Proposed Monetary Penalty Circular : A Matter of Perception, Uniformity and Clarity

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:

  1. The circular attempts to reduce discretion of Disciplinary Committees of IPA’s in imposition of monetary penalty by bringing in uniformity and consistency.
  2. 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.
  3. Show-cause notice will necessarily provide opportunity to the IP to explain followed by a personal hearing.
  4. The Disciplinary Committee will then have to decide about the due diligence of the concerned IP.
  5. If the Disciplinary Committee decides to hold the IP guilty, it may proceed to take action as envisaged in the Bye-laws.
  6. 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.

Clarity Needed

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.

Analyzing Delhi High Court Order on Threshold Limit under IBC

When the Central Government increased the threshold limit with effect from 24th March, 2020, many speculative interpretations were doing the rounds.

Here we have a ‘prima facie’ view of Hon’ble Delhi High Court dated 23rd June, 2020 in the matter of Pankaj Aggarwal vs. Union of India and Ors which noted that NCLT fell in error while ignoring the increased threshold limit from 24th March, 2020 while admitting a petition on the basis of default of Rs. 1,00,000/-. The Court stayed the order of NCLT till next date of hearing on deposit of Rs. 10 lakhs with the Registrar of the Court within 2 weeks. It also allowed the company to carry on its day to day operations and IRP was given a liberty to approach the Court for seeking any directions.

Let’s analyze this order:

  1. This order is only an interim order and presents prima facie view of the Court. It is not the final view.
  2. None appeared on behalf of the operational creditor whose application was admitted by NCLT and even the IRP was not present at the time of hearing.
  3. What probably persuaded the court was the protection of MSME’s from insolvency proceedings. This aspect weighed heavily in favor of the Petitioner.
  4. At this moment, the Court has not gone into the question whether the notification applies prospectively and not retrospectively.
  5. It seems that the application u/s 9 was pending prior to this notification was not brought to the notice of the Court.
  6. The law on the date of filing of application should apply as has been held by Supreme Court in Supreme Court in Glaxo Smith Kline Plc. & Ors. v. Controller of Patents and Designs & Ors., 2008 (4) CHN 197 while upholding single bench judgment of Calcutta High Court held that “the petitioner’s application submitted on September 29, 1999 is to be decided by the transport authority under the law that was existing at that date, and not by applying the government notification dated August 2, 2004 that was given no retrospective effect”.
  7. The mandate of law is clear on this aspect and this interim order which is only a prima facie view should not be a cause of concern amongst IP fraternity.
  8. No doubt, uncertainty will continue to prevail on this issue till 13th August, 2020, which is the next date of hearing in this case unless the Operational Creditor challenges it or some other Court passes an authoritative judgment on this aspect in some other case.
  9. The Court was under the impression that NCLT was not aware of notification dated 24th March, 2020. It seems the NCLT order did not deal with this issue.
  10. A question also needs to be answered on the fact whether High Court should have entertained the Writ Petition on non-consideration of notification of 24th March, 2020 in a specific case by NCLT. There is alternative efficacious remedy provided in IBC in the form of appeal before NCLAT, which is hearing all urgent matters online during these unprecedented times.
  11. In conclusion, this interim order, is not a conclusive or authoritative judgment being a prima facie view.

Disclaimer: The views expressed here are for academic purposes alone and should not be deemed as legal or professional advise on the subject. If relied upon, Tranzission does not take any responsibility for any liability or non-compliance.