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CONSTITUTIONAL VALIDITY OF REGULATION 7A OF ‘INSOLVENCY AND BANKRUPTCY BOARD OF INDIA (INSOLVENCY PROFESSIONALS) REGULATIONS, 2016

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CONSTITUTIONAL VALIDITY OF REGULATION 7A OF ‘INSOLVENCY AND BANKRUPTCY BOARD OF INDIA (INSOLVENCY PROFESSIONALS) REGULATIONS, 2016
By: Mr. M. GOVINDARAJAN
November 10, 2020
All Articles by: Mr. M. GOVINDARAJAN       View Profile
  • Contents

Authorization for assignment

Regulation 7A was inserted in ‘Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016 (‘Regulations’ for short) vide Notification No. IBBI/2019-20/GN/REG045, dated 23.07.2019.  Regulation 7A requires insolvency professional to obtain a valid authorization for assignment from his Insolvency Professional Agency (‘IPA’ for short) with effect from 01.01.2020.  Without such valid assignment the insolvency professional cannot undertake any assignment on or after 01.01.2020.  This Authorization is valid for one year or attaining the age of 70 years by the Insolvency Professional whichever is earlier.  This Authorization is not required for the assignments undertaken by the Insolvency Professional as on 31.12.2019 or the date of expiry of his authorization for assignment.

Regulation 12A of Insolvency and Bankruptcy Board of India (Model Bye Laws and Governing Board of Insolvency Professional Agencies) Regulations, 2016 (‘Model Bye law’ for short) provides that the IPA requires to issue or renew authorization for assignment on the application of its insolvency professional member.  This regulation provides-

  • the eligibility criteria by a insolvency professional to obtain authorization for assignment from his IPA;
  • issue or renew of the authorization for assignment;
  • for payment of fees for this purpose;
  • validity of the authorization;
  • appeal procedure in case of discrepancy.

Challenge of Regulation 7A

One Insolvency Professional, CA V. Venkata Sivakumar, filed a writ petition before the High Court, Madras, under Article 226 of the Constitution of India in WP No. 13229 of 2020 (decided on 03.11.2020)  to issue a writ of declaration  declaring Regulation 7A read with Bye-law 12A of Model Bye Laws,  as improper exercise of discretion, patently unrelated to or inconsistent with the purpose or policy of the statute, acting unreasonably and arbitrarily violating Article 14,19 and 21 of r Constitution with mala fide intention and hence an abuse of process of law becomes void and inoperative, impose costs.

The petitioner is a practicing Chartered Accountant.  He passed the insolvency examination conducted by the Insolvency and Bankruptcy Board of India (‘Board’ for short) and enrolled himself as insolvency professional member of the Institute of Insolvency Professionals of the Institute of Chartered Accountants of India (‘IIIPI’ for short).  He also registered with the Board. 

The petitioner applied for authorization for assignment on 31.12.2019.  The IPA rejected his application on 14.01.2020 on the ground that he had not paid the requisite fee as per Regulation 7(2)(ca), i.e.,  he failed to pay to the Board, a fee calculated at the rate of 0.25 % of the professional fee earned for the services rendered by him as an insolvency professional in the preceding financial year, on or before the 30th  of April every year, along with a statement in Form E.  The petitioner produced the documentary evidence on payment of the fee under regulation 7(2)(ca) on 28.04.2019.  The same was again rejected on the ground that the petitioner failed to file Corporate Insolvency Resolution Process (CIRP) forms in respect of a few assignments, which had been completed one year ago.

The CIRP forms could not be filled-up because the forms contain about 120 columns, which is unnecessary because the Petitioner functioned as an interim resolution professional for only about three days.  The rejection of the application for authorization for assignment was communicated to him on 16.07.2020 when the third Respondent informed the Registry of the National Company Law Tribunal at Chennai that the Petitioner was not authorized to act as an Insolvency Professional.  The appeal filed by the Petitioner to the Membership Committee of IIIPI is still pending. Meanwhile, a show cause notice was issued by the first Respondent to call upon the Petitioner to show cause as to why action should not be taken against him for accepting an assignment without a valid authorization for assignment.    The petitioner filed an application before his IPA for authorization for assignment which was also rejected.  Therefore the petitioner filed this present writ petition before the High Court.

The petitioner submitted the following before the High Court-

  • The impugned regulations are contrary to Article 14 of the Constitution of India since he possessed all the necessary qualifications to practice as insolvency professional.
  • Once a person is registered as insolvency professional, he cannot be called upon to continually obtain an AFA on an ongoing annual basis.
  • The requirement of obtaining an authorization for assignment is akin to requiring an advocate, who has enrolled with the Bar Council of India, to nonetheless obtain an authorization on an annual basis in order to accept briefs from a client.
  • The principle of reasonableness is an essential element of equality and non arbitrariness.
  • In the present case, neither Regulation 7A of the IP Regulations nor Regulation 12A of the Model Bye-Laws IPA Regulations is reasonable.
  • His right to carry on the profession of insolvency has been adversely impacted by the impugned regulations which deprive him of the opportunity of accepting assignments as insolvency professional without an authorization for assignment notwithstanding the fact that he is a registered insolvency professional.
  • This is also a case of sub-delegation by a delegate which is contrary to the principle of delegatus non-potest delegare.
  • The delegation of power without substantial control by the principal is invalid.
  • Regulation 12A (7) stipulates a seven day time limit for filing an appeal before the Membership Committee.
  • The time limit is so short as to render the right of appeal as illusory.
  • There is no provision to condone delay.
  • The circulars, guidelines and directions do not constitute law.
  • The impugned regulations are liable to be declared as invalid.

