Bombay High Court Partially Nixes IBBI Clarification On Liquidator Fee Rules

The Bombay High Court on Thursday scrapped parts of a clarification issued for how liquidators' fees are calculated.

The clarification that came out in September 2023 was challenged for essentially amending Liquidation Process Regulations without proper authority rather than merely explaining them further. The court ruled against specific paragraphs of the notification, stating that they introduced substantive changes rather than just clarifications.

The petitioner, who is a chartered accountant registered as an insolvency professional with the IBBI, was accused of charging excessive fees during the liquidation process of a company called Hindustan Dorr Oliver Ltd. The IBBI issued show cause notices to the petitioner, alleging misconduct.

The court observed that the IBBI's regulations need to be presented to Parliament for review and can only become law after a specified period.

In its decision, the court upheld some parts of the circular that clarified existing legal terms while striking down others that introduced new requirements. The court also instructed the IBBI to handle the petitioner's case fairly and promptly while avoiding duplicative proceedings.

Which Parts Have Been Invalidated?

In simple terms, the part struck down by the Bombay High Court relates to how the "amount realised" is defined and calculated in the liquidation process.

The clarification stated that the liquidator's fee is to be calculated based on a percentage of the "amount realised" from the sale of assets, excluding liquid assets like cash and bank balances.

It also mentioned how the "amount of realisation/distribution" should be interpreted. The correct way to calculate is to consider the cumulative value of all assets realised so far and then divide them into slabs, it explained. Then, these slabs are further divided based on when the assets were realised.

Since these clarifications were more of the nature of amendments and not introduced correctly as such, they were invalidated by the high court.