This has reference to the following regulations under the Code;
Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016.
Chapter V - Recognition of Insolvency Professional Entities.
# Regulation 12.(1) A company, a registered partnership firm or a limited liability partnership may be recognised as an insolvency professional entity, if –
(a) its sole objective is to provide support services to insolvency professionals;
(b) it has a net worth of not less than one crore rupees;
(c) majority of its shares is held by insolvency professionals, who are its directors, in case it is a company;
(d) majority of capital contribution is made by insolvency professionals, who are its partners, in case it is a limited liability partnership firm or a registered partnership firm;
(e) majority of its partners or directors, as the case may be, are insolvency professionals;
(f) majority of its whole time directors are insolvency professionals, in case it is a company; and
(g) none of its partners or directors is a partner or a director of another insolvency professional entity:
Provided that the insolvency professional entities recognised as on the date of commencement of the Insolvency and Bankruptcy Board of India (Insolvency Professionals) (Amendment) Regulations, 2018 shall comply with the provisions of clauses (a), (b) (c)and(d) on or before 30th September, 2018 and the provisions of clauses (e), (f) and (g) on or before 30th June, 2018.
Recently, AAA Insolvency Professionals LLP (AAAIP) released a brochure inviting Insolvency Professional to get associated with AAAIP as “Associate Partner” to avail a host of support services.
Join AAAIP as Associate Partner
AAAIP was providing all marketing and operational support to its partners only. However, consequent to an amendment in IP Regulations dated 30/06/2020, it has decided to develop a network of Associate Partners who would not be partner of AAAIP.
AAAIP would provide same level of services to an IP who is willing to become an Associate Partner of AAAIP with commitment to handle entire business under the IBC and its allied business through the AAAIP by executing a Memorandum of Understanding.
Now the Issues are;
1. What are support services ?
Let’s look into various provisions of the Code and Regulations.
A. Insolvency and Bankruptcy Code, 2016.
# Section 20. Management of operations of corporate debtor as going concern. -
(1) The interim resolution professional shall make every endeavour to protect and preserve the value of the property of the corporate debtor and manage the operations of the corporate debtor as a going concern.
(2) For the purposes of sub-section (1), the interim resolution professional shall have the authority-
(a) to appoint accountants, legal or other professionals as may be necessary;
(b) to enter into contracts on behalf of the corporate debtor or to amend or modify the contracts or transactions which were entered into before the commencement of corporate insolvency resolution process;
(c) to raise interim finance provided that no security interest shall be created over any encumbered property of the corporate debtor without the prior consent of the creditors whose debt is secured over such encumbered property:
Provided that no prior consent of the creditor shall be required where the value of such property is not less than the amount equivalent to twice the amount of the debt.
(d) to issue instructions to personnel of the corporate debtor as may be necessary for keeping the corporate debtor as a going concern; and
(e) to take all such actions as are necessary to keep the corporate debtor as a going concern.
B. Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016.
Chapter V - Recognition of Insolvency Professional Entities.
# Regulation 12.(1) A company, a registered partnership firm or a limited liability partnership may be recognised as an insolvency professional entity, if –
(a) its sole objective is to provide support services to insolvency professionals;
Section 20(2), authorises IRP to appoint accountants, legal or other professionals for the purposes mentioned in Section 20(1) viz.
i). to protect and preserve the value of the property of the corporate debtor
ii). manage the operations of the corporate debtor as a going concern.
Section 20 of the Code does not give powers to the board to make regulations for the subject matter of the provisions of section 20. Here observations of NCLT (PB) New Delhi (2020.09.16) Invest Asset Securitisations and Reconstruction Pvt Ltd v/s Mohan Gems & Jewels Pvt. Ltd. [IA 1490/2020 in CP No. (IB)-590 (PB)/2018] are quite significant.
Quote;
# 13. 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" we must at the cost of repetition reiterate, 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, it is for supplementation, not for supplantation.
