Conflict between Code & Regulations
Issue - 1.
# Section 52. Secured creditor in liquidation proceedings.
(8) The amount of insolvency resolution process costs, due from secured creditors who realise their security interests in the manner provided in this section, shall be deducted from the proceeds of any realisation by such secured creditors, and they shall transfer such amounts to the liquidator to be included in the liquidation estate.
# Section 53. Distribution of assets. -
(1) Notwithstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force, the proceeds from the sale of the liquidation assets shall be distributed in the following order of priority and within such period as may be specified, namely: -
(a) the insolvency resolution process costs and the liquidation costs paid in full;
(b) the following debts which shall rank equally between and among the following:
- (i) workmen’s dues for the period of twenty-four months preceding the liquidation commencement date; and
- (ii) debts owed to a secured creditor in the event such secured creditor has relinquished security in the manner set out in section 52;
Liquidation Regulation 21A(2) reads as under;
(2) Where a secured creditor proceeds to realise its security interest, it shall pay -
(a) as much towards the amount payable under clause (a) and sub-clause (i) of clause (b) of sub-section (1) of section 53, as it would have shared in case it had relinquished the security interest, to the liquidator within ninety days from the liquidation commencement date; and
(b) the excess of the realised value of the asset, which is subject to security interest, over the amount of his claims admitted, to the liquidator within one hundred and eighty days from the liquidation commencement date:
Provided that where the amount payable under this sub-regulation is not certain by the date the amount is payable under this sub-regulation, the secured creditor shall pay the amount, as estimated by the liquidator:
Provided further that any difference between the amount payable under this sub-regulation and the amount paid under the first proviso shall be made good by the secured creditor or the liquidator, as the case may be, as soon as the amount payable under this sub-regulation is certain and so informed by the liquidator.
Thus, as per Regulations, the secured creditor is required to share the proceeds from the realization of security interest, with the liquidator for the following;
Insolvency resolution process costs. [Section 53(1)(a)]
The Liquidation costs. [Section 53(1)(a)]
Workmen’s dues for the period of twenty-four months preceding the liquidation commencement date. [Section 53(1)(b)(i)]
Whereas as per the provisions of the Code [Section 52(8)], secured creditor is required to share the proceeds of realization of security interest for “Insolvency resolution process costs” only.
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Issue - 2.
Section 54. Dissolution of corporate debtor. -
(1) Where the assets of the corporate debtor have been completely liquidated, the liquidator shall make an application to the Adjudicating Authority for the dissolution of such corporate debtor.
(2) The Adjudicating Authority shall on application filed by the liquidator under sub-section (1) order that the corporate debtor shall be dissolved from the date of that order and the corporate debtor shall be dissolved accordingly.
(3) A copy of an order under sub-section (2) shall within seven days from the date of such order, be forwarded to the authority with which the corporate debtor is registered.
Liquidation Regulation 45. Final report prior to dissolution.
(1) When the corporate debtor is liquidated, the liquidator shall make an account of the liquidation, showing how it has been conducted and how the corporate debtor’s assets have been liquidated.
(2) If the liquidation cost exceeds the estimated liquidation cost provided in the Preliminary Report, the liquidator shall explain the reasons for the same.
(3) The liquidator shall submit an application along with the final report and the compliance certificate in form H to the Adjudicating Authority for –
(a) closure of the liquidation process of the corporate debtor where the corporate debtor is sold as a going concern; or
(b) for the dissolution of the corporate debtor, in cases not covered under clause (a).]
Section 54 of the Insolvency and Bankruptcy Code (the Code) says that where the assets of the Corporate Debtor have been completely liquidated, the liquidator shall make an application to the Adjudicating Authority for the dissolution of such Corporate Debtor and this Authority shall dissolve the Corporate Debtor and the copy be forwarded to the ROC concerned within seven days.
By looking at section 54, it is clear that the mandate u/s 54 is to terminate the life of corporate debtors by dissolving them after liquidation of their assets.
In the Liquidation Regulation 45 (3), IBBI has given a peremptory direction to the liquidator to file an application for closure of the liquidation process of the Corporate Debtor where the Corporate Debtor is sold as a going concern.
The aforesaid regulation is repugnant to the mandate u/s 54, because after liquidation of the assets of the corporate debtor, an application shall be filed for dissolution of the corporate debtor and same shall be allowed.
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Issue - 3
Recently Appellate Authority (NCLAT) in Visisth Services Ltd. Vs. S. V. Ramani, Liquidator of United Chloro-Paraffins Pvt. Ltd. [Company Appeal (AT) (Insolvency) No.896 of 2020] upheld the orders of Adjudicating Authority (NCLT) confirming sale/auction of Assets & Liabilities of CD as a going concern during liquidation process.
