Delhi HC Warns 'Scavenger' IPs in Landmark IBC Ruling - 2025-10-18

Delhi High Court Warns Against 'Scavenger' IPs, Upholds Suspension in Landmark IBC Ruling

In a judgment laden with stern admonishments, the Delhi High Court has delivered a powerful message to the insolvency and bankruptcy ecosystem, upholding a disciplinary order against a senior insolvency professional (IP) and warning that those who act like "predators" of financially distressed companies will be "dealt with severely." The Court's scathing remarks underscore the judiciary's commitment to reinforcing the highest ethical standards under the Insolvency and Bankruptcy Code, 2016 (IBC).

The ruling, delivered by Justice Subramonium Prasad in Savan Godiawala v. Insolvency and Bankruptcy Board of India , dismissed a challenge to a two-year suspension order issued by the Insolvency and Bankruptcy Board of India (IBBI). The Court's decision not only validates the IBBI's regulatory authority but also sets a crucial precedent on the non-negotiable duties and accountability of professionals entrusted with the revival or liquidation of ailing corporations.

At the heart of the judgment was the Court's condemnation of conduct that undermines the very purpose of the IBC. In an observation that will likely resonate across the profession, Justice Prasad stated:

“The Insolvency Professional itself cannot become a predator of a company which itself is in the dire financial strains. Such professionals who act more like scavengers of a dead body for their own ulterior motives have to be dealt with severely as they strike at the heart rather the very object of the IBC.”

This powerful analogy frames the case not merely as a matter of regulatory non-compliance, but as a fundamental breach of the fiduciary trust placed in insolvency professionals.

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Background of the Disciplinary Action

The case centered on the conduct of Savan Godiawala, a chartered accountant and registered IP who served in various capacities—Interim Resolution Professional (IRP), Resolution Professional (RP), and Liquidator—for the high-profile case of Lanco Infratech Limited. He was also the IRP/RP for Shirpur Power Private Limited (SPPL).

Following an inspection initiated in October 2020, the IBBI issued a show-cause notice in June 2022, leveling three primary allegations against Godiawala:

1. Withdrawal of Excess Fees: He was accused of drawing over ₹83 lakh in excess fees during the Lanco Infratech liquidation process, contravening the stipulated regulatory framework.
2. Improper Delegation of Duties: Godiawala appointed Deloitte Touche Tohmatsu India LLP, a firm where he was a partner, for liquidation-related work without the necessary approval from the Committee of Creditors (CoC). The IBBI contended that the assigned tasks were core, non-delegable duties of the liquidator.
3. Inordinate Delay: In the Shirpur Power insolvency, he allegedly failed to file a mandatory avoidance application in a timely manner, despite the completion of a transaction audit report identifying preferential and undervalued transactions.

The IBBI’s disciplinary committee found these charges substantiated and, on September 16, 2022, suspended Godiawala's registration for two years. Additionally, it imposed a significant financial penalty, directing him to refund 50% of the fees paid to Deloitte to the Consolidated Fund of India. Godiawala challenged this order before the Delhi High Court.

The Petitioner's Defense and the Court's Rebuttal

Before the High Court, Godiawala’s counsel, Senior Advocate Sandeep Sethi, presented a multi-pronged defense. He argued that the excess fee withdrawal was a "bona fide mistake" based on his interpretation of the regulations. He emphasized that the amount was refunded in February 2022 and sought to rely on a September 2023 IBBI circular that appeared to waive action against IPs who returned excess fees.

The Court, however, was unpersuaded. It sided with the IBBI’s counsel, Senior Advocate Madhavi Divan, who argued the refund was a reactive measure, not a proactive correction. The Court held that the repayment came only after the IBBI had identified and flagged the contravention. In a critical finding, the judgment stated:

“The act of the Petitioner refunding the excess fee only after the said contravention was pointed out by the Respondent does not absolve the Petitioner rather it points out to the culpability of the Petitioner.”

This establishes a clear principle: subsequent corrective action, especially when prompted by regulatory scrutiny, cannot erase the initial misconduct.

On the appointment of Deloitte, Godiawala claimed the scale and complexity of the Lanco liquidation necessitated external professional support and that lenders had supported the engagement. The Court dismantled this argument by delineating the scope of a liquidator’s responsibilities. It clarified that while a liquidator can engage professionals for specialized services outside their domain, core functions are non-delegable. Justice Prasad observed:

“Services such as claim verification, taking custody or control of assets, evaluating the assets, inviting and settling claims of creditors, etc. will fall in these services where the liquidator has the expertise and they do not fall in the domain of another professional.”

The Court found that the work outsourced to Deloitte fell squarely within the liquidator’s statutory duties, making the appointment improper and a clear case of delegating fundamental responsibilities.

Finally, regarding the delay in filing the avoidance application for SPPL, Godiawala cited the COVID-19 pandemic and difficulties in accessing company data. He also argued that other IPs had received lighter penalties for similar lapses. The Court rejected this defense, noting that the transaction audit was already complete, providing him with the necessary information to proceed. Furthermore, it pointed out that the IBC provides IPs with the power to approach the National Company Law Tribunal (NCLT) to compel cooperation from erstwhile management—a remedy Godiawala failed to utilize.

Legal Implications and a Message to the Profession

The Delhi High Court's judgment serves as a vital jurisprudential marker for the IBC regime. Its implications are far-reaching for insolvency professionals, legal practitioners, and the regulatory framework itself.

1. Upholding the Highest Standard of Ethics: The Court unequivocally reinforced the IBBI's stance that IPs are fiduciaries who must adhere to the "highest standard of professional ethics." It explicitly stated that "even a single act of negligence, omission, or commission is sufficient" for the IBBI to initiate disciplinary action, lowering the threshold for regulatory intervention and emphasizing a zero-tolerance approach to misconduct.

2. Limiting Judicial Interference in Regulatory Decisions: By refusing to interfere with the disciplinary authority's decision, the judgment signals judicial deference to the expertise and mandate of the IBBI. This strengthens the regulator's hand in enforcing the IBC's code of conduct and ensuring professional accountability without fear of its reasoned orders being easily overturned.

3. Clarifying Non-Delegable Duties: The ruling provides crucial clarity on the distinction between permissible professional assistance and impermissible delegation of a liquidator's core statutory functions. This will guide IPs in structuring their engagements and ensure that they remain personally responsible for essential tasks like claim verification and asset custody.

4. Rejecting "Post-Facto" Justifications: The Court’s dismissal of the "bona fide mistake" and subsequent refund as mitigating factors is significant. It prevents the creation of a loophole where professionals could potentially engage in misconduct and only rectify it upon being caught, thereby escaping accountability.

Ultimately, the Savan Godiawala judgment is a stark reminder that the role of an Insolvency Professional is not merely administrative but is imbued with a deep fiduciary duty to all stakeholders. The Court’s strong language—comparing errant professionals to "predators" and "scavengers"—is a deliberate and powerful call to the profession to uphold the integrity and foundational principles of the Insolvency and Bankruptcy Code. As the IBC continues to evolve, this ruling will stand as a bulwark against the dilution of professional ethics and a testament to the robust institutional framework designed to preserve it.