Official Liquidator must follow Ethical Principles and Fairness While Discharging Duties under IBC: Delhi HC [Read Order]

The Delhi High Court has held that official liquidators must follow ethical principles and fairness to discharge their duties under the Insolvency and Bankruptcy Code ( IBC ), 2016.

Sundaresh Bhat , the Petitioner challenged an order issued by the Disciplinary Committee of the Insolvency and Bankruptcy Board of India ( IBBI ) which suspended the registration of the Petitioner for a period of two years. The Corporate Debtor, ABG Shipyard Limited, was 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 ), Ahmedabad, admitted the application and initiated the Corporate Insolvency Resolution Process ( CIRP ). The Petitioner was appointed as the Interim Resolution Professional and later directed to act as Liquidator following an NCLT order.

Later, the Petitioner received a Notice of Inspection related to the liquidation assignment of the Corporate Debtor. A Show Cause Notice was issued, outlining charges against the Petitioner which included influencing a Registered Valuer to change asset valuations, prescribing 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 passed the order. The IBBI took a lenient view on the charge of influencing registered valuers and closed it with caution. However, the Board held the Petitioner guilty of the other charges. The Petitioner was found to have appointed unregistered valuers by engaging RBSA Valuation Advisors LLP, which was not registered at that time. Feeling aggrieved, the Petitioner approached the High Court.

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

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 court viewed that the proviso to Schedule I (1) (3) prohibiting non-refundable fees was not in effect during the auction and 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 unregistered valuers, the High Court held that the procedural missteps in the use of firm names do not necessarily imply a contravention of the regulations, provided the valuation was conducted by registered valuers.

It was found that under the IBC, once attempts to revive a company fail, it proceeds to liquidation. The appointed Liquidator plays a crucial role in maximizing the value of the company's assets to ensure that creditors, including financial institutions, public sector banks, and employees, are adequately paid.

The Liquidator's responsibilities are vital which requires adherence to high ethical standards, diligence, and impartiality. Any misconduct or conflict of interest could severely undermine the integrity of the insolvency process. Therefore, while the Liquidator enjoys significant autonomy, the High Court held that this power must be exercised judiciously, transparently, and ethically, in the best interest of all stakeholders involved.

The bench of Justice Subramonium Prasad viewed 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 which is under liquidation. They must adhere to the highest standards of ethical conduct, diligence, and impartiality to uphold the integrity of the process.

Further held that there was no reason to interfere with the Board's conclusion that the Petitioner was guilty of misconduct regarding the appointment and fee structure of BRAL. The writ petition was dismissed.

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