Bombay High Court
Kairav Anil Trivedi vs Insolvency And Bankruptcy Board Of ... on 9 August, 2024
Author: A.S. Chandurkar
Bench: A.S. Chandurkar
2024:BHC-OS:12020-DB
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
WRIT PETITION (LODGING) NO.13865 OF 2024
Kairav Anil Trivedi, ]
Address : 413/414, Shramjeevan B5, ]
Opposite Lodha New Cuffe Parade, ]
Wadala Truck Terminus, Mumbai - 400001. ] .. Petitioner
Versus
1. Insolvency & Bankruptcy Board of India (IBBI), ]
Through its Chairperson, ]
th
Address : 5 Floor, Mayur Bhavan, ]
Shankar Market, Connaught Circus, ]
New Delhi - 110001. ]
2. ICSI Institute of Insolvency Professionals, ]
Through its Managing Director, ]
rd
Address : 3 Floor, ICSI House 22, ]
Institutional Area, Lodhi Road, ]
New Delhi - 110003. ]
3. Union of India, ]
Through Secretary - Ministry of Corporate Affairs, ]
th
Address : 5 Floor, 100, Everest, ]
Marine Drive, Mumbai - 400002. ] .. Respondents
Mr. Pratik Sarkar with Ms. Priyal Gupta, Advocates, i/by Vidhi Legal, for
the Petitioner.
Mr. Pankaj Vijayan with Ms. Sushmita Chauhan, Advocates for Respondent
No.1.
CORAM : A.S. CHANDURKAR & RAJESH S. PATIL, JJ
The date on which the arguments were heard : 19 TH JULY 2024.
The date on which the Judgment is pronounced : 9TH AUGUST 2024.
JUDGMENT :
[ Per A.S. Chandurkar, J. ]
1. Rule. Rule made returnable forthwith and heard the learned counsel
for the parties.
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2. The challenge raised in this writ petition is to the show cause
notices dated 26th October 2023 and 10th April 2024 that have been issued
to the petitioner by the Insolvency & Bankruptcy Board of India proposing
to take action against him for violations under the Insolvency and
Bankruptcy Code, 2016 and Regulations framed thereunder. The petitioner
besides seeking restoration of his Authorization for Assignment also
challenges the validity of Clause 23A provided in the Schedule to the
Insolvency and Bankruptcy Board of India (Model Bye-Laws and
Governing Board of Insolvency Professional Agencies) Regulations, 2016
("2016 Regulations") as well as Clause 23A of the Bye-Laws of ICSI
Institute of Insolvency Professionals by urging the same to be ultra vires.
3. Facts relevant for considering the challenge as raised in the writ
petition are that the petitioner is presently registered with the Insolvency
& Bankruptcy Board of India ("IBBI") as an Insolvency Professional ("IP").
This registration is granted under The Insolvency & Bankruptcy Code,
2016 ("Code") read with the Insolvency and Bankruptcy Board of India
(Insolvency Professionals) Regulations, 2016. The IBBI, through its Deputy
General Manager issued a show cause notice to the petitioner on 26 th
October 2023 under Section 219 of the Code read with Regulations 11 and
12 of the Insolvency and Bankruptcy Board of India (Inspection and
Investigation) Regulations, 2017 ("2017 Regulations"). In the show cause
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notice, reference was made to an investigation report that was submitted
by the Investigating Authority. On the basis of the said investigation
report, the petitioner was called upon to show cause why action should
not be taken to cancel the petitioner's registration as an IP. The petitioner
submitted his reply to the said show cause notice and denied the
allegations made therein. Further proceedings in that regard are pending.
4. Thereafter on 10th April 2024, the IBBI, through its Deputy General
Manager issued another show cause notice to the petitioner under Section
219 of the Code read with Regulations 11 and 12 of the Regulations of
2017, calling upon the petitioner to show cause why suitable actions
under Section 220 of the Code should not be taken against the petitioner.
Reference in the show cause notice was made to the investigation report
dated 8th March 2024 and the same was made the basis of the show cause
notice. The petitioner submitted his reply to the said show cause notice
and denied the allegations made therein.
