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TMI Blog2021 (9) TMI 984X X X X Extracts X X X X X X X X Extracts X X X X ..... i Bench in Para 23 of 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 disagreed with the Committee of Creditors ("CoC" for short) which has approved 'success fees' to the Resolution Professional of an amount of Rs. 3 Crores. 3. Impugned Para 23 of the impugned order (Page 59) is as under:- "23. Even though the plan is approved, we would like to disagree with the decision of the COC wherein it has approved the success fees to the RP. It has been made clear by the Hon'ble NCLAT in the matter of Mr. Devarajan Raman, Resolution Professional Poonam Drum & Containers Pvt. Ltd v. Bank of India Ltd. [Company Appeal (AT) (Insolvency) No. 646 of 2020] that the fees of the RP is not the commercial wisdom of the COC. The following para from the said judgment is hereby reproduced: "...Fixation of fee is not a business decision depending upon the commercial wisdom of the Committee of Creditors. We accordingly find this appeal lacking merit. The appeal is accordingly dismissed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the Adjudicating Authority erred in Para 23 of the impugned order in interfering with the decision taken by the Committee of Creditors in this regard. Considering the issue involved, we request Advocate Mr. Sumant Batra to assist us as Amicus Curiae. The Counsel for the Appellant to send the copy of the appeal and its annexures to the Amicus Curiae. List the Appeal 'For Admission Hearing' on 25th June, 2021." 6. Thus, Advocate Mr. Sumant Batra came to be appointed as Amicus Curiae to assist us in the decision of the issue which has arisen in this matter. It is necessary for us to consider whether the 'success fees' could be charged, and the manner in which it has been charged. 7. The Appellant has filed Written Submissions as well as we have the Written Submissions filed by the Amicus Curiae and we have also heard Learned Senior Counsel for the Appellant as well as the Learned Amicus Curiae. Before discussing the submissions made, it may be appropriate to refer to the relevant parts of documents as are available in this matter. 8. The Corporate Insolvency Resolution Process (CIRP) was initiated on 20.11.2018. In the first CoC meeting dated 24.12.2018, the appointment o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has various entries of CIRP expenses in which there is one entry 'Success Fees' with an *(Asterisk) and a fine print footnote stating that 'Amount of Success Fees to be decided by the COC'. 11. Then there are minutes of 20th CoC meeting dated 12.11.2019 with the adjourned meeting dated 13.11.2019. The document is at Annexure A-1 in the Appeal (Page 63). In these minutes, Item No.4 shown is 'Subject to the decision of the Hon'ble NCLT Mumbai Bench, to evaluate Resolution Plans, to finalize the Resolution Applicant, decide the distribution matrix and way forward'. The minutes then show the discussion with regard to the Resolution Plans received. Then Item No.5 may be referred. The same reads as:- "5. TO RATIFY THE CIRP COST INCURRED TILL DATE AND TO APPROVE THE BUDGET FOR FURTHER EXPENSES TO BE INCURRED AND DECIDE WAY FORWARD FOR FURTHER FUND RAISE IN THIS CONNECTION: The Chairman informed that he has circulated list of expenses incurred during the CIRP Process of the Corporate Debtor along with the notice of 20th COC Meeting. The COC members appreciated the efforts made by the RP and his team in bringing successful Resolution Plan of the Corporate Debtor with increment in upf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cating Authority which is being impugned. 13. The Appeal has referred to the various efforts made by the Appellant during the course of CIRP. It is argued that the assets of the Corporate Debtor were worth Rs. 1,089 Cr. and the same were handled and safeguarded by the Appellant; that he convened 20th CoC meeting; that there were more than 20 hearings before the Adjudicating Authority, Appellate Tribunal and the Hon'ble Supreme Court; that there were different classes of stakeholders which included approx. 100 number of Financial Creditors, approx. 400 number of homebuyers, who were required to be dealt with; that various meetings arranged between homebuyers and Resolution Applicant to harmoniously resolve the issues and concerns of homebuyers; that the Appellant successfully convened CoC meeting and got CoC's approval on the Resolution Plan. Learned Senior Counsel for the Appellant submitted that the issue can be only reasonableness of 'success fees'. According to the Senior Counsel, only CoC can consider if the success fees is to be paid and what should be the success fees. According to the Learned Senior Counsel, the Adjudicating Authority cannot look into this aspect as it is p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofessionals engaged under CIRP be regulated? Should there be a ceiling, a floor or a band for fee payable to the IRP/RP, IPE and other professionals. Should it be a percentage linked to some variable of the corporate debtor? Should it be decided based on estimation of man hours of services required in a CIRP? Please elaborate. vi. How should the fee and costs associated with CIRP be ascertained and minimized? vii. Is there any further suggestion / comment on costs and fee associated with CIRP? 15. The comments and suggestions may please be mailed at [email protected] latest by 20th April, 2018." 