IBC | Bombay High Court Issues Notice To Attorney General Of India In Petition Challenging Provisions On Resolution Professional

Sections 7 and 9 deal with application of corporate insolvency resolution process (CIRP) by a financial creditor and an operational creditor respectively. As per Sections 7(5) and 9(5), The Adjudicating Authority may reject such application if any disciplinary proceeding is pending against the proposed resolution professional.

“Since the constitutional validity of Sections 7(5) and 9(5) of the IBC, 2016 are also challenged in the present Petition, notice is issued to the Attorney General of India returnable on 27th September, 2023”, a bench of Justice BP Colabawalla and Justice MM Sathaye said in its order.

The petition challenges sections 7(5), 9(5), 16(2), 16(3), 16(4), 27(5), 82(1), 89(3), 97(1), 98(3), 98(5), 125(1), 145(5) of the IBC contending that these provisions and other rules, regulations, circulars, and notifications effectively suspend an Insolvency Professional without hearing, upon issuance of a Show Cause Notice.

“It is unfathomable that merely because a disciplinary proceeding is pending, an insolvency professional must be debarred from taking up an assignment, irrespective of the gravity of charges, as this goes against the established canons of our jurisprudence, where there is a presumption of innocence until otherwise proven”, said Advocate Aniruth Purusothaman for the petitioner.

An Insolvency Professional (IP) filed the petition challenging an order dated August 11, 2023, passed by the Disciplinary Committee of the Insolvency and Bankruptcy Board of India (IBBI) suspending her registration for three years. The committee found that the IP violated IBC and the Insolvency Professionals Regulations while conducting the CIRP of a corporate debtor. The IP sought interim relief of stay on suspension.

Senior Advocate Sharan Jagtiani for the petitioner contended before the court that as per the proviso to Section 220(1) of the IBC the members of the Disciplinary Committee shall consist of Whole Time Members of the IBBI only. He relied on IBBI (Inspection and Investigation) Regulations, 2017 providing that a Disciplinary Committee means a Committee of Whole Time Members constituted under Section 220(1). Jagtiani said that the impugned order was without jurisdiction as it was passed by Ravi Mital, Chairperson of IBBI, and not by a Whole Time Member.

Advocate Pankaj Vijayan for IBBI referred to Section 189 of the IBC, which defines the composition of the IBBI. Vijayan argued that the Chairperson's appointment is not as a Part Time Member, making him de-facto a Whole Time Member. Therefore, the order passed by the Chairperson, is valid, he contended.

As per section 189 of the IBC, IBBI consists of ten members – one Chairperson, four ex-officio members, and five other members to be nominated by the Central Government, of whom at least three have to be Whole Time Members.

The court held that, prima facie, the Chairperson and Whole Time Members were distinct categories, as the nomination of Whole Time Members and the appointment of the Chairperson are separate processes under this section. The court noted that the IBBI's argument effectively means there are 6 Whole Time Members instead of five on the IBBI board, which would contravene Section 189.

“nomination of the Whole Time Members is to be done by the Central Government under Section 189 (1) (d) whereas the appointment of the Chairperson is under Section 189 (1)(a). If we were to accept the submission of Mr. Vijayan, it would effectively mean that instead of 5 Whole Time Members, the Board would consist of 6 Whole Time Members, which would be contrary to the provisions of Section 189”, the court observed.

The court highlighted that the IBBI (Delegation of Powers and Functions) Order, 2017 aligned with these provisions, distinguishing the Chairperson from Whole Time Members.

The court ruled that prima facie, the impugned order was passed by an authority without jurisdiction. The court granted ad-interim relief in favour of the petitioner, restraining IBBI from implementing the order. The case was posted for further hearing on September 27, 2023.

Case no. – Writ Petition (L) No. 23016 of 2023

Case Title – Poonam Basak v. Union of India & Ors.

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