India: NCLAT Disapproves Committee Of Creditors' Approval Of ‘Success Fee' To Be Paid To Resolution Professional As Part Of CIRP Costs

In Jayesh N. Sanghrajka, Erstwhile R.P. of Ariisto Developers Pvt. Ltd. v. The Monitoring Agency nominated by the Committee of Creditors of Ariisto Developers Pvt. Ltd.,¹ an appeal was filed by the Resolution Professional of Corporate Debtor- Ariisto Developers Pvt. Ltd.  The Appeal was filed against the observations and findings of the Adjudicating Authority (NCLT, Mumbai Bench) in the impugned order dated 23.03.2021 passed in M.A. No. 3714 of 2019 in C.P. (IB) No. 2714 of 2018. By the impugned order, while approving the Resolution Plan submitted by Successful Resolution Applicant- ‘Prestige Estates Projects Ltd.', the Adjudicating Authority had disagreed with the Committee of Creditors (“CoC”) which approved ‘success fees' to the Resolution Professional of an amount of INR 3 Crores. The grievance raised before the Appellate Authority (NCLAT) was that the approval of the success fees was a commercial decision of the CoC and the Adjudicating Authority could not have interfered with the same while approving the Resolution Plan and directing distribution of the amount set apart for success fees.

While dismissing the appeal, the Appellate Authority (NCLAT) referred to the circulars issued by the Insolvency and Bankruptcy Board of India (“IBBI”), Section 208(2)(a) of the Code and the Code of Conduct for Insolvency Professionals. It was inter alia, observed and held that claim of success fee squeezed in at the last moment when the Resolution Plan is being approved is more in the nature of taking a reward or gift than expenditure incurred on or by the Resolution Professional. Reference to term “success fee” in Annexure-B of the Circular dated 12.06.2018 which was the view of the ‘Society for Insolvency Practitioners of India' is a term which is unguided. Rather even the said society has a caveat to it when it mentions that the success and contingency fee is only to the extent that it is consistent with the requirements of integrity and independence of Insolvency Professionals. It was thus held that if the Resolution Professional seeks to have success fee at the initial stage of CIRP, it would interfere with independence of Resolution Professional which can be at the cost of Corporate Debtor. If success fee is claimed when the Resolution Plan is going through or after the Resolution Plan is approved, it would be in the nature of gift or reward. “Success fee” term is contrary to what IBBI provided in its Circular dated 16.01.2018 that Insolvency Professional shall render services for a fee which is a reasonable reflection of his work. The fee has to be related to acts performed or to be performed for furtherance of the CIRP, for dues or expenses actually incurred. It has to be directly related to acts done or expenses incurred which are necessary for the CIRP. The role of the Resolution Professional has to be like a dispassionate person concerned with performance of his duties under the Code for reasonable fees and it cannot be result oriented.

Therefore, it cannot be said that charging of success fee is within the provisions of the Code or the Regulations. By indirect reference in a Circular it cannot be accepted that success fee as sought is legally chargeable or payable.

As regards justiciability of the fees charged by the insolvency professional, it was held that when the fees have to be on the basis of the case and work performed or to be performed, the reasonability or otherwise would be justiciable. By pushing in a big amount at last moment in the name of success fees for the Resolution Professional and making it part of CIRP costs at the time of approval of the Resolution Plan does not make the same a commercial decision of the CoC. The Resolution Applicant and other stakeholders, other than those present in the CoC would not know what is being hived off from the beneficiaries of the Resolution Plan. Fees payable to IRP/ RP have been made part of CIRP costs so as to safeguard interest of the IRP/ RP. Section 30(2) provides that the Resolution Plan should provide for payment of Insolvency Resolution Process Costs in a manner specified by the Board in priority to the payment of other debts of the Corporate Debtor. The protection is to the CIRP costs validly incurred. The interest of IRP/ RP cannot be equated with the interest of the Corporate Debtor and other stakeholders, creditors. Fees cannot be disproportionate to eat into the percentage of other claimants of the Corporate Debtor and the Corporate Debtor about to be resolved. ‘Success fees' which is more in the nature of contingency and speculative is not part of the provisions of the Code and the Regulations and the same is not chargeable. In view of the facts of the case, it was further observed by the NCLAT that even if it is to be said that it is chargeable, the manner in which it was charged in the present matter i.e., at the time of approval of the Resolution Plan and the quantum are both improper and incorrect.

Conclusion

The case assumes significance in understanding the role of a Resolution Professional and how such professional is expected to work in adherence to the Code of Conduct for Insolvency Professionals, especially Clause 25 to 27 thereof, as prescribed by the IBBI. Some legal experts are arguing against the NCLAT's observations on the ground that there is no bar in terms of the Insolvency and Bankruptcy Code or the Regulations made thereunder to charging of ‘success fee' by a Resolution Professional. We, however, feel that the bar is inherent to the nature of duty of this profession. One must look into the consequences if ‘success fee' for a Resolution Professional is held to be accepted. Can a Resolution Professional then be justified in not putting efforts for a successful resolution of a Corporate Debtor if success fee is not approved by the Committee of Creditors? The profession of an Insolvency Professional is said to be a profession of professionals. Will it not be unprofessional for an Insolvency Professional to expect such a reward from the Committee of Creditors? The NCLAT seems to have answered these questions in the right direction.

Footnote

1 Company Appeal (AT) (Insolvency) No. 392 of 2021

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