The promulgation of the Insolvency and Bankruptcy Code, 2016 (IBC/Code) is a watershed moment in development of law relating to Restructuring and Insolvency in the Indian eco-system as the Code introduced a robust mechanism for resolution of distressed entities significantly distinct from the earlier legal regime. One of the unique features as introduced by the Code was setting up of an autonomous body being the Insolvency and Bankruptcy Board of India (IBBI) by the Central Government. The IBBI has been instituted as a body corporate and entrusted with various functions as envisaged under the Code and is primarily involved in the process of registration of Insolvency Professional Agencies, Insolvency Professionals and Information Utilities. The IBBI has been instrumental in developing the IBC.
The Code specifically Section 196 inter alia envisages the power of IBBI to levy fee or other charges as regards insolvency professional agencies, insolvency professionals and information utilities. The said power of levy fee or other charges is also coupled with the power of framing specific Regulations for the functioning of such Insolvency Professional Agencies, Insolvency Professionals and Information Utilities.
The IBBI in terms of the Insolvency and Bankruptcy Board of India (Mechanism for Issuing Regulations) Regulations, 2018 has the power to make Regulations to carry out the provisions of the Code after public consultation and supported with economic analysis.
It is in the above mentioned legislative regime that one should consider the power of IBBI as a Regulator of the Insolvency Professionals and Information Utilities to include within its ambit the power to impose Regulatory Fee in cases of successful resolution. The power of imposition of Regulatory Fees by IBBI of late has gained significance in light of growing jurisprudence wherein all sorts of exorbitant insolvency resolution process costs including the fees of the Resolution Professional and the professionals being engaged by the Resolution Professional is being question by the NCLT/NCLAT. Such costs in certain instances have been denied by the Courts being non-commensurate to the nature of activities being carried on in the resolution process.
The IBBI is established to act as a supervisor of Insolvency Professionals and as a Regulator for the overall Insolvency and Bankruptcy process in the country. The process of funding required for carrying on the operations of IBBI was also elaborately discussed and provided for in the BLRC Report which specifically provided that the finances of the IBBI shall be funded through a mix of fees levied on the Insolvency Professionals, Information Utilities and Central Government grants.
The power and authority of IBBI to introduce Regulation 31A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulation) has been recently become a subject matter of challenge before Hon'ble High Court and the present article summarizes the issues which have been raised in the challenge.
For purposes of brief introduction, Regulation 31A of CIRP Regulation, introduces payment of regulatory fee to be calculated @ 0.25% of the realizable value to the Creditors under an approved Resolution Plan which is payable to IBBI where such realizable value is more than the liquidation value. Further the said regulation at sub regulation (2) provides for payment of regulatory fee to be calculated @1% of the cost being booked in Insolvency Resolution Cost towards hiring any professional or other services by the Interim Resolution Professional/Resolution Professional which is also payable to the IBBI.
At its plain reading it is being argued in the challenge the said provisions is clearly ultravires to Article 14, 19 and 21 of the Constitution of India as well as Section 196 and 240(1) of Code. The introduction of the said Regulation as per the challenge is clearly not supported with any legislative sanction and thus falls within the ambit of excessive delegation. The language and manner of introducing regulatory fee is claimed to be arbitrary and falling short of any economic analysis which is mandatory for insertion of any such Regulation.
The object and purpose of IBC is resolution of companies in financial distress in a timely manner while ensuring value maximization. However, the imposition of regulatory fee is being argued to be a deterrent for the Prospective Resolution Applicants as the same results in imposition of an additional burden and in effect shrinks the pool of available resources of the stakeholders in an approved Resolution Plan contrary to object and purpose of the Code.
Interestingly the virus of the above-mentioned Regulation 31A of CIRP Regulation has been challenged before the Hon'ble Delhi High Court as well as the Hon'ble High Court of Bombay. The IBBI as the promulgator of the Regulation, has quickly taken steps to defend its stand including filing of a transfer petition before the Hon'ble Supreme Court of India seeking consolidation of the petitions. It is pertinent to take note of the immediate action of IBBI to introduce Explanation to sub-regulation (1) vide notification dated 20.07.2023 clarifying that payment of the regulatory fee shall not be payable in cases where the approved the Resolution Plan in respect of the Insolvency Resolution of a Real Estate Project is from an association or group of allottees in such Real Estate Project.
The introduction of such an explanation immediately after the challenge to the Regulation before the Hon'ble High Court by a group of allottees who are the Successful Resolution Applicant in case of a Real Estate Company clearly establishes the proactive approach of IBBI to fine tune any procedural challenges to meet the interest of all stakeholders.
The entire object and purpose of imposing the regulatory fee under Regulation 31A is being argued to be a mechanism derived by the IBBI to earn revenue out of Resolution Process in which as per the case of the Petitioners there is neither any contribution nor any efforts/ actions on the part of the IBBI. The justifiability of the fees and the legal position of levying the same shall be clearly defended by the IBBI and the filing of the transfer petition itself shows that IBBI is in the process of taking appropriate legal action to ensure that the Regulations framed by the Board are not interpreted in any incorrect manner.
The process of approval of a Resolution Plan is more often than not intertwined with some haircut being taken by the creditors for the larger purpose of resolution of the company. The said haircut of the creditors is to be aligned with the mechanism which has been created under the Code for timely recovery and cannot be interpreted in a unidimensional manner to argue that imposition of regulatory fee will further burden the prospective Resolution Applicants and reduce the available financial pool of the creditors. The inclusion of the amount of regulatory fee as a part of insolvency resolution process costs is also to be reviewed vis-à-vis applicability of Section 5 (13) of IBC which restricts the power of IBBI to specify "Costs" as a part of Insolvency Resolution Process Costs. The usage of the term "Costs" is distinct from levy of "fees" as provided in Regulation 31A. In terms of Section 196 (1) (c) and (t) the levy of fee or other charges by IBBI is for registration and renewal of license for Insolvency Professional Agencies, Insolvency Professional and Information Utilities.
IBBI has partly taken cognizance of the above mentioned issues as raised in the petition and attempted to balance equity in case of allottees of a real estate project. Thus the fate of the remainder of the provisions of the said Regulation for the time being is clearly subject to outcome of pending proceedings before the Hon'ble Court. The final decision on the said issue shall greatly further the cause of IBBI and remove the clouds of uncertainty which has been raised on the Regulatory power of the Board as on date.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
