Madras HC upheld constitutional validity of Regulation 7A of IP Regulations

IN THE HIGH COURT OF JUDICATURE AT MADRAS

The Relevant Text of the Order as follows :

10. We considered the oral and written submissions of the partyin- person and the learned Additional Solicitor General of India and examined the materials on record.

11. The first question that arises for consideration is with regard to the power to frame the impugned regulations and bye-laws, and whether there is excessive delegation. On perusal of the IP Regulations, it is clear that the said regulations were framed under the power conferred by Sections 196, 207 and 208 read with 240 of the IBC. In an earlier judgment, namely, V. Venkata Sivakumar v. IBBI, 2020-4-L.W. 161, this Court rejected a challenge by the Petitioner herein to Regulation 7(2)(ca) of the IP Regulations as regards the power of the IBBI to charge a fee from IPs by using the annual turnover as a measure, including the allegation that there was excessive delegation. In this case, in addition to Regulation 7A of the IP Regulations, Regulation 12A of the Model Bye-Laws IPA Regulations is under challenge. On perusal of the Model Bye-Laws IPA Regulations, we find that the said regulations were framed by the IBBI under the power conferred by Sections 196, 203 and 205 read with Section 240 of the IBC. Section 196 of the IBC deals with the powers and functions of the IBBI and sub-section (2) thereof expressly empowers the IBBI to frame model byelaws to be adopted by an IPA. The relevant clauses of Section 196(2) are as under:

“(2) The Board may make model bye-laws to be adopted by insolvency professional agencies which may provide for-

(a) the minimum standards of professional competence of the members of insolvency professional agencies;
(c)requirements for enrolment of persons as members of insolvency professional agencies which shall be non discriminatory.

Explanation: For the purposes of this clause, the term “non-discriminatory” means lack of discrimination on the grounds of religion, caste, gender or place of birth and such other grounds as may be specified;

(d) the manner of granting membership;

(l) the procedure for enrolment of persons as members of insolvency professional agency;

(n) the manner of monitoring and reviewing the working of insolvency professionals who are members;”

Section 205 of the IBC deals with the power of the IPA to frame bye-laws in accordance with the model bye-laws. On examining the said Sections of the IBC, the undoubted position that emerges is that the IBBI is empowered to frame Regulation 7A of the IP Regulations and Regulation 12A of the Model Bye-Laws IPA Regulations. In turn, the IPAs, including the second Respondent, are empowered to frame bye-laws in consonance with the model bye-laws. Given the fact that the IBBI has framed the Model Bye-Laws IPA Regulations and IPAs, such as the IIIPI, have framed bye-laws in consonance with the model bye-laws, it cannot be said that there is excessive delegation. Indeed, Section 205 of the IBC expressly stipulates that, subject to the provisions of the IBC and rules and regulations thereunder, after obtaining the approval of the IBBI, an IPA should frame bye-laws that are consistent with the model bye-laws framed by the IBBI. Moreover, as regards the criteria for accepting or rejecting an application for an AFA, Regulation 12A(2) of the Model Bye-Laws IPA Regulations stipulates the criteria. Therefore, it certainly cannot be said that principles or norms have not been laid down in respect of the exercise of power by IPAs. Hence, the delegation of power is not in derogation of principles laid down in judgments such as P.K. Roy and Nargesh Meerza.

12. This leads to the next question as to whether the impugned regulations violate Article 14, 19 and 21 of the Constitution of India. The primary ground on which the regulations are assailed is that it subjects registered IPs to the added requirement of obtaining an AFA from the IPA. Therefore, the question arises as to whether the imposition of the AFA requirement violates the aforesaid provisions of the Constitution. Chartered Accountants are subject to the regulatory and disciplinary control of the Institute of Chartered Accountants of India. In the exercise of audit functions, they are also subject to the supervisory control of the National Financial Reporting Authority under Section 132 of the Companies Act, 2013 (CA 2013) and, in the event of the commission of or abetment of fraud, they may be removed by the NCLT even suo motu under Section 140(5) of CA 2013. Upon challenge, including on the ground of being subject to the regulatory control of multiple authorities, a Division Bench of the Bombay High Court in N. Sampath Ganesh v. Union of India 2020 SCC Online Bom 782, upheld the validity of Section 140(5) of CA 2013.

Similarly, in contempt jurisdiction, the exercise of control by the court over the right of advocates to appear in court was upheld in cases such as Mahipal Singh Rana v. State of Uttar Pradesh (2016) 8 SCC 335. Therefore, the existence of more than one authority with regulatory or disciplinary control over a professional is per se not a ground to hold that the impugned regulations are unconstitutional. In the specific context of IPs, the registration of an enrolled professional member as an IP and the cancellation of such registration are within the domain of the IBBI, whereas the grant of or cancellation of membership and the issuance, renewal and cancellation of an AFA are within the domain of the IPA, which functions under the supervisory control of the IBBI. Indeed, we note that paragraph 4.4.3 of the BLRC Report recommended such a two-tiered regulatory structure. Hence, we conclude that the challenge on this basis is untenable.

