New Delhi: The National Company Law Appellate Tribunal (NCLAT) has ruled that Resolution Professionals should not charge “success fees”, opining that such fee is contingent and speculative in nature and not part of the Insolvency Bankruptcy Code (IBC) and its regulations.
A Bench of Chairperson, Justice AIS Cheema and Technical Member Dr. Alok Srivastava ruled, “We hold that ‘success fees’ which is more in the nature of contingency and speculative is not part of the provisions of the IBC and the Regulations and the same is not chargeable."
Referring to the case at hand, the Bench added that the “success fee” of Rs 3 crore to the Resolution Professional was pushed at the last minute, at the time of approving the Resolution Plan and, therefore, both improper and incorrect.
The NCLAT rejected submissions that a reference to ‘success fees’ in a 2018 circular meant that it was permitted.
The Amicus Curiae appointed by the Bench, Sumant Batra, had submitted that the circular only guides stakeholders on what could constitute "reasonable" fees for a Resolution Professional and that it does not endorse the payment of success fee.
“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,” the Bench opined.
The Bench added that the circular calls for a prior consultation of minds at the initial stage of the Corporate Insolvency Resolution Process (CIRP) so as to gauge what is the reasonable fee to be incurred on a Resolution Professional.
“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,” the NCLAT said.
The Bench further opined that the payment of success fees would interfere with the independence of the Resolution Professional, which would, in turn, adversely affect the 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," the NCLAT said.
The Bench also agreed with the amicus that if a gift like the success fee is approved for the Resolution Professional, it would be at the cost of the creditors waiting in line, whose percentage of dues would get reduced as a consequence.
"It is rightly argued that this would be a bad precedent … We agree with the Learned Amicus Curiae," the tribunal said.
It rejected the contention that the adjudicating authority cannot interfere with the success fee as it is a commercial decision of the Committee of Creditors. Fees payable to the Resolution Professional would have to be based on the work performed that the reasonability or otherwise of such fee would be justiciable, it was reiterated.
"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 of CoC would not know what is being hived off from the beneficiaries of the Resolution Plan ... Fees cannot be disproportionate to eat into the percentage of other claimants of the Corporate Debtor and the Corporate Debtor about to be resolved," the NCLAT observed.
The Bench was hearing an appeal moved by the Resolution Professional who guided the CIRP for Ariisto Developers Pvt. Ltd (corporate debtor).
Whereas the Resolution Plan for this corporate debtor was approved, the National Company Law Tribunal (NCLT), Mumbai disagreed with the decision of the Committee of Creditors to approve the payment of a "success fee" of ₹3 crores to the Resolution Professional. The NCLT, instead, directed that the marked as "success fees" be proportionally distributed among the employees or underpaid operational creditors or unsecured creditors of the corporate debtor.
By September 20, 2021 ruling, the NCLAT has dismissed the appeal challenging the NCLT ruling.
"The Adjudicating Authority was at the ground level monitoring the progress of CIRP and its observations cannot be simply ignored", the NCLAT added before dismissing the appeal.
