IBBI Regulations: Beyond The Scope Of Delegated Legislation

The Insolvency and Bankruptcy Board (IBBI) has done a commendable job particularly given the compelling need to keep experimenting with the insolvency laws, as recognised by the Hon’ble Supreme Court in Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17[1]. However, some of its regulations, as discussed in this article, are bad in law for primarily following three reasons, firstly, they are beyond the legislative power of the board and propose to bring into existence substantive disabilities which are not provided in the Insolvency and Bankruptcy Code, 2016 (IBC), secondly, they are inconsistent with provisions of IBC, and lastly, they suffer from omissions making the regulations logically and legally absurd.

The relevant regulations are discussed as below:

• Regulation 30A of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Person) Regulations, 2016.

Regulation 30A is a classic example of a regulation being not only inconsistent, but also antithetical to the parent provision of the IBC. The regulation purports to prescribe the manner of withdrawal of an application under Section 12A of IBC even before constitution of the committee of creditors, which it cannot for reasons explained hereinbelow.

Section 12A of IBC enables withdrawal of the applications filed under Section 7, 9 or 10 of IBC, post its admission, if the committee of creditors (CoC) approves of such withdrawal by a voting share of at least ninety percent. The introduction of Section 12A is preceded by recommendation of Insolvency Law Committee in its report of March 2018 which is reproduced as follows:

“On a review of the multiple NCLT and NCLAT judgments in this regard, the consistent pattern that emerged was that a settlement may be reached amongst all creditors and the debtor, for the purpose of a withdrawal to be granted, and not only the applicant creditor and the debtor. On this basis read with the intent of the Code, the Committee unanimously agreed that the relevant rules may be amended to provide for withdrawal post admission if the CoC approves of such action by a voting share of ninety per cent. ….”

The very fact that Section 12A of IBC mandates the approval of CoC as a precondition for withdrawal, there is no occasion to apply the said provision before constitution of the committee of creditors. A bare reading of the provision, as well as the legislative intent behind its enactment, indisputably makes it clear that Section 12A can come into application only post constitution of the CoC. The non application of Section 12A pre constitution of CoC is further fortified by the observation of the Hon’ble Supreme Court in Swiss Ribbons (P) Ltd. v. Union of India (Supra) while deciding the vires of Section 12A of the IBC which is reproduced as follows:

“52. …..A question arises as to what is to happen before a committee of creditors is constituted (as per the timelines that are specified, a committee of creditors can be appointed at any time within 30 days from the date of appointment of the interim resolution professional). We make it clear that at any stage where the committee of creditors is not yet constituted, a party can approach the NCLT directly, which Tribunal may, in exercise of its inherent powers under Rule 11 of the NCLT Rules, 2016, allow or disallow an application for withdrawal or settlement…….”

However, absurdly the IBBI, by way of regulation 30A(1), prescribed the manner not only for withdrawal after CoC, but also for withdrawal before the constitution of CoC. The relevant part of regulation, as amended up to date, is reproduced as follows:

“30 A. Withdrawal of application. (1) An application for withdrawal under section 12A may be made to the Adjudicating Authority – (a) before the constitution of the committee, by the applicant through the interim resolution professional; (b) after the constitution of the committee, by the applicant through the interim resolution professional or the resolution professional, as the case may be: ………….………..” (emphasis supplied)

Apart from above legal inconsistency Regulation 30A also suffers from pragmatic difficulties which seemingly were not contemplated. The settlement with the individual applicant at whose instance the insolvency proceeding is initiated has to be mandatorily placed before the Adjudicating Authority at the earliest and, in any case, not after the constitution of CoC. The said regulation prescribes additional requirements namely: (i) filing of a statutory form, (ii) annexing a bank guarantee, and (iii) making application through Resolution Professional. These additional requirements make the process unnecessarily cumbersome and hyper technical. Though the regulation does make it mandatory for the Resolution Professional to forward the said application to the adjudicating authority within three days from receipt thereof, the same has been practically not possible and has led to difficulties in implementation, as observed by the Hon’ble NCLAT in K.C. Sanjeev vs Eswara Pillai Kesavan Nair IRP of Solar Offset Printers Pvt Ltd. & Ors. Comp Appeal (AT) (INS) 1427/2019:

“Considering the Provisions of Section 12 A of IBC and Regulation 30 A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, it is clear that the IRP is duty bound to place the Application for withdrawal within three days of its receipt. The grievance of the Appellant is that in spite of such provision such action was not taken. The Appellant is raising various grievances against the IRP. We have been dealing with these types of matters relating to withdrawal and in this regard various parties do appear to have been facing problems. The date of filing of application for withdrawal to Adjudicating Authority is material considering Judgment in the matter of Swiss Ribbons Pvt. Ltd. vs. Union of India 2019 SCC Online SC 73.”