15. The Learned Senior Counsel then submitted that suggestions were invited by IBBI and after considering suggestions, the Circular dated 12.06.2018 was issued. The Circular reads as under:- "Insolvency and Bankruptcy Board of India 7th Floor, Mayur Bhawan, Connaught Place, New Delhi-110001 CIRCULAR No. IBBI/IP/013/2018 12th June, 2018 To All Registered Insolvency Professionals All Recognised Insolvency Professional Entities All Registered Insolvency Professional Agencies (By mail to registered email addresses and on website of the IBBI) Dear Madam / Sir, Sub: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... im, fee payable to an Insolvency Professional Entity, and fee payable to Registered Valuers and other Professionals, and other expenses incurred by him during the CIRP are reasonable; (b) the fee or other expenses incurred by him are directly related to and necessary for the CIRP; (c) the fee or other expenses are determined by him on an arms' length basis, in consonance with the requirements of integrity and independence; (d) written contemporaneous records for incurring or agreeing to incur any fee or other expense are maintained; (e) supporting records of fee and other expenses incurred are maintained at least for three years from the completion of the CIRP; (f) approval of the Committee of Creditors (CoC) for the fee or other expense is obtained, wherever approval is required; and (g) all CIRP related fee and other expenses are paid through banking channel. 7. The Code read with regulations made thereunder specify what is included in the insolvency resolution process cost (IRPC). The IP is directed to ensure that:- (a) no fee or expense other than what is permitted under the Code read with regulations made thereunder is included in the IRPC; (b) no fee or expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e powers conferred under clause (h) of sub-section (1) of section 196 read with regulation 34A of the IBBI (Corporate Insolvency Resolution Process for Corporate Persons) Regulations, 2016, in consultation with all the three registered Insolvency Professional Agencies. Yours faithfully, -Sd- (Dilip Arjun Khandale) Deputy General Manager Email: [email protected]" (Emphasis supplied) 16. The Learned Senior Counsel pointed out the Circular from the convenience compilation (Diary No.28625 at Page 771). The relevant existing provisions and regulations which have a bearing on fee and other expenses of the CIRP are at Annexure A of the Circular. Annexure A reads as under:- "Annexure-A Provisions and Pronouncements having a bearing on Fee and other Expenses of CIRP I. The Insolvency and Bankruptcy Code, 2016 Section 5(13) reads as under: "(13) Insolvency Resolution Process Costs" means - (a) the amount of any interim finance and the costs incurred in raising such finance; (b) the fees payable to any person acting as a resolution professional; (c) any costs incurred by the resolution professional in running the business of the corporate debtor as a goin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsolvency Resolution Process for Corporate Persons) Regulations, 2016 Chapter IX of the Regulations reads as under: "Chapter IX INSOLVENCY RESOLUTION PROCESS COSTS Insolvency Resolution Process Costs 31. "Insolvency resolution process costs" under Section 5(13)(e) shall mean- (a) amounts due to suppliers of essential goods and services under Regulation 32; (b) amounts due to a person whose rights are prejudicially affected on account of the moratorium imposed under section 14(1)(d); (c) expenses incurred on or by the interim resolution professional to the extent ratified under Regulation 33; (d) expenses incurred on or by the resolution professional fixed under Regulation 34; and (e) other costs directly relating to the corporate insolvency resolution process and approved by the committee. Essential supplies. 32. The essential goods and services referred to in section 14(2) shall mean- (1) electricity; (2) water; (3) telecommunication services; and (4) information technology services, to the extent these are not a direct input to the output produced or supplied by the corporate debtor. Illustration- Water supplied to a corporate debtor will be essent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count." (Emphasis supplied) 17. Learned Counsel for Appellant insisted on reading Para 3 of the Circular dated 12.06.2018 to link the Circular to contents of Annexure-B. 18. Annexure B of the Circular reads as follows:- "Annexure-B What is Reasonable 'Cost' and Reasonable 'Fee' I. As regards reasonable costs, the Society for Insolvency Practitioners of India, in its statement of best practices on "PAYMENT OF CORPORATE INSOLVENCY RESOLUTION PROCESS COSTS" observes: "Insolvency professionals must ensure that the costs incurred are reasonable. To determine the reasonability of these costs, they should consider if the costs are- (a) directly related to the insolvency resolution process, (b) necessary for meeting the objectives of the insolvency resolution process, and the Code, (c) proportional to the work required to be done and the assets of the corporate debtor, and (d) determined on an arms' length basis, in consonance with the requirements of integrity and independence." [http://www.insolindia.com/uploads_insol/draft_best_practices/files/-1013.pdf] II. As regards reasonable fee, the Society for Insolvency Practitioners of India, in