Is An Insolvency Professional A 'Public Servant' Under The Prevention Of Corruption Act, 1988?

India's Insolvency and Bankruptcy Code, 2016 (IBC), relies on Insolvency Professionals (IPs) or Resolution Professionals (RPs) as neutral persons for distressed entities and creditors to maximise the output value of stressed assets. IPs' discretion over billions in assets is fuelled with multiple corruption allegations. Hence, to invoke the stringent Prevention of Corruption Act, 1988 (PC Act, 1988) against IPs, a debate has been ignited over “whether IPs are 'Public Servant' under the Prevention of Corruption Act, 1988?” Delhi High Court's refusal in Dr. Arun Mohan vs. Central Bureau of Investigation, clashes with the affirmative decision of the Jharkhand High Court in Sanjay Kumar Agarwal vs. Central Bureau of Investigation, and Madras High Court in Anil Kumar Ojha vs. The State and Others, which categorises RPs as a public servant. In light of these conflicting interpretations, the issue is now sub-judice before the Supreme Court of India. Hence, it is necessary to dissect IPs' evolving role, regulatory frailties, the PC Act, 1988 and its interpretive evolution, to analyse the pros and cons of both views, which will keep intact IBC's integrity without sacrificing efficiency.

IPs' Quasi-Fiduciary Mandate: Power And Peril

The IBC framework puts IPs into the epicentre of the Insolvency Resolution Process and entrusts them with professional management of a distressed company, verifying claims, coordinating with the Committee of Creditors (CoC), and shaping entire resolution plans. In the Indian context, the role of IP becomes even more important, considering India follows the Creditor-in-possession model. The Supreme Court in Swiss Ribbons Pvt. Ltd. vs. Union of India called them 'facilitators and not adjudicators'. Yet, this position provides profound discretion considering IPs probe avoidance transactions, negotiate homebuyer claims in realty insolvencies, and anchor liquidation values for dissenters; Hence, corrupt practices by IPs can impact the entire insolvency process, which can lead to multiple rounds of litigation and depreciation of assets.

Regulatory Duality: Command, Consensus, And Blind Spots

IBC, 2016 and IBBI's Insolvency Professionals Regulation 2016 have created a two-tier mechanism for the regulation of IPs. One is managed by Insolvency Professional Agencies (IPAs), and another is the Insolvency and Bankruptcy Board of India (IBBI). It is based on Consensus as well as the Command and Control method of regulation. This framework includes appointment, eligibility, disclosure norms and disciplinary architecture, which provide for the suspension of the license of IPs by the IBBI in case of contravention of rules and regulations. However, its efficacy to deter corruption and malpractices within the larger set-up remains questionable. As in  Mr. Mahender Kumar Khandelwal case, an IP authorised payments to unverified operational creditors, eroding asset pools, such a lack of due diligence led to multiple rounds of litigation and demanding scrutiny beyond IBC's procedural framework.

High Courts' Divergence In Interpretation

Delhi High Court's approach is primarily based upon two reasons to conclude that RPs are not the 'Public Servant'. First, that the duties of RPs lack the 'Public Character' and secondly, there is no mention in the IBC code, which is an entire mechanism in itself. High Court relies upon the Supreme Court's decision on Swiss Ribbons, in which it stated that RPs merely act as a 'facilitator'. However, the High Court acknowledges that, considering the nature of work involved in the Insolvency, there is no explanation required regarding duties performed by IPs. They are performing public duty irrespective of appointment authority. As it involves managing the company affairs, considering the claims of creditors, and trying to provide solutions to issues of homebuyers, etc. There is a statutory provision attached to the duty and punishment for non-compliance. Hence, they act in the interest of the larger public.

However, the Jharkhand High Court and Madras High Court approaches without getting into the debate of determining the 'Public Character' and primarily focus upon the nature of duties assigned to RPs. Hence, it emphasises upon the definition provided u/s 2(b) and 2(c)(v) of the PC Act, 1988, which provides the meaning of 'Public Duty' and the definition of 'Public Servant' respectively. Both High Courts give primacy to public interest over the technical meaning attached to the test of 'Public Character'.

'Public Character' a New Test

PC Act, 1988 has provided a wider definition of public servant in comparison to other criminal laws. Section 2(c) of the PC Act, 1988 defines a 'Public Servant' as:

“any person who holds an office by virtue of which he is authorised or required to perform any public duty”…

and u/s 2(b) of the PC Act, 1988, 'Public Duty' is defined as:

“a duty in the discharge of which the State, the public or the community at large has an interest”

However, the Supreme Court in Central Bureau of Investigation, Bank Securities and Fraud Cell vs. Ramesh Gelli and Ors. held that every duty, even if it has a colour of 'Public Duty', may necessarily not be of a character which is public in nature. There could be many instances where a role or a responsibility of an individual in a particular statute would assume the nature of 'Public Duty' but not the 'Public Character'. Therefore, to understand the expression 'Public Servant', there is a need to look with reference to the office and the duties performed in connection therewith to be of a public character. However, the Supreme Court has, over the period of time, provided a clear and wider meaning of Public Servant and Public Duty, but there is no judgment which would clearly provide an interpretation of the 'Public Character' of the office. Hence, it needs to be tested in courtrooms and academic discourse.

Concern Among IPs

The IBC framework evolves to provide an efficient Insolvency Resolution Process and achieve maximum output from stressed assets. Hence, discretion in the hands of IPs is justified. If a stringent act like the PC Act, 1988, is applied, then it might turn counterproductive, and it may also struggle with bureaucratic hurdles. At the same time, considering wider stakeholders involved, the nature of interaction with minority stakeholders and on the other side, allegations of corruption cases, there is a need to tackle the situation by providing an effective mechanism. While balancing both sides, there is also a need to ensure that the provision of the PC Act, 1988, will not be misused to twist the arms for favourable output.

Towards Principled Accountability

As a matter is sub-judice in the Supreme Court, and it would be too early to interpret the term and comment upon the merit of the case, but each argument has their own merits and demerits apart from legal interpretations. But it is also noteworthy that classifying IPs as public servants will not automatically lead to constant watchdog and suspicion by investigating agencies, as there is a procedural safeguard under section 19 of the PC Act, 1988, which provides targeting graft without micromanaging errors. Hence, this safeguard can filter the vexatious FIRs while maintaining the efficiency of IBC. Further safe harbours can be provided, tolerating certain minimum percentage claim variances. But these reforms need to be led by the Parliament, and before that, there is a need to wait till the Supreme Court delivers its final verdict with respect to recognising IPs as a 'Public Servant' under the PC Act, 1988. It is important to remember Kautilya's wisdom that unchecked 'honey at the tongue's tip' corrodes republics; principled regulation redeems them.