# 15. If these two provisions 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.
# 16. 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”
# 17. 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.
# 18. 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.
# 19. 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. ………
# 20. 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. In Kerala Samsthana Chethu Thozhilali Union v. State of Kerala (2006) 4 SCC 327, it has been 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." Unquote.
Thus the creation of the institution of IPE by the Board under the regulations, for whatever purpose was beyond the mandate of the Board.
Secondly section 25 provides for the duties of resolution professional. The question here is whether the cost of support services incidental to the functions & duties of Insolvency Professional, specified in section 25, forms part of the fees agreed by the Insolvency Professional or are chargeable separately as CIRP cost.
As “Support Services” are not defined in the regulations, confusion prevails as to what constitutes the support services for which an IPE can be engaged. Here observations of the Disciplinary Committee In the matter of Mr. Vijay Kumar Garg (IBBI/DC/26/2020 8th June 2020) are quite significant, which reads as under;
Quote;
“The services provided by D&P have been detailed by the RP in paragraphs 17 to 36 of the Affidavit in Rejoinder dated 12th September 2019 filed by the RP before the AA in MA No. 1520 of 2019 & MA No. 254 of 2018. A summary of the work carried out by D&P is represented below:
a. Liasioning with senior officials of the Enforcement Directorate, Mumbai (ED), Central Bureau of Investigation (CBI) and Serious Fraud Investigation Office (SFIO);
b. Filing of Intervention Applications, written synopsis, appeals before the National Company Law Appellate Tribunal (NCLAT), Prevention of Money Laundering Authority (PMLA);
c. Emails/Correspondences and meetings with erstwhile employees of the Corporate Debtor/Company Secretary/Chartered Accountants;
d. Back office, technology and infrastructural support;
e. Preparation and execution of action plans in respect of subsidiaries;
f. Liasioning for protection and preservation of International Assets;
g. Recovery efforts to recover dues from Domestic Debtors;
h. Claim verification, conduct of CoC meetings and initiation/follow-up of legal action.
Some of the services, as stated above, should have been provided by other professionals and some of the services like liasioning are those which should have been undertaken by the RP himself or his employees as a part of his professional services …….. Unquote.
Here it is worthwhile to mention that the orders of “Disciplinary Committee” constitute policy decisions of the Board. Thus support services incidental to the functions & duties of IRP/RP are part of professional services being provided by the insolvency professionals and as such are not chargeable to CIRP cost. There is an urgent need to define support services which are beyond the scope of functions & duties of IRP/RP and are chargeable to CIRP cost.
2. Second issue is, when an IPE (an entity of insolvency professionals) can provide support services to an IRP/RP, as a natural corollary, can an IRP/RP, during CIRP, source support services from another independent Insolvency Professional? I request the Board to issue clarification on this aspect.
3. Third issue Let’s go back to the brochure issued by .AAAIP, inviting insolvency professionals to join AAAIP as associate partners, reading as under;
Join AAAIP as Associate Partner
AAAIP was providing all marketing and operational support to its partners only. However, consequent to an amendment in IP Regulations dated 30/06/2020, it has decided to develop a network of Associate Partners who would not be partner of AAAIP.
AAAIP would provide same level of services to an IP who is willing to become an Associate Partner of AAAIP with commitment to handle entire business under the IBC and its allied business through the AAAIP by executing a Memorandum of Understanding.
The question here is whether this “commitment to handle entire business” constitute restrictive trade practices, which may hamper competition and development of specializations in the field of support services.
To sum up, I request the Board;
Drop Chapter V, Recognition of Insolvency Professional Entities, from Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016. As the creation of the institution of “Insolvency Professional Entity” was beyond the mandate of the Board.
Define support services which are beyond the scope of functions & duties of IRP/RP and are chargeable to CIRP cost.
Clarification, whether IRP/RP can source support services from an independent insolvency professional during CIRP.
Issue directions to AAAIP to withdraw their brochure inviting insolvency professionals to join AAAIP as associate partners.