5. With the issuance of the aforesaid show cause notices, the
Authorization for Assignment ("AFA") of the petitioner came to be
suspended. It is in this backdrop that the petitioner has raised a challenge
to the aforesaid show cause notices as well as the action of suspending the
AFA pending adjudication of the show cause notices.
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6. Mr. Pratik Sarkar, learned counsel for the petitioner raised various
contentions in support of the prayers made in the writ petition. He
submitted that :-
(a) Section 218 of the Code empowers the IBBI to
undertake action in the matter of a complaint received
under Section 217 of the Code as regards the
functioning of an IP. The Board by an order in writing
can issue directions to any person or persons to act as
an investigating authority for conducting an inspection
or investigation. In absence of there being any order in
writing issued by the Board, it was not permissible to
undertake any inspection or investigation on the
complaint received under Section 217 of the Code. It
was urged that in the present case, there was no order
passed by the IBBI to undertake such investigation as
was evident from the response of the IBBI to the
information sought under the Right to Information
Act, 2005. Hence issuance of the show cause notices to
the petitioner was without jurisdiction. Further, the
requirements of Regulation 12 of the 2017 Regulations
of sharing all relevant information were also not
satisfied. On these counts, the entire action was liable
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to be struck down. It was thus submitted that if the
jurisdictional facts on the basis on which the show
cause notices could be issued were absent, this Court
could exercise discretion under Article 226 of the
Constitution of India and interfere in the matter.
(b) The suspension of the AFA was without jurisdiction
inasmuch as there was no statutory sanction to the
action of suspending such authorization merely on the
issuance of the show cause notices. Referring to the
provisions of Chapter VI of the Code, it was submitted
that there was no power conferred on the IBBI to
suspend the authorization of an IP pending
adjudication of the show cause notices. Even under
the 2016 Regulations or 2017 Regulations, no such
power was conferred. Clause 23A of the 2016
Regulations that stipulates such suspension upon
initiation of disciplinary proceedings was ultra vires
the provisions of the Code. Since the suspension of the
AFA affected the legal rights of the petitioner, it was
necessary for the IBBI to have first complied with the
principles of natural justice. Exclusion of the principles
of natural justice before effecting suspension of the
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AFA rendered Clause 23A bad in law. Merely for the
reason that the requirement of complying with the
principles of natural justice was not stipulated in
Clause 23A, the same could not be dispensed with. It
was necessary to comply with the principles of natural
justice before suspending the AFA since substantial
rights of the petitioner were affected.
(c) The 2016 Regulations as well as the 2017 Regulations
did not have the force of law and they travelled
beyond the scope conferred by the Code. In fact,
Section 240 of the Code did not confer any power on
the IBBI to make Regulations that could curtail the
right of IP's to function pending adjudication of the
show cause notices. Relying upon the decisions in
Bharathidasan University and Anr. Vs. All-India
Council for Technical Education and Ors, (2001) 8
SCC 676 and Kerala State Electricity Board and Ors,
Vs. Thomas Joseph alias Thomas M.J. and Ors, (2023)
11 SCC 700 it was urged that the aforesaid
Regulations could not be given effect to since they
travelled beyond the power conferred under the Code
and were ultra vires. It was thus prayed that the
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prayers made in the writ petition be granted and the
AFA be restored in favour of the petitioner.
7. Mr. Pankaj Vijayan, learned counsel appearing for the first
respondent - IBBI opposed the aforesaid submissions and submitted that
the petitioner was not entitled to any relief whatsoever. Replying to the
grounds as urged by the learned counsel for the petitioner, it was
submitted that :-
(a) Both the show cause notices issued to the petitioner
were preceded by investigation reports that were duly
submitted pursuant to an order passed under Section
218 of the Code. Referring to the relevant documents
in that regard, it was submitted that insofar as the
show cause notice dated 26th October 2023 was
concerned, a separate order had been passed
appointing Mr. Mayank Mehta, Deputy General
Manager as Investigating Authority. After submission
of such report by the Investigating Authority, the show
cause notice came to be issued to the petitioner by
furnishing all necessary details. Similar was the case
with regard to the show cause notice dated 10 th April
2024. After complying with all the statutory
requirements, the said show cause notice had been
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issued. Since the IBBI had complied with all necessary
pre-requisites, there was no case made out to entertain
the challenge to the issuance of the show cause
notices. The petitioner had submitted his reply to the
show cause notices but failed to raise these
contentions therein. The challenge, if any, could only
be to an adverse order if passed on the show cause
notices. Referring to the decision in Union of India
and Anr. Vs. Kunisetty Satyanarayana, AIR 2007 SC
906 it was submitted that the writ petition as filed
raising a challenge to the show cause notices was
premature and the same did not deserve to be
entertained.
