Tale of notifications issued by IBBI – Whether Retrospective or Not?
Kiran Sharma
Advocate & CS
Eshwarya Saraf
4th year, B.A. LL.B (Hons.), WBNUJS
Overview of IBBI – Scope and Powers to Issue/Amend Regulations
Insolvency and Bankruptcy Board of India (hereinafter referred as “IBBI”) is the statutory body formed under section 188 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred as “IBC”) acts as regulator of the professional and proceedings under the IBC.[1] Its primary objective is to facilitate the insolvency and liquidation proceedings of the companies and to act as quasi-judicial body with respect to the disputes arising during the proceedings under the IBC, registering Insolvency Professional Agencies, Insolvency Professionals, and Information Utility and renewing, withdrawing, suspending, or canceling their registration; establishing minimum eligibility requirements and rules for them; and, if necessary, inspecting and looking into the conduct. From time to time, in order to regulate, IBBI issues clarifications and notifications with respect to any provision of the IBC or relating to the IPs. IBBI is also empowered with regulation making power under section 240 of the IBC.[2]
However, since inception, one pertinent question with respect to the “notifying power” of the IBBI stands unclarified as to the scope of the powers it possesses and the ambit beyond which the IBBI cannot perform. Does IBBI have unlimited power to perform any of the functions as mentioned in section 196, or section 240 or any other section of IBC? The answer to which stands negative, subject to other exceptions.
This blog endeavors to analyze the restriction on the scope and power of the IBBI. Especially with respect to the retrospective nature of the circulars issued by the IBBI from time to time arising out of the practical difficulties faced by various strata of stakeholders concerned in an insolvency resolution process.
Let us understand what is retrospective legislation in brief:
Any legislation while being enacted contains a date which is the date from which such law comes into effect for the general public. Such date is generally the day on which the legislation is notified/published in the Official Gazette or as notified by the Government. At times, the Government makes a law effective from a previous date and creates a backdated effect. This backdated effect is known as retrospective application of the law or ex post facto laws.
Article 20(1) of the Indian Constitution prohibits retrospective application of criminal liability but does not forbid the retrospective application of civil law and the same can be permitted as seen in cases such as imposition of tax liability or any other civil liability.
In Hirendra Vishnu Thakur, the Hon’ble Supreme Court laid illustrative principles culling out from various judgements of the Hon’ble Courts regarding the scope and ambit of retrospective application of an amending act.[3] The Hon’ble Court held that any statute affecting substantive rights will have prospective effect and statute affecting procedural rights would have retrospective application, unless the context is otherwise, or the construction makes it impossible to do so. Moreover, when procedural law aims to create new disabilities or obligations the same cannot be made applicable retrospectively. In Mithilesh Kumari, the Hon’ble Supreme Court held that no statute would have retrospective application unless the same is explicitly mentioned.[4]
Retrospective obligation created by Insolvency And Bankruptcy Board of India
In the recent past IBBI has issued various circulars where the question might arise as to the creation of retrospective obligation by the notification issued by IBBI. For reference, two of them are cited in this article. Firstly, is the amendment notification dated September 13, 2022 which amended the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2019 (“CIRP Regulations”) and made changes to the fee to be paid to interim resolution professional and resolution professional.[5] The second illustration being the Notification dated September 28, 2023 which was a clarification issued by the IBBI with respect to Regulation 4(2)(b) of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (“Liquidation Regulations”).[6] The contents of the said notifications are not the matter of contention but what requires special focus is the effective date mentioned in these notification/circular. The relevant points of consideration are discussed hereinafter:
A. Amendment notification dated September 13, 2022 in CIRP Regulations:
The wordings of the first notification mention that “The fee of the interim resolution professional or the resolution professional, appointed on or after 1st October 2022, shall not be less than the fee specified in clause 1 for the period specified in clause 2 of Schedule-II”. The problem or confusion surrounding the amendment may arise in regard to the minimum fees for Interim Resolution Professionals (IRP) or Resolution Professionals (RP) appointed before October 1, 2022. The moot question arises, whether the amendment would act as minimum fees requirement for RPs (who were appointed even before October 1, 2022) post October 1, 2022 or they would continue to be governed by the previously applicable provisions?
In order to demarcate the powers of the IBBI, it is necessary to refer to the source of such power, i.e., sections 196(1)(t) and 240 of the IBC which enables IBBI to make rules and regulations. An essential criterion mentioned in section 240 stipulates “consistent to this Code and the rules made thereunder” and none of the provisions of the IBC or its rules provides the power to IBBI to make rules with retrospective effect. The rationale behind the same arrives from the maxim lex prospicit non respicit which essentially means that law must look forward and should not correspond to a backward date.
This confusion can be dealt with in light of numerous judgements by various judicial authorities and, one such important case would be Director General of Foreign Trade and Ors. v. Kanak Exports, whereby the apex Court has held that “delegated or subordinate legislation can only be prospective and not retrospective, unless the rule-making authority has been vested with power under a statute to make rules with retrospective effect.”[7] Consequently, this effectively removes the authority to issue notifications with retrospective effects, as the same falls under the purview of delegated legislation by virtue of section 196 and 240 of IBC.