its statement of best pra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ponsibility). (iv) An insolvency professional should not increase the fee charged without the prior approval of the authority fixing his/her fee." [http://www.insolindia.com/uploads_insol/draft_best_practices/files/-1008.pdf] III. Rule 1.04(b) of the Texas Disciplinary Rules of Professional Conduct, which sets forth eight factors to determine what is reasonable fee in the context of lawyers, reads as under: "Factors that may be considered in determining the reasonableness of a fee include, but not to the exclusion of other relevant factors, the following: (1) the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly; (2) the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer; (3) the fee customarily charged in the locality for similar legal services; (4) the amount involved and the results obtained; (5) the time limitations imposed by the client or by the circumstances; (6) the nature and length of the professional relationship with the client; (7) the experience, reputation, and ability of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rseas Bank and Ors" [MANU/SC/0189/2019], it is argued that the Adjudicating Authority or this Appellate Tribunal cannot interfere with the commercial decision of the CoC. It is claimed that the success fee approved was part of commercial decision. It is further argued that if the Adjudicating Authority did not agree with the fee approved it should have sent back the Resolution Plan to the CoC. 23. We have heard Learned Amicus Curiae also. Learned Amicus Curiae submitted that in the IBC and the Regulations, there is no express provision for grant of success fee. The Learned Amicus Curiae for context made reference to Section 206, Section 5(27) and Section 5(13) of the IBC as under:- "Section 206 of the Code provides that, "No person shall render his services as insolvency professional under this Code without being enrolled as a member of an insolvency professional agency and registered with the Board". Section 5(27) provides that "resolution professional", means, "an insolvency professional appointed to conduct the corporate insolvency resolution process [or the pre-packaged insolvency resolution process, as the case may be,] and includes an interim-resolution professional" S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the Code or Regulations have not quantified as to what would be the remuneration or the form in which the fees may be paid or charged. It is argued that in the scheme of IBC and layout of Sections the Resolution Professional is appointed in the First Meeting under Section 22 of the IBC at which stage invariably and transparently the fee gets fixed. That, it is against transparency if at the last moments when Resolution Plan is being approved higher amounts as fees are squeezed in it and then to hide behind Resolution Plan. The Learned Amicus Curiae referred to the Discussion Paper dated 01.04.2018 (Document-9, Diary No.28625 filed by the Appellant) wherein para 2 recorded as under:- "2. An IP needs to be compensated for his services commensurate with his qualification, experience and responsibilities. The law does not specify the amount of fee to be paid to an IP for his services in a particular process. It is partly because of contemporary economic thought that market should determine the fee and partly because of practical difficulties that no two CIRPs require the same quality and quantity of services or no two IPS render homogenous service. The Bankruptcy Law Reforms Commi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... success fees. According to the Amicus Curiae, the claim of the Appellant that this Circular provides for payment of success fees is misplaced. It is stated that the purpose and context of Circular dated 12.06.2018 is entirely different. In the brief written submissions filed by the Learned Amicus Curiae (Diary No. 29028), Paras 8 to 15 read as follows:- "8. Concern was expressed by the Adjudicating Authority ("AA") in some cases about the unreasonable fee charged by insolvency professionals [Refer page 3 of IBBI Discussion Paper dated 1.4.2018 filed by Amicus Curiae]. There were other unhealthy practices noticed by IBBI in matter of charging fees by insolvency professionals. 9. IBBI undertook an exercise to address the concerns and published a Discussion Paper on 1.4.2018 titled "Regulation of fee payable to Insolvency professionals and other process cost under the Corporate Insolvency Resolution Process". Comments were invited from the stakeholders on various questions listed in the Discussion Paper. It is pertinent to mention that none of the questions inquired if success fees should be permitted. [Refer page 6, 12 of IBBI Discussion Paper dated 1.4.2018 filed by Amicus Curia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he regulations." 