13. Whether the equality clause is violated by the impugned regulations is, however, a separate matter to be examined. IPs perform a distinct function in insolvency resolution and liquidation under the IBC and the regulations framed thereunder. Therefore, they indubitably constitute a distinct class. On examining the impugned regulations, we find that the said regulations treat all IPs alike. Indeed, Section 196(2)(c) of the IBC stipulates expressly that the conditions of membership of an IP should be non-discriminatory. To put it differently, all IPs are required to enrol as professional members of an IPA, register themselves with the IBBI and also obtain an AFA from the IPA concerned before accepting assignments, with effect from 01.01.2020, and, thereafter, on an annual basis. In every case, such AFA is required to be obtained from the appropriate IPA in which such IP is enrolled as a professional member. The admitted position is that there are only three IPAs in India, and the Petitioner has admittedly obtained membership from the IIIPI. Accordingly, as per Regulation 12A of the Model Bye-Laws IPA Regulations, he is required to apply for and obtain the AFA from the IIIPI.

14. Upon submission of such application, the IPA is required to examine as to whether the IP concerned is eligible for an AFA as per the criteria stipulated in Regulation 12A(2). The criteria are, inter alia, that such person should be registered with the IBBI as an IP; he should be a fit and proper person in terms of the explanation to Regulation 4(g) of the IP Regulations; he should not be debarred by any direction or order of the Agency or the Board; he should not have attained the age of seventy years; there should be no disciplinary proceedings pending against him before the Agency or the Board; and he should have complied with requirements with regard to the payment of fees to the IPA and the IBBI, filings and disclosures, continuous professional education and other requirements as stipulated in the IBC, regulations, circulars, directions and guidelines of the IPA and the IBBI. We do not find anything ex facie arbitrary about the specified criteria. Mr. Venkata Sivakumar focused on the fact that circulars, directions or guidelines do not constitute law. Although it may be correct that non-statutory circulars/directions and guidelines do not constitute law, these expressions are used in juxtaposition to compliance with the requirements of the IBC and regulations and, therefore, should be construed as extending to only relevant and material requirements (for purposes of obtaining an AFA) that are contained in the circulars, directions and guidelines issued by the IBBI or the IPA. Thus, the said criteria are clearly not unreasonable or arbitrary but appear to be germane for deciding the eligibility of an IP for such AFA. In our view, these measures are intended to regulate the profession and not to deprive a person of the right to practice the profession. Hence, we conclude that Articles 14, 19 and 21 are not violated.

15. Mr.Venkata Sivakumar had contended that the time limit of 7 days for filing an appeal against the rejection of an application by the IPA is arbitrary and unreasonable. On this issue, as held in cases such as Anant Mills Co. Ltd. v. State of Haryana (1975) 2 SCC 175; Seth Nand Lal v. State of Haryana (Supp.) SCC 574; Ganga Bai v. Vijay Kumar (1974) 2 SCC 393; Shyam Kishore v. Municipal Corporation of Delhi (1993) 1 SCC 22; and by this Court in T. Chitty Babu v. Union of India [2020-4- LW 123] and N. Madhavan v. Union of India [MANU/TN/3756/2020], the settled legal position is that a right of appeal is purely statutory and therefore a person is required to comply with the statutory conditions in connection with the filing of an appeal unless such condition is struck down as unconstitutional. While the learned ASGI contended that Section 5 of the Limitation Act would be applicable and that an application to condone the delay would be maintainable, we find that Section 238A of the IBC only applies to proceedings before the Adjudicating Authority under the IBC and to proceedings under the IBC before the NCLT, NCLAT, DRT and DRAT. Therefore, Section 238 A of the IBC does not apply in this situation. However, the time limit under Regulation 12 A(7) of the Model Bye-Laws IPA Regulations clearly runs from the date of receipt of the order, and the Petitioner would be entitled to reckon limitation from 16.07.2020 if that were indeed the date of receipt of the order of rejection as alleged. More importantly, in contrast to a withdrawal of registration or loss of professional membership as an IP, the rejection of the application for an AFA is not final and apart from the appellate remedy, it is always open to the IP concerned to remedy the non-compliance, as cited in the order of rejection, and re-apply. For all the reasons set out above, we conclude that Regulation 12A is not unconstitutional. Nonetheless, we are of the view that the time limit prescribed in Regulation 12A(7) may be revisited by the IBBI by considering an appropriate amendment either providing for a larger time limit or by conferring power to condone delay for sufficient cause.

16. In light of the aforesaid discussion and analysis, we find that the Petitioner has failed to make out a case to declare the impugned regulations as unconstitutional. Needless to say, this decision will not preclude the Petitioner from prosecuting the pending appeal in respect of the rejection of his application for AFA or from submitting a fresh application for an AFA upon remedying the stated defects in the order of rejection provided he retains his professional membership and registration as an IP.

17. In the result, the writ petition fails and the same is dismissed.