Notably, Hon’ble Calcutta High Court in Univalue projects v. UOI, [2020] ibclaw.in 25 HC has clarified upon this stance and made the position extremely clear.[8] In this case, an order passed by the Hon’ble NCLT was under challenge for being de hors the IBC and being of retrospective effect. A single bench of Hon’ble Justice Saraf not only considered the judgement to be outside the scope of the powers of the Hon’ble NCLT but also discussed the position with respect to the retrospective nature of delegated legislation. Considering the limited scope of section 240 of IBC, the Court opined that since IBC is itself silent on the point of granting power to make retrospective notifications to the IBBI, the same is hit by the decision in Kanak Exports (supra). Therefore, the Hon’ble Court rejected the plea of making retrospective notifications and in fact observed that:
“Therefore, any delegate, let alone the NCLT, not even the IBBI can make regulations, by way of the impugned order or of such nature, to make a delegated legislation retrospective under the IBC, 2016.”
Amendment notification dated September 28, 2023 Liquidation Regulations
The second notification dated September 28, 2023 is also worth discussing as this amendment, in guise of clarifying an existing provision, attempted to amend an existing provision with retrospective effect. The said amendment purported to clarify regulation 4(2)(b) of the Liquidation Regulations which was inserted via amendment in 2019. With attempt to clarify the meanings of certain words, the IBBI, also mentioned that “The IPs who are currently handling or have handled in the past any liquidation assignment shall ensure that the fee charged by them under Regulation 4(2)(b) is in accordance with above clarifications and inform the same to the Board electronically on the website of BOARD.” This paragraph forms the main bone of contention as it leads to 2019 amendment (which also amended the definition of “Liquidation Costs”) being applied retrospectively. This amendment was challenged by an IP named Amit Gupta as there were disciplinary actions taken against him under this clarificatory circular.[9] The Court while dealing in depth with the notification, held that paragraph 2.1 and 2.5 of the notification inserts new parameters, thereby amounting to amendment and thus would be ultra vires as it inserts new changes neither mentioned in the Liquidation Regulations nor in the parent code. Whereas paragraphs 2.3, 2.4 and 2.5 survived the test. The petitioner arguments with respect to the paragraph 2.3 had been that these clarifications made the 2019 amendment applicable retrospective but the Court neutralized them on the ground that although the clarifications dealt with the provision inserted in 2019 amendment, the term clarified in paragraph 2.3, i.e. “liquidation costs” existed since the inception of IBC (defined in section 5(16)) and the amendment merely made the general principle obvious which was to be earlier deduced using harmonious reading of various provision of IBC and LP regulations. Therefore, the Court rejected the argument that this clarification made the 2019 amendment apply retrospectively. In our opinion, this judgement could be treated as a missed opportunity as even if it did not consider the said notification to create any retrospective obligations, it should have had highlighted the fact that creating any retrospective obligation is beyond the scope of IBBI or any authority by means of delegated legislations.
The language of paragraph 2.2 makes it clear that the four new components added via 2019 amendment to the definition of “liquidation costs” were even present before the said amendment by virtue of section 53 of IBC and thus, would be applicable since the inception of the IBC. Although, the rationale of IBBI is valid in the eyes of law and can be accepted on the ground that where the clarification does not make any addition to the existing provision, it can be held retrospective as held by Supreme Court, yet it does not negate the fact that creating any retrospective right is beyond the power of IBBI. Thus, while discussing the constitutional validity of the clarificatory circular, the Court should have highlighted the scope of the power of IBBI and restricted it to the point that it cannot create any retrospective obligation. Another point was highlighted by the Petitioner that IBBI had notified that the 2019 amendment was to be applied only prospectively and not retrospectively. However, the Court did not comment upon the same and restricted itself to the legality of the contents of the Clarifications and left the same to answered by IBBI. However, post notifying such prospective application, this clarification tends to create a retrospective obligation which is both contradictory and beyond the scope of the powers of IBBI. In Hirendra Vishu Thakur, Supreme Court has clarified that there cannot be any retrospective application of law which tends to create new disabilities.[10] This gives rise to a pertinent confusion as to even if such components inserted by 2019 amendment could be deduced even before their insertion using section 53 of the IBC, can IBBI under the garb of such deductive rationale apply the proponents of the amendment retrospectively.
Conclusion
IBBI is vested with enormous responsibilities for efficient execution of IBC endeavors to ensure that the clarification, notifications and/or circulars issued are for easier understanding and not create further confusion amongst the professionals. Moreover, creating retrospective obligations and issuing notifications to that effect may lead to complications for the professionals and in turn prolong the entire process of insolvency/liquidation.
By fostering a transparent and consistent regulatory environment, IBBI – as the most dynamic regulator, would aid to streamline the insolvency and liquidation process and build confidence amongst professionals working in this sector.
References:
[1] Insolvency and Bankruptcy Code, §188
[2] Id., §240
[3] Hitendra Vishnu Thakur v. State of Maharashtra, (1994) 4 SCC 602
[4] Mithilesh Kumari v. Prem Behari Khare, (1989) 2 SCC 95
[5] IBBI (Insolvency Resolution Process for Corporate Persons) (Third Amendment) Regulations, 2022 (last visited July 11, 2024).
[6] Circular – Clarification w.r.t. Liquidators’ fee under clause (b) of sub-regulation (2) of Regulation 4 of IBBI (Liquidation Process) Regulations, 2016 available at https://ibbi.gov.in//uploads/legalframwork/276e15152ac2147c101fcbfbf37d0ddb.pdf (last visited July 11, 2024)
[7] Director General of Foreign Trade and Ors. v. Kanak Exports, (2016) 2 SCC 226
[8] Univalue Projects Pvt. Ltd. v. Union of India, [2020] ibclaw.in 25 HC.
[9] Amit Gupta v. Insolvency & Bankruptcy Board of India, (2024) ibclaw.in 250 HC.
[10] Hitendra Vishnu Thakur v. State of Maharashtra, (1994) 4 SCC 602