Thus, it can be safely said that Regulation 30A is misconceived and bad in law to the extent it purports to prescribe manner of withdrawal before constitution of CoC.

• Regulation 2B and 37(8) of INSOLVENCY AND BANKRUPTCY BOARD OF INDIA (LIQUIDATION PROCESS) REGULATIONS, 2016

The IBBI amended Regulation 2B and 37 of Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (Liquidation Regulations) on 06.01.2020 introducing a blanket disability for persons ineligible under 29A of IBC to participate in any manner during liquidation proceedings. The ineligibility under Section 29A otherwise applies only during insolvency resolution process for submission of a resolution plan. Interestingly, no such disability is provided in the IBC for liquidation of a corporate debtor, and the amendments to the Liquidation Regulations supplant the IBC, rather than supplementing it.

Regulation 2B has been amended by way of insertion of following proviso:

“Provided that a person, who is not eligible under the Code to submit a resolution plan for insolvency resolution of the corporate debtor, shall not be a party in any manner to such compromise or arrangement.”

Further sub-regulation 8 has been added in Regulation 37 as follows:

“(8) A secured creditor shall not sell or transfer an asset, which is subject to security interest, to any person, who is not eligible under the Code to submit a resolution plan for insolvency resolution of the corporate debtor.”

Apparently, the aforesaid regulations not only affect the substantial rights of a prospective buyer but also the right of a secured creditor to sell its secured assets. It is a trite law that the regulation making power cannot be exercised to introduce any right or disability not provided in the parent legislations. The action of the IBBI flies in the face of the judgment of Hon’ble Supreme Court in Hindustan Zinc Ltd. vs. Rajasthan Electricity Regulatory Commission (2015) 12 SCC 611, whereby the Hon’ble Supreme Court held as follows:

“25. It is now a well settled principle of law that the rule-making power 'for carrying out the purpose of the Act' is a general delegation. Such a general delegation may not be held to be laying down any guidelines. Thus, by reason of such a provision alone, the Regulation-making power cannot be exercised so as to bring into existence substantive rights or obligations or disabilities which are not contemplated in terms of the provisions of the said Act.”

Per contra, it may be argued that the aforesaid amendments in regulations are brought to give effect to Section 33(1)(f) of IBC which prohibits the liquidator to sell the assets forming part of liquidation estate to any person ineligible under Section 29A of IBC to present a resolution plan. However, it would be erroneous to suggest that restriction upon sale of assets by the liquidator would also cover any scheme of compromise under Section 230 of the Companies Act, 2013. Indisputably, the scheme of compromise, by no stretch of imagination, is a sale of assets of corporate debtor by liquidator.

Further, 33(1)(f) does not, in any manner, disable a secured creditor from selling its secured interest and the scope of the section is restricted to sale by a liquidator.

The author is conscious of contrary view taken by the Hon’ble NCLAT in Jindal Steel and Power Ltd. VS Arun Kumar Jagatramka & Anr. Comp Appeal (AT) 221/2018, and State Bank of India. VS Anuj Bajpai (Liquidator) Comp Appeal (AT) (INS) 509/2019 [2] in as much as Section 33(1)(f) was relied upon to prohibit a person ineligible under Section 29A to participate in compromise under Section 230 of the Companies Act, 2013 and to acquire assets even from the secured creditor. However, highlighting the errors in the aforesaid judgments would be a digression from the present topic which is restricted to regulation making powers of IBBI.

In author’s opinion, such disabilities could not have been brought by a regulatory body, and the proper course would have been introduction of relevant amendments in IBC itself.

Of course, the power to make regulations is plenary but the regulations must be consistent with the provisions of the parent legislation, and must be made for carrying out the provisions of the parent legislation. However, it seems that the regulatory body has assumed the power of the Parliament in as much as aforesaid regulations have been enacted. It is necessary to point out that the role of IBBI is not to legislate afresh, but merely to regulate what is already legislated. The adjustment to this limited extend in the approach of IBBI while enacting regulations is required.

Anuj Tiwari is an advocate based out of New Delhi and specialises in corporate and insolvency laws. He can be reached at an.anuj@gmail.com

[1] See para 120 of Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17.

[2] Appeal against the order has been summarily rejected by Hon’ble Supreme Court in C.A. 855/2018 vide order dated 07.02.2020.