India: Resolution Professional Not Entitled To Success Fee: NCLAT

The National Company Law Appellate Tribunal, Delhi (NCLAT) in its recent judgment in Jayesh N. Sanghrajka erstwhile R.P. of Ariisto Developers Pvt. Ltd. v. Monitoring Agency nominated by Committee of Creditors of Ariisto Developers Pvt. Ltd. held that a resolution professional (RP) would not be entitled to a 'success fees' that is based upon certain contingency and is speculative in nature. The NCLAT observed that the fee charged by an RP must be reasonable and based on the services rendered in the insolvency resolution process. The NCLAT concluded that a success fee for an RP was not covered by the provisions of the Insolvency and Bankruptcy Code, 2016 (IBC) or the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016 (Regulations). In this article, we briefly navigate through the facts and findings of the case which led to the aforementioned judgment.

Brief facts

The appeal in the instant matter before the NCLAT was filed by the RP (Appellant) of Ariisto Developers Pvt. Ltd. (Corporate Debtor). The respondent, monitoring agency of the Corporate Debtor is a formal party to the matter. The appeal was filed against the observations and findings of the National Company Law Tribunal, Mumbai Bench (NCLT/ Adjudicating Authority). By the impugned order, the Adjudicating Authority while approving the resolution plan of the successful resolution applicant denied the success fee of INR 30 million to the Appellant as decided by the Committee of Creditors (CoC). The Appellant being aggrieved with the order of the Adjudicating Authority, filed an appeal before the NCLAT. The Appellant contended that the approval of success fee was a commercial decision of the CoC and the NCLT could not have interfered with the same while approving the resolution plan and directing distribution of the amount set apart for success fees. The NCLAT appointed an advocate for assisting the court as Amicus Curiae (Amicus Curiae). The issue in the present matter was whether the Appellant could charge a success fee, more specifically in the manner that it was sought to be charged.

The Amicus Curiae referred to the chart of Corporate Insolvency Resolution Process (CIRP) expenses prepared for the CoC. The CIRP expenses carried an entry namely 'success fees' with an asterisk and a fine print footnote stating the amount of success fees was to be decided by the CoC. The Appellant in his appeal referred to various efforts made by him during the course of the CIRP. It was argued by the Appellant that the assets of the Corporate Debtor were worth INR 10.89 billion and the same were handled and safeguarded by the Appellant. The Appellant also stated that there were more than 20 hearings conducted before the NCLT, NCLAT, and the Hon'ble Supreme Court involving hundreds of financial creditors and homebuyers. The Appellant emphasized that he successfully convened CoC meeting and got the CoC's approval on the resolution plan. At most, the Appellant submitted that the issue could only be of reasonableness of success fees which could only be considered by the CoC.

The Appellant then placed reliance on a circular dated 12 June 2018 in which the IBBI invited suggestions for fee and expenses incurred for CIRP (Circular). Annexure B of the Circular stated that an insolvency professional may use, inter alia, a success or contingency fee to charge fee for carrying out different duties. The Appellant relied on the multiple decisions¹ to contend that the NCLT or the NCLAT could not interfere with the commercial decisions of the CoC.

The Amicus Curiae submitted that in the IBC and the Regulations, there is no express provisions for grant of success fee. The Amicus Curiae submitted that an insolvency resolution professional could only charge renumeration in a transparent manner and such renumeration should be a reasonable reflection of the work performed and services rendered. It was against the principle of transparency if an insolvency resolution professional at the last moments of approval of a resolution plan squeezed a hidden fee into the resolution plan. Moreover, according to the Amicus Curiae, the Circular relied upon by the Appellant did not provide prescribe, recommend, promote, endorse, or sanctify the payment of success fee. In any case, the Circular could not be equated with the Rules and Regulations framed under the provisions of the IBC. The Amicus Curiae argued that the fee of an insolvency resolution professional had to be directly related to the acts done or expenses incurred which are necessary for the CIRP.

Held

The NCLAT, at the outset, observed that while approving the fee to be provided to the resolution professionals, the CoC must ensure that the same is reasonable under the provisions of the IBC and the Regulations, and it is justiciable. The NCLAT agreed with the submissions of the Amicus Curiae in this regard. It was observed that pushing in a big amount of fee at the last moment in the name of success fee and making it a part of CIRP costs does not make the same a commercial decision of the CoC. The NCLAT approved of the Amicus Curiae's reliance on the decision in Alok Kaushik v. Bhuvaneshwari Ramanathan & Ors.² where the Apex Court held that the NCLAT had the powers to determine the fee and expenses payable to a professional.

In view of the arguments presented by the Amicus Curiae, and the reasons recorded by the NCLAT, it was held that the success fee could not be charged in the instant matter. The NCLAT observed that even if it is said to be chargeable, the manner of approving the fee of INR 30 million at the last moment was held to be improper and incorrect. Accordingly, the appeal was dismissed.

Comments

The concept of success fee is not alien to the Indian jurisdiction. Rule 21 in Part VI, Chapter II of the Bar Council of India Rules, 1975 (BCI Rules) imposes an express bar on advocates from stipulating a fee contingent to the result of the litigation, or agreeing to share proceeds thereof. The BCI rules were formulated under the Advocates Act, 1961. The rationale behind this limitation is to ensure that the advocates do not deviate from their solemn duty as an officer of the court to act objectively and assist the judges in arriving at a conclusion.

Following the same reasoning, it is opined that an insolvency professional must also not be entitled to any success fee. An insolvency professional may be entitled to a reasonable fee that is agreed upon and approved by the CoC in a transparent manner. However, allowing a success fee to insolvency professionals may cause them to depart from their role of dispassionate professionals carrying out the insolvency resolution process. This is turn may defeat the very object of the IBC to bring a financially ailing corporate debtor back on its feet.

Footnotes

1. Authorised Signatory v. Satish Kumar Gupta & Ors., Civil Appeal No. 8766-67 of 2019; K. Sashidhar v. Indian Overseas Bank and Ors, 2019 SCC OnLine SC 257.

2. Alok Kaushik v. Bhuvaneshwari Ramanathan & Ors., 2015 5 SCC 787.

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