Should IBBI levy fee on an annual remuneration basis?

Should the Insolvency and Bankruptcy Board of India (IBBI) be charging fee on the basis of the annual remuneration or the annual turnover of Insolvency Professionals (IPs) or Insolvency Professional Entities (IPEs)?

The Madras High Court through an order on 28 July 2020 dismissed a writ challenging the IBBI’s power to levy fee on IPs and IPEs after it made the observation that the insolvency regulator has enough constitutional and legislative backing to levy fees on the basis of annual remuneration or turnover of an IP or IPE.

Rules of payment of fee by IPs and IPEs are enshrined in the Regulation 7(2)(ca) and Regulation 13(2)(ca) of the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016. The Regulation 7(2)(ca) stipulates the requirement that the IP should pay a fee calculated at 0.25% of the professional fee earned for services rendered as an IP in the preceding financial year to the IBBI. Regulation 13(2)(ca) stipulates payment of a fee at 0.25% of the turnover of the IPE in the preceding financial year to the IBBI. Besides, Regulation 12 of the IP Regulations provides for the recognition of a company, registered partnership firm or a limited liability partnership as an insolvency professional entity (IPE) subject to the conditions set out therein.

Both the Regulation 7(2)(ca) and 13(2)(ca) were challenged by a chartered accountant Venkata Siva through a writ petition filed the Madras High Court. In the writ filed by Venkata Siva, he says that IP Regulations violate Articles 14, 19 and 21 of the Constitution and are, therefore, liable to be struck down.

Petitioner’s contention

He primarily had three contentions. First, that Section 196 of the Insolvency and Bankruptcy Code (IBC), which talks about the powers and functions of IBBI, does not empower the IBBI to levy fees on the basis of the annual remuneration or the annual turnover of the IP or IPE. He points out that a registration fee of Rs 10,000 is anyways charged every five years after the certificate of registration is granted.

His second contention was that there is excessive delegation and, therefore, the regulation is liable to be struck down. In support of this contention, he relied upon the judgments of the Supreme Court in the State of Tamil Nadu v. K. Shyam Sunder, AIR 2011 SC 3471 (Shyam Sunder) and Avinder Singh v State of Punjab, AIR 1979 SC 321 (Avinder Singh), wherein it was held that conferring unfettered powers on the delegate would be an abdication of legislative responsibility, and that essential legislative functions cannot be delegated.

His third contention was that the IBBI has not provided services to IPs and, therefore, there is no quid pro quo to justify the charging of fees as a percentage of the annual remuneration/turnover.

Argument in favour of respondents

Appearing for the respondents – IBBI, ICAI (one of the Insolvency Professional Agencies), Ministry of Corporate Affairs and Finance ministry — Additional Solicitor General of India (ASGI) R Sankaranarayanan contented that the Section 196 of the IBC expressly empowers the IBBI to levy fees or other charges for registration and renewal of registration of insolvency professional agencies, insolvency professionals and information utilities and that the only fetter is that such fee should be for carrying out the purposes of the Code. He also pointed out that Section 207 provides for the registration of IPs with the IBBI and for the payment of fees, in connection therewith, as specified by regulations. Therefore, he submitted that the power to levy the fee is beyond question and that there are sufficient safeguards in the IBC.

On the point of quid pro quo, he contended that it is not necessary that there should be a direct correlation between the fee received and the services provided.

“Indeed, it is not even necessary that the Petitioner and other IPs should be direct beneficiaries of the services provided by the IBBI. As a matter of fact, he pointed out that the IBBI is entrusted with several functions under the IBC qua insolvency resolution, in general, and IPs in particular,” he said.

He referred to Section 16(3) and (4) of the IBC wherein the IBBI is empowered to recommend an IP in case no proposal is made by the operational creditor concerned.

Court’s order and observation

Dismissing the petition, the Madras High Court noted that Parliament enacted the IBC by drawing on the Bankruptcy Law Reforms Committee (BLRC) Report and the bill prepared by the BLRC. It says that both the Financial Sector Legislative Reforms Commission (FSLRC) and BLRC reports, it was recommended that the regulator should be self-sufficient at least with regard to operational expenses by collecting fees to finance its activities.

It notes that the IBBI plays a significant role as the principal regulator as regards insolvency and liquidation.  It referred to various acts and laws to prove IBBI plays an important role in functioning of IPs and IPEs.

It referred to Section 16(3) and (4) of the IBC under which the IBBI is entrusted with the responsibility of recommending a resolution professional (RP) if the operational creditor concerned fails to do so. In addition,  it referred to Section 22(4) and (5) and Section 27(4) and (5), respectively, under which the IBBI is required to confirm the proposal of the committee of creditors (the CoC) with regard to the appointment of the RP or the replacement RP, respectively.

It further says that the RP is required, in the discharge of duties, to act in the manner specified by the IBBI under Section 25(d), (h) and (k).  Under Section 28(4) and (5), if the RP acts without seeking the approval of the CoC, the CoC is entitled to report the matter to the IBBI for taking necessary action against the RP. Even with regard to proposing the name of an IP as a liquidator, the IBBI plays a role under Section 34.

The court further says that it finds that the IBBI has been tasked with several responsibilities under the IBC as is evident from the fact that the IBC is replete with references to the IBBI. Thus, it concludes that the IBBI does provide significant services, including in relation to IPs and that there is broad correlation between fees and services.

“Given the fact that direct or arithmetical correlation as between the fee received and service rendered is not necessary especially in the context of regulatory fees, we are of the view that Regulation 7(2)(ca) of the IP Regulations does not suffer from any constitutional infirmity on account of the absence of quid pro quo,” it concludes.