Genesis of the orders of NCLT & NCLAT lies in the following regulations;
a). Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.
# Regulation 39C. Assessment of sale as a going concern.
(2) Where the committee recommends sale as a going concern, it shall identify and group the assets and liabilities, which according to its commercial considerations, ought to be sold as a going concern under clause (e) or clause (f) of regulation 32 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016.
b). Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016.
# Regulation 32A. Sale as a going concern.
(1) Where the committee of creditors has recommended sale under clause (e) or (f) of regulation 32 or where the liquidator is of the opinion that sale under clause (e) or (f) of regulation 32 shall maximise the value of the corporate debtor, he shall endeavour to first sell under the said clauses.
(2) For the purpose of sale under sub-regulation (1), the group of assets and liabilities of the corporate debtor, as identified by the committee of creditors under sub-regulation (2) of regulation 39C of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 shall be sold as a going concern.
(3) Where the committee of creditors has not identified the assets and liabilities under subregulation (2) of regulation 39C of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, the liquidator shall identify and group the assets and liabilities to be sold as a going concern, in consultation with the consultation committee.
The word “Liability” or “Liabilities” is nowhere defined in the Code, CIRP Regulations, Liquidation Regulations or The Companies Act.
Elaborate provisions have been provided in the Code to identify the assets & claims (liabilities) of the CD.
a). Section 36 - Identification of Assets.
b). Section 38 to 42 - Identification of claims on CD (Liabilities of CD).
Further Section 52 & 53 provides for disposal of assets & settlement of claims (liabilities).
As per the provisions of Section 53, after distribution of the proceeds of assets by the liquidator, all claims/liabilities stand satisfied/extinguished.
Now the question is how CoC can identify the liabilities (claims on CD) during insolvency process, even prior to public announcement of Liquidator calling for the claims on CD.
Liabilities, auctioned/sold along with assets in going concern auction/sale during liquidation, will thus get novated and will be satisfied in full in due course of time. Clubbing of liabilities (claims on CD) with assets will also tantamount to preferential treatment of such liabilities vis-a-viz liabilities/claims settled by liquidator under the provisions of Section 53.
This will also be the violation of Fundamental Rights of Equality enshrined under the Constitution of India.
The Constitution Of India
Article 14. Equality before law The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India Prohibition of discrimination on grounds of religion, race, caste, sex or place of birth.
Now the questions arise;
What is the criteria to be adopted by CoC [Regulation 39(c)] & liquidator [Regulation 32A] for identifying the liabilities for clubbing the same with assets in going concern sale during liquidation?
Whether these liabilities so identified (supra) will stand attached with the assets and constitute as part of Liquidation Estate (Section 36)?
Whether the liquidator has powers to auction/sale any asset/liability, which are not part of Liquidation Estate?
Whether liquidator has to settle liabilities/creditors mandatorily as per the priority specified in section 53 or the priority of liabilities/creditors can be altered by RP/Liquidator by clubbing the liabilities with assets in consultation with CoC [CIRP Regulation 39(c)] / SCC [Liquidation Regulation 32A]
How will the compliance of Section 54 be taken care of?
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Issue - 4
Board Distorts the provisions of Regulatory Controls in IBC
Recently there has been a flood of Disciplinary Cases against the Insolvency Professionals. Let’s look into some of the important provisions of the Code & Regulations framed by the Board, in respect of appointment of Inspecting / Investigating Authority and constituting the Disciplinary Committee.
Insolvency and Bankruptcy Code, 2016.
# Section 218. Investigation of insolvency professional agency or its member or information utility. -
(1) Where the Board, on receipt of a complaint under section 217 or has reasonable grounds to believe that any insolvency professional agency or insolvency professional or an information utility has contravened any of the provisions of the Code or the rules or regulations made or directions issued by the Board thereunder, it may, at any time by an order in writing, direct any person or persons to act as an investigating authority to conduct an inspection or investigation of the insolvency professional agency or insolvency professional or an information utility.
# Section 220. Appointment of disciplinary committee. –
(1) The Board shall constitute a disciplinary committee to consider the reports of the investigating Authority submitted under sub-section (6) of section 218:
Provided that the members of the disciplinary committee shall consist of whole-time members of the Board only.
Insolvency and Bankruptcy Board of India (Inspection and Investigation) Regulations, 2017.
