The Madras High Court, on July 28, 2020, dismissed a writ petition challenging the constitutional validity of regulations 7(2)(ca) and 13(2)(ca) of the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016 (“Regulations”). The petition was filed on the grounds that the aforementioned regulations are, inter alia, violative of Articles 14, 19 and 21 of the Constitution of India.  

Facts:

The Regulations were amended vide notification number IBBI/2018-19/GN/REG036, dated October 11, 2018, whereby regulations 7(2)(ca) and 13(2)(ca) were inserted in the Regulations. Regulation 7(2)(ca) mandates every insolvency professional (“IP”) to pay to the Insolvency and Bankruptcy Board of India (“IBBI”), a fee equivalent to 0.25% (zero point two five percent) of the professional fee earned for the services rendered by him as an IP in the preceding financial year, on or before April 30 every year. Similarly, regulation 13(2)(ca) mandates an insolvency professional entity (“IPE”) to pay to the IBBI, a fee of 0.25% (zero point two five percent) of its turnover from services rendered by it in the preceding financial year, on or before April 30 every year.  

Vide communication to the chairperson of IBBI, dated November 13, 2018, the petitioner, an IP, stated that the charging of fees based on an IP’s earnings is in violation of the principles of natural justice. He called upon the IBBI to withdraw the notification levying fees on the remuneration received by the IP in the preceding financial year. He also made a request under the Right to Information Act, 2005 to the Central Public Information Officer, IBBI, on January 13, 2020, asking for information as to the basis for charging the fee and as to the manner in which such monies were utilised during the year 2018-2019. In response, a reply dated February 25, 2020 was received by the petitioner. On account of being dissatisfied with the response, the petitioner filed the aforesaid writ petition.  

Arguments for the petitioner: 

The petitioner contended that the impugned regulations are ultra vires section 196 of the Insolvency and Bankruptcy Code, 2016 (“Code”), which deals with powers and functions of the IBBI. It was contended that section 196 does not empower the IBBI to levy fees on the basis of annual remuneration/annual turnover of an IP/IPE. It was also contended that there is excessive delegation, hence, the impugned regulations are liable to be struck down.  

Further, it was contended that since the IBBI had not provided any services to IPs, there was no quid pro quo to justify the charging of fee based on annual remuneration.  

Arguments for the respondent:  

On behalf of the respondents, it was contended that section 196 of the Code expressly permits the IBBI to levy fees for registration/renewal of registration of IPs and IPEs. Additionally, section 207 of the Code provides for registration of IPs with the IBBI and for payment of fees in respect of the same. Accordingly, it was contended that the IBBI is empowered to levy fees.  

With regard to quid pro quo, it was submitted that a direct correlation between the fee received and the services provided is not necessary. Reliance was placed on the decision of the Supreme Court in BSE Brokers’ Forum, Bombay v. SEBI, (2001) 3 SCC 482, where it has been held that quid pro quo is not a condition precedent for the levy of regulatory fees. Further, on the issue of charging a fee based on annual turnover, the Supreme Court held that the annual turnover was not the subject matter of the levy but only a measure of the levy and that it does not amount to a turnover tax or a tax on income.  

Decision of the Madras High Court: 

Regarding the challenge to regulation 13(2)(ca), the court noted that the petitioner was not a director or a partner of an IPE. Therefore, it was held that he had no locus standi to challenge regulation 13(2)(ca) and, accordingly, the court declined to examine the constitutional validity of the same.  

With respect to the challenge to regulation 7(2)(ca), the court noted that, pursuant to sections 196 and 207 read with section 240 of the Code, there can be no question whatsoever with regard to the powers of the IBBI to frame regulations with regard to the fee payable by IPs and IPEs. Regarding the charging of fees as a percentage of remuneration, the court observed that the fee making power of the IBBI is not subject to any fetters except that it should be for carrying out the purposes of the Code.  

On the issue of absence of quid pro quo for charging the fees, the court observed that direct or arithmetical correlation between the fee received and service rendered is not necessary, especially in the context of regulatory fees. The court also observed that adequate safeguards are in place to ensure that the funds of the IBBI are utilised for the purposes of fulfilling the role of the IBBI under the Code. Thus, the delegate has not been vested with unfettered powers, and the charging of fee by using the annual remuneration as a measure does not amount to delegation of an essential legislative function.   

In view of the above, the writ petition was dismissed. 

Please find a copy of the judgment here.

This update has been contributed by Aastha (Partner) and Arhat Chhabra (Associate).