Regulations for Liquidator’s Fees, i.e. Regulation 39D of CIRP Regulations & Regulation 4(1) & 4(1A) of Liquidation Regulations are ultra-vires, being inconsistent with the Provisions of the Code (IBC, 2016).
Insolvency and Bankruptcy Code, 2016.
# 34. Appointment of liquidator and fee to be paid. -
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(8) An insolvency professional proposed to be appointed as a liquidator shall charge such fee for the conduct of the liquidation proceedings and in such proportion to the value of the liquidation estate assets, as may be specified by the Board.
(9) The fees for the conduct of the liquidation proceedings under sub-section (8) shall be paid to the liquidator from the proceeds of the liquidation estate under section 53.
# 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; XXXXX
(3) The fees payable to the liquidator shall be deducted proportionately from the proceeds payable to each class of recipients under sub-section (1), and the proceeds to the relevant recipient shall be distributed after such deduction.
# 196. Powers and functions of Board. -
(1) The Board shall, subject to the general direction of the Central Government, perform all or any of the following functions namely: -
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(t) make regulations and guidelines on matters relating to insolvency and bankruptcy as may be required under this Code, including mechanism for time bound disposal of the assets of the corporate debtor or debtor; and
(u) perform such other functions as may be prescribed.
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# 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.
(2) In particular, and without prejudice to the generality of the foregoing power, such regulations may provide for all or any of the following matters, namely: —
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(x) the fee for the conduct of the liquidation proceedings and proportion to the value of the liquidation estate assets under sub-section (8) of section 34;
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Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.
# 39D. Fee of the liquidator
While approving a resolution plan under section 30 or deciding to liquidate the corporate debtor under section 33, the committee may, in consultation with the resolution professional, fix the fee payable to the liquidator, if an order for liquidation is passed under section 33, for
the period, if any, used for compromise or arrangement under section 230 of the Companies Act, 2013;
the period, if any, used for sale under clauses (e) and (f) of regulation 32 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016; and
(c) the balance period of liquidation.]
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Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016.
# 4. Liquidator’s fee.
(1) The fee payable to the liquidator shall be in accordance with the decision taken by the committee of creditors under regulation 39D of the Insolvency and Bankruptcy Board of India Insolvency Resolution Process for Corporate Persons) Regulations, 2016.
(1A) Where no fee has been fixed under sub-regulation (1), the consultation committee may fix the fee of the liquidator in its first meeting.
(2) In cases other than those covered under sub-regulation (1) 14[and (1A)], the liquidator shall be entitled to a fee-
(a) at the same rate as the resolution professional was entitled to during the corporate insolvency resolution process, for the period of compromise or arrangement under section 230 of the Companies Act, 2013 (18 of 2013); and
(b) as a percentage of the amount realised net of other liquidation costs, and of the amount distributed, for the balance period of liquidation, as under:
Clarification: For the purposes of clause (b), it is hereby clarified that where a liquidator realises any amount, but does not distribute the same, he shall be entitled to a fee corresponding to the amount realised by him. Where a liquidator distributes any amount, which is not realised by him, he shall be entitled to a fee corresponding to the amount distributed by him.]
(3) Where the fee is payable under clause (b) of sub-regulation (2), the liquidator shall be entitled to receive half of the fee payable on realisation only after such realised amount is distributed.
Clarification: Regulation 4 of these regulations, as it stood before the commencement of the Insolvency and Bankruptcy Board of India (Liquidation Process) (Amendment) Regulations, 2019 shall continue to be applicable in relation to the liquidation processes already commenced before the coming into force of the said amendment Regulations.
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Analysis;
A. From the provisions of the Code following emerges;
Liquidators can charge fees in such proportion to the value of the liquidation estate assets, as may be specified by the Board.[section 34(8)]
Section 240(1) provides authority to the Board (IBBI) to make regulations consistent with this Code and the rules made thereunder, to carry out the provisions of this Code.
Section 240(2)(x) provides authority to the Board (IBBI) to specify the fee for the conduct of the liquidation proceedings and proportion to the value of the liquidation estate assets under sub-section (8) of section 34;
Provisions of the Code do not authorize the Board to delegate its (Board) authority to specify/fix the fees of the liquidator to either Committee of Creditors (CoC) or Stakeholders Consultation Committee (SCC).
The fees for the conduct of the liquidation proceedings under section 34(8) shall be paid to the liquidator from the proceeds of the liquidation estate under section 53. [section 34(9)]
Liquidator’s fees shall be paid by way of deduction proportionately from the proceeds payable to each class of recipients under section 53 (1), and the proceeds to the relevant recipient shall be distributed after such deduction. [section 53(3)].
Status of Liquidator's fees remains as “Payable” till such time proceeds of the liquidation estate are distributed to the stakeholders under section 53(1).
In no case Liquidator’s fees can be paid on a monthly basis or can be funded by SCC members.
B. Under Regulation 39D of CIRP Regulations, Board has delegated the authority to fix the fees of the liquidator, to CoC, whereas provisions of the Code do not permit the Board to delegate the authority to specify/fix the fees of the liquidator. As such the said regulation is inconsistent to the provisions of the Code, hence are ultra-vires
C. Under Regulation 4(1) & 4(1A) of Liquidation Regulations, Board has delegated the authority to fix the fees of the liquidator, to SCC, whereas provisions of the Code do not permit the Board to delegate the authority to specify/fix the fees of the liquidator. As such the said regulations is inconsistent to the provisions of the Code, hence are ultra-vires
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Case Law;
i). Hon’ble Supreme Court of India (2006.03.24) in Kerala Samsthana Chethu Thozhilali Union v. State of Kerala [(2006) 4 SCC 327] held that:
"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."
ii). Hon’ble Supreme Court of India (2006.03.24) in State of Tamil Nadu & Anr vs P. Krishnamurthy & Ors. [(2006) SCC 517], ruled 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.
# 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).
The same ratio is held in;
I.T.C Bhadrachalam Paper Boards and another vs Mandal Revenue Officer, AP and others (1996) 6 SCC 634,
Gupta Modern Breweries vs State of J&K and Others (2007) 6 SCC 317, and
Cellular Operators Association of India and others vs Telecom Regulatory Authority of India and Others (2016) 7 SCC 703.
Disclaimer: The sole purpose of this blog is to create awareness on the subject and must not be used as a guide for taking or recommending any action or decision, commercial or otherwise. One must do his own research and seek professional advice if he intends to take any action or decision in the matters covered in this blog.
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