(b) The suspension of AFA was in view of the provisions of
Clause 23A of the Model Bye-Laws under the 2016
Regulations. With the issuance of the show cause
notices, the disciplinary proceedings against the IP
were deemed to have commenced and therefore the
AFA was rightly suspended. It was well settled that
suspension pending the disciplinary proceedings could
not be treated as a punitive measure so as to confer
any right upon the person suspended to challenge the
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same. The learned counsel referred to the decision in
State Bank of Patiala and Ors. Vs. S.K. Sharma, 1996
(3) SCC 364 and State of Maharashtra and Ors. Vs.
Sajjad Ali Mohammad Ali and Ors, 2011 (2) Mh.L.J.
392 in that regard. Referring to the provisions of
Section 241 of the Code, it was submitted that the
2016 Regulations and the 2017 Regulations had been
laid before each House of Parliament and hence they
had the necessary statutory support for being
implemented. Reference was made to the Bulletin
published by the Rajya Sabha and the Lok Sabha in
that regard. The IBBI having acted in accordance with
the statutory provisions which had the force of law,
the challenge as raised to its validity was
misconceived. The validity of Clause 23A of the 2016
Regulations had been upheld by the Madras High
Court in CA V. Venkata Sivakumar Vs. Insolvency and
Bankruptcy Board and Ors, Writ Petition No.16650 of
8.2020 decided on 22nd January 2024.
(c) The 2016 Regulations as well as the 2017 Regulations
had been framed by the IBBI pursuant to such powers
being conferred by Sections 196 and 217 to 220 read
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with Section 240 of the Code. The said Regulations
having been laid before the Parliament as required by
Section 241 of the Code and no objections whatsoever
having been received, the same had become part of
the statute. The Bye-Laws of the ICSI Institute of
Insolvency Professionals were forming part of the
Regulations and were also valid. The learned counsel
referred to the decision of the Supreme Court in
Premachandran Keezhoth and Anr. Vs. Chancellor
Kannur University and Ors, 2023 INSC 1032 to
contend that the Regulations and Bye-Laws were
legally valid. As the IBBI had acted within the
jurisdiction conferred on it, its action was not liable to
be interfered with at the behest of the petitioner.
. It was thus submitted that in absence of any jurisdictional infirmity
on the part of the IBBI in issuing the show cause notices, there was no
case made out to interfere in exercise of writ jurisdiction. In view of
various adjournments sought by the petitioner before the Disciplinary
Committee, those proceedings could not be completed. The petitioner
ought to participate in the disciplinary proceedings. The writ petition was
therefore liable to be dismissed.
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8. We have heard the learned counsel for the parties at length and
with their assistance, we have perused the documents on record. We have
thereafter given thoughtful consideration to the respective submissions. At
the outset it is to be borne in mind that the challenge raised in the present
writ petition is to the show cause notices dated 26 th October 2023 and 10th
April 2024. By these show cause notices, the petitioner has been called
upon to show cause why action should not be taken to cancel his
registration as an IP. Action is also proposed under Section 220 of the
Code. Ordinarily, challenge to a show cause notice is considered to be a
premature challenge for the reason that the noticee has an opportunity to
reply to such notice and contest the assertions made therein. The show
cause notice itself calls for the response of the noticee prior to taking any
further action as proposed. It is therefore for the authority issuing the
show cause notice to consider such response and thereafter indicate either
the action to be taken or the dropping of the notice on acceptance of the
noticee's stand. It is thus clear as held in Kunisetty Satyanarayana (supra)
that mere issuance of a show cause notice does not result in infringement
of any right of the noticee. This is for the reason that the authority issuing
the show cause notice may well be satisfied with the explanation furnished
by the noticee and drop the proceedings. It is only if an order imposing a
penalty or taking some action is passed that the noticee can complain of
his rights being affected. Notwithstanding this position, the Court may
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interfere with the issuance of show cause notice if it is found to be issued
without any jurisdiction or if it is for any other reason wholly illegal. It is
to this limited extent that the challenge as raised by the petitioner to the
impugned show cause notices would require examination.
