IBBI Chairperson Cannot Act As Disciplinary Committee Under IBC: Calcutta High Court

The Calcutta High Court on 16 July held that the Chairperson of the Insolvency and Bankruptcy Board of India (IBBI) cannot act as the Disciplinary Committee under the Insolvency and Bankruptcy Code (IBC), as the Committee can consist only of Whole-Time Members of the IBBI.

Justice Shampa Sarkar allowed the petition filed by Sashi Agarwal, an Insolvency Professional, and set aside the IBBI order cancelling his registration under Section 220(2) of the IBC, which empowers the Disciplinary Committee to pass orders after considering a report of investigation. He held:

“Thus, when the statute provides that the Disciplinary Committee shall consist of Whole Time Members only, emphasis has to be laid on the expression 'only'. Thus, none other than Whole Time Members can constitute the Disciplinary Committee, irrespective of whether the Chairperson is also a Whole Time Member or not. The provisions do not state that the Chairperson shall be a Whole Time Member.”

Agarwal was appointed as the Interim Resolution Professional of INCAB Industries Limited in August 2019. During the Corporate Insolvency Resolution Process (CIRP), he constituted the Committee of Creditors (CoC), initially recognising Kamala Mills Limited and Fasqua Investments Private Limited as financial creditors.

The decision was based on a Delhi High Court judgment that had set aside the appointment of Ramesh Gowani as a director of the corporate debtor. Subsequently, Pegasus Assets Reconstruction Private Limited objected that the two entities were related parties.

Following the objection, Agarwal excluded Kamala Mills Limited and Fasqua Investments Private Limited from the CoC. However, after the National Company Law Tribunal (NCLT) held that Gowani was never a director of the corporate debtor, the two entities were re-inducted into the CoC.

The CoC later resolved to liquidate the company, and the NCLT approved the liquidation. The National Company Law Appellate Tribunal (NCLAT) subsequently set aside the liquidation order and directed the IBBI to consider action against Agarwal.

The IBBI thereafter issued a show-cause notice alleging that Agarwal had constituted the CoC without verifying claims, allowed related parties to participate in the CoC, failed to prepare the Information Memorandum and hastily recommended liquidation. The IBBI ultimately cancelled his registration, following which Agarwal approached the High Court.

Before the High Court, Agarwal argued that the Chairperson lacked jurisdiction to act as the Disciplinary Committee since Section 220 of the IBC permits only Whole-Time Members of the IBBI to constitute such a Committee. He contended that the defect could not be cured by consent or waiver.

The Court held that the IBC treats the Chairperson and Whole-Time Members as separate statutory categories and that the Disciplinary Committee can comprise only Whole-Time Members. It further held that disciplinary proceedings against an Insolvency Professional must be preceded by an inspection or investigation under Section 218 of the IBC (which empowers the IBBI to order inspection or investigation into the conduct of an Insolvency Professional). It observed:

“First and foremost, Section 218(1) of IBC, does not contemplate issuance of show cause notice by the Board. If the Board had reasonable grounds to believe that the Insolvency Professional had violated the law, the provision empowered the Board to direct an investigation or an inspection into the conduct of the Insolvency Professional.”

The Bench also observed that the show-cause notice was issued without the mandatory inspection under Section 218, despite an earlier inspection finding no irregularity in Agarwal's conduct. It further noted that the IBBI had mechanically relied on the NCLAT's observations instead of independently examining the matter, even though the Supreme Court had permitted Agarwal to raise all his contentions before the Board.

Accordingly, the High Court held that the disciplinary proceedings suffered from jurisdictional and procedural defects and set aside the IBBI's order cancelling Agarwal's registration.

For Petitioner: Senior Advocate Jaydip kar, Advocates Swatarup Banerjee, Suddhastva Banerjee, Kuldip Mallick, Dyutimoy Pal, Arun Kumar Mishra, Shantanu Mishra and Diptomoy Talukdar

For Respondents: Senior Advocate Jishnu Chowdhury, Advocates Rashmi Bothra, Ritoban Sarkar, Aparajita Rao and Nabanita Dutta