The Insolvency and Bankruptcy Board of India (the IBBI) is the regulator tasked with monitoring the implementation of the Insolvency and Bankruptcy Code. As per the Code, one of its functions is to make regulations on “matters relating to insolvency and bankruptcy”. These regulations, being pursuant to a power granted by the Code itself, have the force of law. However, recently, two decisions of the Supreme Court involved an interpretation of the IBBI’s regulations. In both cases, the Supreme Court disregarded the binding character of the regulations – correctly, in my opinion.
A word on the original intent behind the legislative powers of the IBBI. The Bankruptcy Law Reforms Committee, the creator of the Code, thought of the Board’s power to make regulations as the power to set out “procedural details about the working of the bankruptcy process”. The delegation of this role to the IBBI was necessary, as these rules of procedure needed “to evolve rapidly based on experience and based on changes in the economy”.
In the first of the two Supreme Court decisions, in Swiss Ribbons v. Union of India, the Court decided that Regulation 30A of the Insolvency Resolution Regulations, which mandates that an application for withdrawal of the insolvency resolution process could be submitted only before the issue of invitations for expression of interest from prospective bidders, was, in fact, not mandatory at all, and only directory.
Regulation 30A was inserted in the wake of the amendment inserting Section 12A of the Code, which allows the withdrawal of applications for initiating the insolvency resolution process that have been admitted by the NCLT. The reading down of Regulation 30A in Swiss Ribbons was, according to the Court, “for the simple reason that on the facts of a given case, an application for withdrawal may be allowed in exceptional cases even after issue of invitation for expression of interest under Regulation 36A.” This amounts to saying that an application for withdrawal may be allowed after the invitation for expression of interest because it is allowed, and that’s that. The Court was more forthcoming with its reasons in an earlier decision (Brilliant Alloys v. S Rajagopal), in which it said that Regulation 36A could be bypassed as it had to be read along with Section 12A, which does not contain any restriction on the timing of an application for withdrawal. It is hard to disagree with the Court’s reasoning in Brilliant Alloys. The Board is constituted to fill in interstitial details in the Code, and not to restrict the obvious meaning of its provisions.
In K Sashidhar v. Indian Overseas Bank , the Court considered the proviso to Regulation 39(3) of the Insolvency Resolution Regulations, which makes it compulsory for the committee of creditors that votes on bids for the insolvent company to record its reasons for approving or rejecting a bid. Again, there is no statutory foundation for this additional requirement. Accordingly, the Court held that as per the Code, the commercial decisions of the committee are not open to judicial review, and the failure to record reasons would not affect a resolution plan, once it is approved by the committee of creditors. While it is arguable that prescribing a requirement to record reasons is more in tune with the Board’s duty to set out procedural details, it is hard to argue with the Court’s logic, especially when Section 31 restricts the enquiry by NCLT into the correctness of a bid to the limited grounds contained in Section 30(2), none of which include the recording of reasons for approving or rejecting a bid.
All in all, in both Swiss Ribbons and K Sashidhar, I think the Court got it right. The IBBI was formed to regulate the working of the Insolvency and Bankruptcy Code. It was not formed to regulate the Insolvency and Bankruptcy Code.
