Delhi High Court Emphasizes Ethical Obligations For Official Liquidators Under IBC

Delhi High Court Emphasizes Ethical Obligations For Official Liquidators Under IBC

Justice Subramonium Prasad, of the Delhi High Court, ruled that official liquidators are obligated to uphold ethical standards and exhibit a steadfast dedication to impartiality while fulfilling their responsibilities under the Insolvency and Bankruptcy Code.

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 that is under liquidation. They must adhere to the highest standards of ethical conduct, diligence, and impartiality to uphold the integrity of the process.”

The petitioner approached the Delhi High Court (High Court) to challenge an order issued by the Disciplinary Committee of the Insolvency and Bankruptcy Board of India (IBBI), which suspended the petitioner's registration for a two-year period. The case stemmed from the insolvency proceedings of ABG Shipyard Limited, a company 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) in Ahmedabad admitted the application and initiated the Corporate Insolvency Resolution Process (CIRP). The petitioner was initially appointed as the Interim Resolution Professional and later directed to act as the Liquidator pursuant to an NCLT order.

Subsequently, 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. This was followed by a Show Cause Notice outlining charges against the petitioner, including allegations of influencing a registered valuer to alter asset valuations, imposing 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 issued the order. While the IBBI took a lenient view on the charge of influencing registered valuers and closed it with caution, the Board found the petitioner guilty of the remaining charges. Specifically, the petitioner was found to have appointed unregistered valuers by engaging RBSA Valuation Advisors LLP, which was not registered at the time. Dissatisfied with this decision, the petitioner approached the High Court.

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

In contrast, the respondent argued that imposing non-refundable fees undermined market freedom and the principles of the IBC. Even without explicit regulation, such fees should not have been imposed. On the charge of appointing unregistered valuers, the petitioner maintained that the valuation was conducted by registered valuers and any procedural irregularities, such as using firm names, did not invalidate the valuation. However, 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.

The High Court acknowledged that the proviso to Schedule I (1) (3), which prohibits non-refundable fees, was not in effect during the auction. It also noted 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 issue of unregistered valuers, the High Court held that procedural missteps in the use of firm names do not necessarily imply a contravention of the regulations, especially if the valuation was conducted by registered valuers.

Furthermore, the High Court emphasized the critical role of the Liquidator under the IBC. Once attempts to revive a company fail, it proceeds to liquidation, and the Liquidator is tasked with maximizing the value of the company's assets to ensure creditors, including financial institutions, public sector banks, and employees, are adequately compensated. The responsibilities of the Liquidator require adherence to high ethical standards, diligence, and impartiality. Any misconduct or conflict of interest could seriously undermine the integrity of the insolvency process. Therefore, while the Liquidator enjoys significant autonomy, the High Court stressed that this power must be exercised judiciously, transparently, and ethically, in the best interest of all stakeholders involved.

In examining the case of the Petitioner, who served as the Liquidator for the Corporate Debtor, the High Court observed that the Petitioner appointed BRAL for support services in the liquidation process, of which the Petitioner was a partner. The High Court held that appointing BRAL, where the Petitioner is a partner, was a deliberate attempt to increase his own fees. It concluded that the Petitioner's actual motive was to enhance 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.