The respondents submitted the following before the High Court-

  •  Regulation 7A was framed by the Board pursuant to powers conferred by Sections 196, 207, 208 and 240 of the Insolvency and Bankruptcy Code, 2016.
  • As per Section 196 of the Code, the Board is empowered to specify minimum eligibility requirements for registration of IPAs and IPs and to specify, by regulations, standards for the functioning of IPAs and insolvency professionals.
  • Under Section 208(2)(e), the insolvency professional is required to perform functions in such manner and subject to such conditions as may be prescribed.
  • The Report of the Bankruptcy Law Reforms Committee stated that insolvency professionals play a significant role in insolvency resolution. Therefore, it is necessary for the regulator to set minimum standards for selection, licensing, appointment, functioning and conduct and also to design entry barriers by way of licensing, registration, certification and accreditation requirements.
  • None of the criteria for being eligible to obtain an AFA under Regulation 12A (2) can be said to be unreasonable or arbitrary.
  • On the contrary, the prescription is germane for purposes of ensuring high standards among insolvency professionals.
  • An appeal is a purely statutory remedy and therefore has to be exercised in accordance with the conditions prescribed by statute.
  • Section 238A of the Code specifies that the Limitation Act, 1963 is applicable to proceedings under the Code. Therefore, an application under Section 5 of the Limitation Act may be filed to condone the delay in filing the appeal under Regulation 12A (7).
  • It is possible to redress grievances and iron out wrinkles and creases by following the procedures.
  • The writ petition is liable to be dismissed on the above said grounds.

The High Court heard the submissions put forth by both the parties.  The High Court considered the following questions-

  • Whether there is excess delegation?
  • Whether the impugned regulations violate Article 14, 19 and 21 of the Constitution of India?
  • Whether the equality class is violated by the impugned regulations?

The High Court analyzed the provisions of the Regulations.  It observed that the said regulations were framed under the power conferred by Sections 196, 207 and 208 read with 240 of the Code.  The Model Regulations were framed by the Board under the power conferred by Sections 196, 203 and 205 read with Section 240 of the Code.   Section 196 of the Code deals with the powers and functions of the Board and sub-section (2) thereof expressly empowers the IBBI to frame model bye laws to be adopted by an IPA.    On examining the said Sections of the Code, the undoubted position that emerges is that the Board is empowered to frame Regulation 7A of the Regulations and Regulation 12A of the Model Regulations. In turn, the IPAs, including the second Respondent, are empowered to frame bye-laws in consonance with the model bye-laws.  The High Court held that it cannot be said that there is excessive delegation.

As regards the criteria for accepting or rejecting an application for authorization for assignment, Regulation 12A (2) of the Model Regulations stipulates the criteria. Therefore, it certainly cannot be said that principles or norms have not been laid down in respect of the exercise of power by IPAs.

In regard to second issue the High Court held that, the existence of more than one authority with regulatory or disciplinary control over a professional is per se not a ground to hold that the impugned regulations are unconstitutional.  The IPAs are functioning under the control of the Board.  The BLRC Report recommended such a two-tiered regulatory structure. Hence, the High Court concluded that the challenge on this basis is untenable.

The High Court observed that the regulations treat all insolvency professionals alike.  Section 196(2)(c) of the Code stipulates expressly that the conditions of membership of an IP should be non-discriminatory.  To put it differently, all insolvency professionals  are required to enroll as professional members of an IPA, register themselves with the IBBI and also obtain an authorization for assignment  from the IPA concerned before accepting assignments, with effect from 01.01.2020, and, thereafter, on an annual basis.    The IPA is required to examine as to whether the IP concerned is eligible for an AFA as per the criteria stipulated in Regulation 12A (2).   He should be a fit and proper person in terms of the explanation to Regulation 4(g) of the IP Regulations.  The High Court did not find anything ex facie arbitrary about the specified criteria.  These measures are intended to regulate the profession and not to deprive a person of the right to practice the profession. Hence, the High Court concluded that Articles 14, 19 and 21 are not violated.

 It is always open to the IP concerned to remedy the non-compliance, as cited in the order of rejection, and re-apply. For all the reasons set out above, the High Court concluded that Regulation 12A is not unconstitutional.  The High Court is  of the view that the time limit prescribed in Regulation 12A(7) may be revisited by the Board by considering an appropriate amendment either providing for a larger time limit or by conferring power to condone delay for sufficient cause.

The High Court found that the petitioner has failed to make out a case to declare the impugned regulations as unconstitutional.  This order will not preclude the Petitioner from prosecuting the pending appeal in respect of the rejection of his application for AFA or from submitting a fresh application.  The High Court dismissed the writ petition.

 

By: Mr. M. GOVINDARAJAN - November 10, 2020

 

 

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