9. At the outset reference to the relevant provisions of the Code would
be necessary. Under Section 196(1)(t), the IBBI has been conferred the
power to make regulations and guidelines on matters relating to
insolvency and bankruptcy as may be required under the Code. Chapter VI
of the Code deals with inspection and investigation against any Insolvency
Professional Agency or its member. A person aggrieved by the functioning
of an IP can make a complaint to the Board under Section 217. On
receiving such complaint under Section 217, if the Board has reasonable
grounds to believe that any IP has contravened any of the provisions of the
Code or the Rules or Regulations, it can by an order in writing direct any
person or persons to act as an Investigating Authority for conducting an
inspection or investigation of such IP. The Investigating Authority can
require any person who is likely to have relevant documents, record or
information to furnish the same to it. Ancillary powers have been
conferred on the Investigating Authority to take steps for conducting such
inspection or investigation. On the inspection or investigation being
completed, the IBBI can issue a show cause notice to such IP in the
manner specified by the Regulations in that regard. The IBBI can appoint a
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Disciplinary Committee for considering the reports of the Investigating
Authority for considering the reports submitted under Section 218(6) of
the Code.
. Such Disciplinary Committee is thereafter required to consider the
reports of the Investigating Authority and on being satisfied that the IP has
contravened the provisions of the Code or the Rules or Regulations framed
thereunder, it can impose penalty as prescribed. Under Section 240 of the
Code, the IBBI has been empowered to make Regulations consistent with
the Code as well as Rules made thereunder for the purposes of carrying
out the provisions of the Code. The said power includes the time and
manner of carrying out investigation under Section 218(2) in view of
Section 240(2)(zzz). A power is also conferred under Section 240(2)
(zzza) to frame Regulations as regards the manner of carrying out
inspection of an IP and the time for giving reply under Section 219 of the
Code. Under Section 241 of the Code, every Rule or every Regulation
made under the Code have to be laid before each House of Parliament in
the manner prescribed and it is only thereafter that such Rule and
Regulation would have effect. It can thus be seen that the aforesaid
provisions in the Code lay down in detail the manner in which inspection
and investigation against any IP can be conducted.
10. In the reply filed on behalf of the IBBI, it has been stated that the
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2016 Regulations as well as the 2017 Regulations were placed before each
House of the Parliament as required by Section 241 of the Code. No
objections whatsoever were raised to the same and thereafter the said
Regulations had become part of the Code. It is well settled that on
compliance with the requirements of laying before each House of
Parliament any Regulations framed under a statute, such Regulations in
the form of subordinate legislation become part of the principal
enactment. Reference in this regard can be made to the decision in
Premachandran Keezhoth and Anr. (supra).
. The learned counsel for the petitioner sought to rely upon the
decisions in Bharathidasan University and Anr. and Kerala State Electricity
Board and Ors. (supra) to contend that notwithstanding the aforesaid, if
the Regulations travelled beyond the parent Act, they would suffer from
the vice of being ultra vires. There can be no dispute with this proposition.
In the present case, it can be seen that Chapter VI of the Code lays down
in detail the manner in which inspection and investigation against an IP
can be undertaken. For doing so, the IBBI has relied upon the Regulations
framed in exercise of powers conferred by Section 240(2)(zzz) and (zzza).
Since the 2016 Regulations and 2017 Regulations have been shown to
have been placed before each House of Parliament, the legal fiction
contemplated by Section 241 of the Code would come into play and the
said Regulations would become part of the Code for being enforced. The
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2016 Regulations and the 2017 Regulations seek to carry out the
provisions of the Code. We do not find that the aforesaid Regulations and
especially Clause 23A of the 2016 Regulations travel beyond what has
been empowered to be done under the Code. We therefore do not find
that Clause 23A can be held to be ultra vires on the grounds canvassed by
the petitioner. The challenge to the validity of Clause 23A therefore fails.