# Regulation 2. Definitions.
(1) In these regulations, unless the context otherwise requires –
(c) “Disciplinary Committee” means a committee of whole time member(s) constituted by the Board under sub-section (1) of section 220 of the Code:
Provided that the whole time member(s) in the Disciplinary Committee shall not be associated with the investigation or inspection;
(e) “Investigating Authority” means an officer or a team of officers of the Board, which has been directed by the Board, to conduct the investigation of a service provider;
(f) “Inspecting Authority” means an officer or a team of officers of the Board, which has been directed by the Board, to conduct the inspection of a service provider;
Conflict between the provisions of the Code & Regulations;
From the above table, it can be observed that Board distorted the the provisions of the Code, mainly in following two areas;
1. The Code provides that members of the disciplinary committee shall consist of whole-time members of the Board only. The legislative intent of the Parliament in using the word “members” in the provisions of the Code, denotes that the disciplinary committee will have two or more members. Logic behind the disciplinary committee having two or more whole time members of the Board might have been that the decisions of the disciplinary committee constitute policy decisions/guidelines of the Board (IBBI) & decisions of the disciplinary committee may not have the disconnect with the existing policy guidelines of the Board.
Whereas the Board framed distorted regulations reading;
“Disciplinary Committee” means a committee of whole time member(s) constituted by the Board”
Thus with the distorted regulations, the Board gave itself authority to constitute a single member disciplinary committee. Accordingly most of the decisions in disciplinary cases are being taken by the single member disciplinary committee.
Now the following questions arise;
Whether the Board has the mandate to frame regulations beyond the provisions of the Code & Legislative intent of the Parliament. Section 240(1) of the Code provides that the Board is empowered to frame Regulations which are consistent with this Code and the rules made thereunder, to carry out the provisions of this Code.
# 240. Power to make regulations. –
(1) The Board may, by notification, make regulations consistent with this Code and the rules made thereunder, to carry out the provisions of this Code.
Whether the decisions of the single member disciplinary committee are legally enforceable. The Code does not provide for the validity of orders of the disciplinary committee during vacancy in the disciplinary committee. In my view, the decisions of a single member disciplinary committee are bad in law and are not enforceable.
2. For appointment of investigating authority the Code gave the Board the authority to direct any person or persons to act as an investigating authority to conduct an inspection or investigation, whereas the Board under the regulations restricted the appointment of investigating/inspection authority of officer or a team of officers of the Board,( mostly non-professionals / babus). This way objectivity & professionalism of inspection & investigations have been lost.
In one case the Inspecting Authority / Disciplinary Committee failed to identify a fraudulent transaction, sanctioned by CoC, despite having discussed the same in the Disciplinary order.
Fraudulent Transactions in IBC - A case study
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Blogger's comments
1). If the Code is carefully read, it could be ascertained that wherever the Code felt that IBBI assistance is required, it has been specifically stated "as specified by the Board or in such manner as may be specified or prescribed" this clause is indicative of the fact that beyond the procedure inbuilt in the Code, if additional mechanism or paraphernalia is required to accomplish implementation of the statute, there it has been mentioned as "as specified by the Board or in such manner as may be specified or prescribed”. The point to remember is that Regulations are for supplementation, not for supplantation.
2). If Sections 196 & 240 are read together, it could be understood that Section 196 is to confer powers and functions upon IBBI, Section 240 is to confer upon IBBI general power (subsection 1) to regulate and particular power (subsection 2) to regulate the areas mentioned in subsection-2. If section 240 (2) regulating powers are read along with other provisions of the Code, it is evident that in whichever Section it has been mentioned as "as specified by the Board or in such manner as may be specified or prescribed”, over those sections alone, regulating power is conferred upon IBBI in subsection 2 of section 240.
3). Of course implicit overriding effect is given in Section 240 (1) of the Code stating that regulating power over particular Sections will not cause prejudice to the general regulating power of subsection 1, which is as follows;
"(1). The Board may, by notification, make regulations consistent with this Code and the rules made there under, to carry out the provisions of this Code”
4). By reading this sub section, it is understandable that IBBI is given discretion to notify regulations. But those regulations are qualified by later-part of the subsection above.
5). Those regulations shall be not only consistent with the Code but shall also be consistent with Rules issued u/s 239. So these Regulations shall be subordinate and supplemental to the Code as well as Rules.
6). The purpose and object of the Regulations issued by IBBI is to carry out the provisions of the Code, not for carrying out the purpose of the Code. ………
7). It is explicitly mentioned in subsection -1 of section 240, Regulations are to sub-serve sections of the Code in implementation. There are umpteen citations of Hon'ble Supreme Court saying though general power is given in one sub section and when the factors enumerated in another subsection are illustrative in nature, the rule making power mostly limited to those illustrations only. In this case, IBBI is to regulate the working of insolvency professionals relating to the duties of them. IBBI regulating power is even subject to rule-making power of the central government u/s 239 of the Code.
