Suspension of Insolvency Professional for Excess Fees, Unapproved Outsourcing, and Delay under IBC Regulations
- REEDLAW
- 4 days ago
- 4 min read
REEDLAW Legal News Network reports: In a pivotal ruling, the Delhi High Court underscored strict accountability for Insolvency Professionals, holding that excess withdrawal of fees, outsourcing of core statutory duties without approval of the Committee of Creditors (CoC), and delay in mandatory filings constitute serious breaches of the Insolvency and Bankruptcy Code (IBC) and its regulations. The Court ruled that such conduct warrants disciplinary suspension and recovery of all improper payments.
The Delhi High Court, Single-Judge Bench of Justice Subramonium Prasad, while adjudicating a writ petition along with a connected application, determined that an Insolvency Professional who withdraws excess fees, outsources core statutory responsibilities without prior CoC approval, and fails to meet filing deadlines violates the IBC and its regulations. The Court held that these lapses justify the imposition of disciplinary suspension and recovery of unauthorised payments.
The Delhi High Court delivered a detailed judgment dismissing a writ petition that challenged disciplinary action taken by the Insolvency and Bankruptcy Board of India (IBBI) against an Insolvency Professional. The Appellant, a registered chartered accountant, had served as Interim Resolution Professional and Resolution Professional of a large corporate debtor and later as its Liquidator after the Committee of Creditors resolved to liquidate the company. He also acted as Resolution Professional for another corporate debtor, during which he admitted substantial claims of financial, operational, and employee creditors and engaged a professional services firm to assist in the complex insolvency and liquidation process.
The IBBI initiated an inspection of the Appellant’s assignments and, after issuing a Draft Inspection Report and Show Cause Notice, alleged serious contraventions. These included withdrawal of excess remuneration as a liquidator’s fee, engagement of a related party without approval of the Committee of Creditors for tasks that fell squarely within the liquidator’s statutory functions, and delay in filing an avoidance application in a separate corporate insolvency case. After considering the Appellant’s responses, the Disciplinary Committee suspended his registration for two years, effective from 16 September 2022 and directed a refund of half the professional fees paid to the engaged firm, to be deposited in the Consolidated Fund of India.
The Appellant argued that the disciplinary proceedings were without jurisdiction, contending that an inspection or investigation under Section 218 of the Insolvency and Bankruptcy Code (IBC) was a statutory precondition for action under Section 220. He submitted that the IBBI lacked authority to conduct a “routine inspection” under Section 196 and that the inspection order was improperly issued by an officer without the requisite rank. He further claimed that any excess fees had been voluntarily refunded before the IBBI’s specified cut-off date and that his actions were protected under Section 233 of the IBC, which shields insolvency professionals acting in good faith.
The High Court rejected these contentions and upheld the disciplinary findings. It held that the Appellant had withdrawn an excess fee of over ₹83 lakh from the liquidation estate due to a misinterpretation of Regulation 4 of the IBBI (Liquidation Process) Regulations, 2016, and that the subsequent refund—made only after detection by the IBBI—did not cure the breach of fiduciary duties under Sections 36 and 208 of the IBC. The Court found no merit in the claim of good faith, denying protection under Section 233. It also endorsed the finding that the Appellant had improperly engaged a related professional firm on vague terms for tasks such as claim verification, preparation of the liquidation estate, valuations, and auction planning, which were core duties of the liquidator already covered by his remuneration, thereby contravening Regulation 7(1) of the Liquidation Regulations.
Regarding the second corporate insolvency matter, the Court noted an unjustified delay in filing the avoidance application mandated by Regulation 35A of the IBBI (CIRP) Regulations. The defence that the delay was caused by the COVID-19 pandemic and lack of management cooperation was rejected, as the Appellant failed to seek appropriate directions under Section 19(2) of the IBC to secure timely compliance.
Relying on settled Supreme Court principles limiting interference in disciplinary matters under Article 226 of the Constitution, the Court concluded that the IBBI had acted within its statutory authority and that the disciplinary process was fair, reasoned, and legally sound. The writ petition was accordingly dismissed, affirming the two-year suspension of the Appellant’s registration and the direction to refund a portion of professional fees to the Consolidated Fund of India.
This judgment reaffirmed the strict fiduciary obligations of insolvency professionals under the Insolvency and Bankruptcy Code, underscoring that excess withdrawal of fees, outsourcing of core duties, and procedural delays invite serious regulatory consequences.
Mr. Sandeep Sethi, Sr. Advocate, with Mr. Manmeet Singh, Mr. Yashvardhan Bandi and Ms. Saru Sharma, Advocates, represented the Petitioner.
For the Respondent/ Defendant: Mrs. Madhavi Divan, Senior Advocate, with Mr. Sahil Monga and Ms. Alekhya Sattigeri, Advocates, appeared for the Respondent.
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