Official Liquidator Must Adhere To Ethical Principles And Fairness To Discharge Their Duties Under IBC: Delhi High Court

The bench held that:

“the role of the liquidator in insolvency proceedings is paramount to the entire process. The liquidation proceedings revolve around the official liquidator and he has to discharge his functions keeping in mind the benefit of the company which is under liquidation. They must adhere to the highest standards of ethical conduct, diligence, and impartiality to uphold the integrity of the process…”

Brief Facts:

The Petitioner approached the Delhi High Court (“High Court”) and challenged an order issued by the Disciplinary Committee of the Insolvency and Bankruptcy Board of India (IBBI) which suspended the registration of the Petitioner for a period of two years. The Corporate Debtor, ABG Shipyard Limited, was engaged in shipbuilding. Following an application by ICICI Bank under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC), the National Company Law Tribunal (NCLT), Ahmedabad, admitted the application and initiated the Corporate Insolvency Resolution Process (CIRP). The Petitioner was appointed as the Interim Resolution Professional and later directed to act as Liquidator following an NCLT order.

Later, the Petitioner received a Notice of Inspection related to the liquidation assignment of the Corporate Debtor. A draft inspection report was sent to the Petitioner under the IBBI Inspection and Investigation Regulations, 2017. Subsequently, a Show Cause Notice was issued, outlining charges against the Petitioner which included influencing a Registered Valuer to change asset valuations, prescribing non-refundable participation fees, appointing unregistered valuers, and paying excessive fees to BDO Restructuring Advisory LLP (BRAL), where the Petitioner was a partner.

The Petitioner responded to the Show Cause Notice, and after a hearing, the IBBI passed the order. The IBBI took a lenient view on the charge of influencing registered valuers and closed it with caution. However, the Board held the Petitioner guilty of the other charges. The Petitioner was found to have appointed unregistered valuers by engaging RBSA Valuation Advisors LLP, which was not registered at that time. Feeling aggrieved, the Petitioner approached the High Court.

The Petitioner argued that since no action was taken on the first charge, the Petitioner should not be held guilty for the remaining charges. Regarding the non-refundable participation fee, the Petitioner contended that the relevant proviso prohibiting such fees was not in effect when the auction process was announced in 2019.

Conversely, the Respondent argued that imposing non-refundable fees undermined market freedom and the principles of the IBC, and even without an explicit regulation, such fees should not have been imposed. On the charge of appointing unregistered valuers, the Petitioner maintained that the valuation was performed by registered valuers, and any procedural irregularities, such as using firm names, do not invalidate the valuation. The Respondent contended that once individuals are appointed as registered valuers, they should not act as partners of unregistered firms, and outsourcing their work violates specific IBBI Circulars.

Observations by the High Court:

The High Court acknowledged that the proviso to Schedule I (1) (3) prohibiting non-refundable fees was not in effect during the auction and that the Petitioner did not violate any explicit regulations at that time. Thus, the High Court found the imposition of non-refundable fees justified. Regarding the unregistered valuers, the High Court held that the procedural missteps in the use of firm names do not necessarily imply a contravention of the regulations, provided the valuation was conducted by registered valuers.

The High Court noted that under the IBC, once attempts to revive a company fail, it proceeds to liquidation. The appointed Liquidator plays a crucial role in maximizing the value of the company's assets to ensure that creditors, including financial institutions, public sector banks, and employees, are adequately paid. The Liquidator's responsibilities are vital which requires adherence to high ethical standards, diligence, and impartiality. Any misconduct or conflict of interest could severely undermine the integrity of the insolvency process. Therefore, while the Liquidator enjoys significant autonomy, the High Court held that this power must be exercised judiciously, transparently, and ethically, in the best interest of all stakeholders involved.

The High Court noted that the Petitioner, who was the Liquidator for the Corporate Debtor, appointed BRAL for support services in the liquidation process. The Petitioner was a partner in BRAL. The High Court held that appointing BRAL, where the Petitioner is a partner, was a deliberate attempt to increase his own fees. It held that the Petitioner's actual motive was to increase his own fee by circumventing Regulation 4 of the Liquidation Regulations.

Consequently, the High Court found no reason to interfere with the Board's conclusion that the Petitioner was guilty of misconduct regarding the appointment and fee structure of BRAL. Therefore, the writ petition was dismissed.

Case Title: Sundaresh Bhat Vs Insolvency And Bankruptcy Board Of India

Citation: 2024 LiveLaw (Del) 684

Case Number: W.P.(C) 14389/2022

Advocate for the Petitioner: Mr. Ramji Srinivasan, Sr. Advocate, Mr. Milanka Chaudhary, Ms. Ashly Cherian, and Ms. Swet Shikha

Advocate for the Respondent: Mr. Vikas Mehta, Ms. Rashi Rampal, Mr. Apoorv Khaton and Mr. Ankit Vashisht

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