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Case Law;
i). High Court Delhi (25.07.2011) Subhash Chand Aggarwal vs Union Of India & Others [Writ Petition (Civil) No. 8359]
# 8. The Supreme Court has held in State of Tamil Nadu & Anr vs P. Krishnamurthy & Ors. (2006) SCC 517 that any subordinate legislation or part thereof, which does not conform to the object, scheme and provisions of the parent Act under which it is made, is invalid. In this case the court elucidated the grounds on which subordinate legislation can be challenged. It was observed:-
" #12. There is a presumption in favour of constitutionality or validity of a subordinate legislation and the burden is upon him who attacks it to show that it is invalid. It is also well recognised that a subordinate legislation can be challenged under any of the following grounds:
(a) Lack of legislative competence to make the subordinate legislation.
(b) Violation of fundamental rights guaranteed under the Constitution of India.
(c) Violation of any provision of the Constitution of India.
(d) Failure to conform to the statute under which it is made or exceeding the limits of authority conferred by the enabling Act.
(e) Repugnancy to the laws of the land, that is, any enactment.
(f) Manifest arbitrariness/unreasonableness (to an extent where the court might well say that the legislature never intended to give authority to make such rules).
The court considering the validity of a subordinate legislation, will have to consider the nature, object and scheme of the enabling Act, and also the area over which power has been delegated under the Act and then decide whether the subordinate legislation conforms to the parent statute. Where a rule is directly inconsistent with a mandatory provision of the statute, then, of course, the task of the court is simple and easy. But where the contention is that the inconsistency or non-conformity of the rule is not with reference to any specific provision of the enabling Act, but with the object and scheme of the parent Act, the court should proceed with caution before declaring invalidity."
ii). Hon'ble Supreme Court (24.03.2006) In Kerala Samsthana Chethu Thozhilali Union v. State of Kerala [(2006) 4 SCC 327, Appeal (civil) 1732 of 2006] held as follows:
"17. A rule is not only required to be made in conformity with the provisions of the Act where under it is made, but the same must be in conformity with the provisions of any other Act, as a subordinate legislation cannot be violative of any plenary legislation made by the Parliament or the State Legislature.
37. Furthermore, the terms and conditions which can be imposed by the State for the purpose of parting with its right of exclusive privilege more or less has been exhaustively dealt with in the illustrations in sub-section (2) of Section 29 of the Act. There cannot be any doubt whatsoever that the general power to make rules is contained in sub-section (1) of Section 29. The provisions contained in sub-section (2) are illustrative in nature. But, the factors enumerated in sub-section (2) of Section 29 are indicative of the heads under which the statutory framework should ordinarily be worked out.
43. The submission of Mr. Iyer that there exists a distinction between carrying out the provisions of the Act and the purpose of the Act, is not relevant for our purpose. The power of delegated legislation cannot be exercised for the purpose of framing a new policy. The power can be exercised only to give effect to the provisions of the Act and not dehors the same. While considering the carrying out of the provisions of the Act, the court must see to it that the rule framed therefore is in conformity with the provisions thereof.
46. In Hotel Balaji and Others v. State of A.P. and Others (1993 Supp (4) SCC 536), whereupon Mr. Iyer placed reliance, it is stated: "The necessity and significance of the delegated legislation is well accepted and needs no elaboration at our hands. Even so, it is well to remind ourselves that rules represent subordinate legislation. They cannot travel beyond the purview of the Act. Where the Act says that rules on being made shall be deemed "as if enacted in this Act", the position may be different. (It is not necessary to express any definite opinion on this aspect for the purpose of this case.) But where the Act does not say so, the rules do not become part of the Act."
iii). Hon'ble Supreme Court (24.03.2006) State Of Tamil Nadu & Anr vs P. Krishnamurthy & Ors [Civil Appeal No.5572 & 5644 of 2005]
# 12. There is a presumption in favour of constitutionality or validity of a sub-ordinate Legislation and the burden is upon him who attacks it to show that it is invalid. It is also well recognized that a sub-ordinate legislation can be challenged under any of the following grounds :-
a) Lack of legislative competence to make the sub-ordinate legislation.
b) Violation of Fundamental Rights guaranteed under the Constitution of India.
c) Violation of any provision of the Constitution of India.
d) Failure to conform to the Statute under which it is made or exceeding the limits of authority conferred by the enabling Act.
e) Repugnancy to the laws of the land, that is, any enactment .
f) Manifest arbitrariness/unreasonableness (to an extent where court might well say that Legislature never intended to give authority to make such Rules).
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