The recent circular of the Insolvency and Bankruptcy Regulator (IBBI) on imposition of monetary penalties on the erring Insolvency Professionals has stirred the hornet’s nest. The IP fraternity is flustered and disquiet is discernible. The circular mandates IPA’s to amend their bye-laws and incorporate 14-point cause and effect to discipline the IP’s. The circular is a graded step after the amendment of Model Bye-Laws Regulations requiring these penalties to be deposited in an internal Fund created to meet establishment bill and other expenses of IBBI.
Effect of Circular
Let’s understand the effect of the circular:
- The circular attempts to reduce discretion of Disciplinary Committees of IPA’s in imposition of monetary penalty by bringing in uniformity and consistency.
- The monetary penalty is to be imposed on erring IP’s upon issue of show-cause notice, which may be sub-moto or on the basis of complaint or information, or directions from MCA/NCLT.
- Show-cause notice will necessarily provide opportunity to the IP to explain followed by a personal hearing.
- The Disciplinary Committee will then have to decide about the due diligence of the concerned IP.
- If the Disciplinary Committee decides to hold the IP guilty, it may proceed to take action as envisaged in the Bye-laws.
- The monetary penalty will be imposed if the Disciplinary Committee decides to invoke this penalty clause.
The process of imposition of penalty has to follow the principles of natural justice. The compliant IP need not worry about the monetary penalties. Fixation of quantum of penalties works two ways – first, it minimizes the discretion of the Disciplinary Committee and second, it brings in certainty. Let us understand it this way. Even today, the Disciplinary Committee has the power to impose monetary penalty on erring IP’s after following the due process but there is no limit on their powers. Unbridled power or controlled discretion – which one is better?
On a positive note, the penalty schedule works as a checklist of what should not be done by an IP.
Regardless of arguments for and against the monetary penalty circular, it calls for clarity on following aspects:
a. Whether it will apply retrospectively or prospectively? In other words, whether it can apply to completed or ongoing assignments or will it apply to assignments to be undertaken on or after the amendment in bye-laws.
b. The meaning of fee is not clear. Whether it would be considered on accrual basis or receipt basis? If the action is taken while the assignment is ongoing, whether the fee up to the date of imposition of penalty would alone be considered?
c. The maximum penalty goes upto 25% of the fee in each of the 14-point non-compliances. If the IP is held guilty of 5 offenses and the Disciplinary Committee decides to impose maximum of 25% of the fee in each case, would the penalty go beyond the 100% fee?
d. How the amount will be recovered from an IP upon imposition of penalty?
e. What are the consequences of failure of an IP to make payment of penalty?
f. What would be the time frame within which the penalty id to be deposited?
g. Will deposit of penalty be a pre-condition for filing appeal against such an order?
h. Should the discretion of Disciplinary Committee in imposition of minimum penalty be restricted?
No work of any professional can go unchecked. The circular has the objective of controlling the discretion of the Disciplinary Committee while imposing monetary penalties. Without a doubt, more clarity is expected and the Governing Boards of IPA’s will do a favor if they can bring out FAQ’s on the subject and hold wide consultations before bringing this into their bye-laws.