. Similar is the case with Clause 23A of the Bye-laws of the ICSI
Institute of Insolvency Professionals. Clause 2(1)(c) of the 2016
Regulations refers to the model bye-laws contained in the Schedule to the
2016 Regulations. Once it is found that the 2016 Regulations are valid in
view of compliance of Section 241 of the Code, the Bye-laws framed by
the ICSI Institute of Insolvency Professionals in accordance with the model
bye-laws contained in the Schedule to the 2016 Regulations would also be
valid.
11. According to the learned counsel for the petitioner, any investigation
undertaken in terms of Section 218 of the Code ought to be preceded by
an order in writing to be issued by the IBBI directing any person or
persons to act as an Investigating Authority to conduct an investigation. In
absence of any such order in writing being issued by the IBBI, the issuance
of the show cause notices was without jurisdiction. In this regard we find
that insofar as the show cause notice dated 26 th October 2023 is
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concerned, office noting dated 26th September 2023 has been placed on
record which indicates that Shri. Mayank Mehta, DGM was directed to
undertake investigation. This office note was supplied to the petitioner
when he demanded information under the provisions of the Right to
Information Act, 2005. There is a similar office noting appointing the very
same officer to undertake investigation that resulted in issuance of the
show cause notice dated 10th April 2024. It therefore cannot be said that
the Investigating Authority in the absence of any order in writing
proceeded to conduct an investigation in terms of Section 218(1) of the
Code.
. We may state that we have not gone into the issue as regards
sufficiency of prima facie material that warranted issuance of an order in
writing under Section 218(1) of the Code appointing an Investigating
Officer in the complaints against the petitioner. Since a jurisdictional issue
was raised on behalf of the petitioner that there was no order in writing
issued by the IBBI, we have referred to the presence of such orders prior to
issuance of the show cause notices. It would be open for the petitioner
while contesting the show cause notices to contend that the material on
the basis of which such order was passed appointing an Investigating
Authority was insufficient in the circumstances of the case.
. We are thus satisfied that the investigation was undertaken
consequent to an order in writing issued by the IBBI under Section 218(1)
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of the Code. The show cause notices therefore cannot be faulted on the
ground that the Investigating Authority submitted its report in the absence
of any prior order in writing as contemplated by Section 218(1) of the
Code.
12. While questioning the show cause notices, the petitioner has raised
a challenge to the validity of Clause 23A of the 2016 Regulations as being
ultra vires. According to him there is no power conferred by the Code on
the IBBI to direct suspension of the AFA pending consideration of the
show cause notices. The Regulations are thus excessive in nature.
. Clause 23A provides for suspension of the AFA on initiation of
disciplinary proceedings by the agency or by IBBI as the case may be. The
Explanation to Clause 23A states that the date of issuance of a show cause
notice till its disposal would amount to pendency of a disciplinary
proceeding. In other words, issuance of a show cause notice amounts to
initiation of such disciplinary proceedings.
13. The validity of Clause 23A was questioned before the Madras High
Court in CA V. Venkata Sivakumar (supra) . After considering the
challenge in detail, the Division Bench held that Clause 23A of the 2016
Regulations was valid and there was no illegality in providing for
suspension of an AFA on initiation of disciplinary proceedings. Paragraphs
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6 to 6.4 of the said decision being relevant, they are reproduced
hereunder:
6. Regulation 23A has already been extracted supra. It can be
seen that it only lays down that the AFA shall remain
suspended once the disciplinary proceedings are initiated.
As a matter of fact, Regulation 12A of the Insolvency and
Bankruptcy Board of India (Model Bye-Laws and
Governing Board of Insolvency Professional Agencies)
Regulations, 2016, categorically provides that the
Resolution Professionals should not have any disciplinary
proceedings pending against them. If that be the case, it is
only logical that there is an ad-interim suspension of AFA if
any disciplinary proceedings are initiated subsequently
also. The power of ad-interim suspension has always been
held to be a valid and natural exercise of power and that
the only requirement there must be an express rule
enabling the same.
6.1 There is no discretion vested with the IPAs and the
suspension is automatic, once the disciplinary proceedings
are initiated. Therefore, it can neither be termed as
manifestly arbitrary nor be challenged on the ground of
any confirmation of unguided/unbridled power.
