost that is to be excluded is the liquidator’s fee; it would be impractical to include the liquidator’s fee as the fee is what is being calculated in the first place.
It was observed that liquidators were excluding a number of components of liquidation cost (eg. going concern costs) in determining “other liquidation cost”. This was on account of a wrong assumption that the expanded definition of “liquidation cost” [3] as effected vide an amendment in 2019 did not apply to instances where the liquidation process commenced before the amendment. The Board made it clear that the additional components were always part of the liquidation cost, irrespective of the date on which the amendment came into effect, particularly in light of the components being paid in priority to payment to stakeholders (including workmen, secured creditors, and so on) under Section 53.
Amount distributed to stakeholders – CIRP and liquidation costs to be deducted
The liquidator’s fee is calculated as a percentage of the “Amount distributed to stakeholders”, which means distributions made to the stakeholders after deducting the Corporate Insolvency Resolution Process (“CIRP”) and liquidation costs. This clarification regarding deduction was rendered necessary after it was noticed that, in certain cases, fees were being calculated even on distribution of the CIRP and liquidation costs.
Cumulative value of amount realised or distributed
Under the circular, it was clarified that the term “Amount of Realisation/ Distribution” refers to the cumulative value of the amount realised or distributed till date which is to be bifurcated in various slabs as per column 1 of the table depicted under Regulation 4(2)(b), and thereafter the same is to be bifurcated into realisation or distribution in various periods of time and then corresponding fee rate from the table is to be taken.
Prior to the issue of this circular, the said term was being incorrectly interpreted to mean the value of assets realised during the tenure in which it was realised (i.e., in the first six months, the next six months, or thereafter), without considering the slab value of assets mentioned under column 1.
Exclusion of time period cannot be done unilaterally
If certain time periods (of stay on liquidation, for instance) are to be excluded in determining the liquidator’s fee, the approval of the National Company Law Tribunal (“NCLT”), the National Company Law Appellate Tribunal (“NCLAT”) or any Court of law should be in place. It is stated that the same will operate only in respect of the asset which could not be realised during such excluded period.
Decision of the Bombay High Court
Concerning the emphasis laid on the form of assets in determining the amount realised, the Court dispelled the notion that there was no effort involved in liquidating liquid assets. Pulling up the example of quoted shares given in the circular, the Court stated that just because a share was quoted, it did not follow that it was a liquid asset; reference was made to the significant effort and skill that might be required to offload a substantial holding without eroding value. Holding that the provision was not “merely clarificatory”, the Court remarked that it was “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”. With this, the concerned paragraph was struck down as ultra vires the LP Regulations and the IBC.
The provision regarding approval for excluding the time period was held to be a completely new requirement not envisaged under the existing framework. It was observed that the requirement that permission had to be obtained for such exclusion from the NCLT, NCLAT, or Court, which stayed the realisation of the asset, was a new stipulation and in the nature of a substantial amendment to the LP Regulations. Moreover, it was pointed out that a new jurisdiction, for approving the liquidator’s fee computation, was sought to be conferred through the circular. Consequently, the said portion was also struck off.
As to the validity of the three other clarifications provided under the circular, the Court upheld the same deeming that no interference was required.
Pursuant to this decision, IBBI modified its earlier circular, on April 18, 2024, withdrawing the paras struck down by the Bombay High Court.[4]
Remarks
The Bombay High Court has based its decision on the principle that a regulatory body such as IBBI cannot, in the garb of issuing clarifications, amend Regulations since such Regulations are required to be presented to the Parliament for review and only become enforceable after a specified period. In other words, the IBBI has no power and/ or authority to amend Regulations framed in the prescribed manner pursuant to review by the Parliament in accordance with law. The IBBI is only empowered to clarify provisions as and when necessary. The aforesaid judgment brings clarity and imbibes confidence in liquidators for legitimately calculating and deducting fees payable to them.