6.2 The power of suspension is not a punishment and is an ad-
interim measure and if one has to be issued with show
cause notice, then the very purpose of ad-interim
suspension is lost. In as much as ultimate punishment is
imposed only on the conclusion of the disciplinary
proceedings it cannot be said that any substantial or vested
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right of the Resolution Professional is violated. On the
contrary, the purpose of suspension is to immediately keep
the erring person away from the office, so that the relevant
materials and evidences which are on record be properly
collected and that there is an impartial and fair enquiry in
the issue. Therefore, the requirement of issuance of show
cause notice cannot be read into a provision of ad-interim
suspension.
6.3 Of course, any suspension, if prolonged, without any
inquiry being proceeded with, would cause stigma. But the
larger public interest and the laudable purpose behind the
rule of suspension and the relative hardship had to be
balanced. Only to avoid hardships, normally swift and
prompt completion of the process of disciplinary
proceedings is insisted upon. Therefore, the petitioner or
any other aggrieved professional can only insist upon
prompt completion of the proceedings and the hardship
cannot be a ground for challenging the very regulation
itself.
6.4 Accordingly, finding no infirmity, we uphold the
constitutional validity of the Regulation 23A of the
Insolvency and Bankruptcy Board of India (Model Bye-
Laws and Governing Board of Insolvency Professional
Agencies) Regulations, 2016.
14. We are inclined to agree with the view taken by the Division Bench
of the Madras High Court in CA V. Venkata Shivakumar (supra). It has
been found in the said decision that suspension by itself cannot be treated
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as a penalty and it is only an ad-interim measure that is to operate till the
disciplinary proceedings are concluded. There is also no question of the
principles of natural justice being attracted in such case as urged on behalf
of the petitioner. According to the IBBI, the suspension on account of the
operation of Clause 23A of the byelaws would not bar the petitioner from
continuing with pending assignments but the same would only bar the
petitioner from accepting new assignments pending disposal of the show
cause notices. Such stand has been taken in paragraph 16 of its affidavit-
in-reply dated 08/07/2024. We therefore do not find that the suspension
of AFA pending consideration of the show cause notices is in any manner
contrary to law or unwarranted in the facts of the present case. The
contention raised by the petitioner in this regard therefore cannot be
accepted.
15. From the foregoing discussion we find that (a) the 2016 and 2017
Regulations have been framed pursuant to the power conferred by the
provisions of the Code and especially Sections 196 and 217 to 220 read
with Section 240 of the Code. The same having been laid before both the
Houses of the Parliament, they have got statutory force thus empowering
the IBBI to take necessary action in accordance therewith. The power
includes issuance of a show cause notice by the IBBI for taking any action
under Section 220 of the Code. (b) the show cause notices dated 26th
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October 2023 and 10th April 2024 were preceded by reports of the
investigating authority which undertook investigation after being duly
authorised by orders passed under Section 218 of the Code. (c) Clause
23A of the 2016 Regulations as well as Clause 23A of the Bye-laws framed
by the ICSI Institute of Insolvency Professionals are valid. The suspension
of the petitioner's AFA is legal as it is the consequence of initiation of
disciplinary proceedings against him. The same is duly provided by Clause
23A of the 2016 Regulations and the Bye-Laws in that regard.
16. Hence for aforesaid reasons, we do not find any exceptional case
made out to interfere with the issuance of show cause notices dated 23 rd
October 2023 and 10th April 2024. The same do not suffer from any
jurisdictional infirmity. It is clarified that the observations made in the
judgment are only for the purposes of considering the validity of the show
cause notices. The same shall not be considered as any expression on the
merits of the petitioner's defence as raised in his reply to the show cause
notices. All contentions of parties on merits are kept expressly open.
17. Rule stands discharged with no order as to costs.
[ RAJESH S. PATIL, J. ] [ A.S. CHANDURKAR, J. ]
Digitally
SNEHA
SNEHA ABHAY OOCJ WRIT PETITION (L) - 13865-2024 -Judgment.doc
ABHAY DIXIT Dixit
DIXIT Date:
2024.08.09
17:39:42
+0530