28. According to the Learned Amicus Curiae, the provisions as appearing in IBC and as can be seen from Regulations read with the Code of Conduct all indicate that although quantum of fees have not been fixed that the Code and Regulations do intend to control the manner in which Resolution Professional charged fees and according to Learned Amicus Curiae, the quantum of fees payable is a subject which is justiciable before the Adjudicating Authority if it is found to be unreasonable and if the manner, method of payment is inconsistent with the Regulations. The quantum of fees can be fixed by the CoC but it would be subject to scrutiny by the Adjudicating Authority as what is reasonable fee is context specific and it is not part of the commercial decision of the CoC. The CoC exercised commercial decision with regard to Resolution Plan which is required to be approved and although CIRP Costs are required to be paid on priority, the reasonableness of fees is not part of commercial decision. While referring to the judgments relied on by the Learned Senior Counsel for the Appellant, it is stated that these judgments did not bar the jurisdiction of the Adjudicating Author ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e aspect of ascertaining fees of IRP/RP is strictly guided by the mandate and parameters provided by the IBBI vide its Circular dated 12.06.2018 bearing No. IBBI/IP/013/2018] [Shri Shrikrishna Rail Engineers Private limited vs. Madhucon Projects Limited in C.P (IB) No. 4322/9/HDB/2017 passed by the passed by the Hon'ble Adjudicating Authority (Hyderabad Bench) on 22.11.2017 (refer Pg. 335 of Vol. II of Compilation filed by Amicus Curiae) The Hon'ble Adjudicating Authority was of the view that remuneration quoted by the IRP was quite exorbitant and the same needs to be referred to IBBI. Though there are no prescribed set of Rules and Regulations/Guidelines at present with regard to the fee to be payable to the IRP/RP, the Adjudicating Authority is of the view that the fee quoted by the professionals should be reasonable, commensurate with the work to be handled.] [Mr. Venkatesan Order No. IBBI/DC/68/2021 dated 5.03.2021 [refer Pg. 339 of vol. II of Compilation filed by Amicus Curiae] Para 3.3.5 of the Order of the Disciplinary Committee ("DC") reiterated "The DC notes that Mr. Venkatesan has allowed inclusion of a success fee clause in the engagement letter with EY for its p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uggest modifications. ii. Should the elements of the insolvency resolution process cost (IRPC), including fee payable to IPs, Insolvency Professional Entities (IPEs) and other Professionals, be regulated? iii. Should the fee be disclosed by interim resolution professional (IRP) / resolution professional (RP), and then published on the web site of the respective Insolvency Professional Agency or the IBBI? Is disclosure of fee good enough for regulation of fee? iv. Should the industry and /or the Board promote development of best practices in respect of fee of the IRP and the RP and other fee associated with CIRP? What should be the elements of best practice? Should best practice for determination of fee good enough for regulation of fee? v. Should the fee payable for various services under CIRP be further (beyond disclosures and best practices) regulated? If so, how should the fee payable to the IRP/RP, Insolvency Professional Entity (IPE) and professionals engaged under CIRP be regulated? Should there be a ceiling, a floor or a band for fee payable to the IRP/RP, IPE and other professionals. Should it be a percentage linked to some variable of the corporate debtor? Should i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x the "expenses" to be incurred on the Resolution Professional and by the Resolution Professional. The "expenses" are to include the 'fee' to be paid to the Resolution Professional. Perusal of such provisions and Regulations clearly indicates a prior consultation of minds at initial stage of CIRP to see as to what is the reasonable fee to be incurred on the Resolution Professional or by the 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. Reference to term "success fee" in Annexure-B of the Circular dated 12.06.2018 which was 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. In our view, if the Resolution Professional seeks to have success fee at the initial stage of CIRP, it would interfere with independence of Resolution Professional whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ill it shows that the attention of the Authority issuing the Circular missed details while referring to opinions as in Annexure-B. The Appellant is trying to take advantage of this so as to pick up from Annexure-B one word 'success fee' and ignoring other aspects benefit is sought to be taken. Apart from the fact that the Code or the Regulations as existing do not provide for fee on speculative basis, Circular dated 12.06.2018 also in the portion where directions are given or clarification issued does not make any such 'success fee' or 'contingency fee' payable. Thus, 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. 34. The Appellant has referred to the Appeal and minutes recorded in the 20th CoC meeting to submit that the CoC appreciated his work and approved the success fee. Appellant has also referred to the various steps taken by the Appellant during the course of CIRP to submit that the Appellant was entitled to the success fee and the quantum as was fixed in this CoC meeting. The Learned Amicus Curiae ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sional and the Adjudicating Authority has interfered so as to rationalise the same. In the present matter, at the last stage when Resolution Plan was being approved the Resolution Professional without putting on record necessary particulars for the success fee got the same included. It is argued that although the fees of the Resolution Professional under the provision which requires to pay as CIRP Costs and the Resolution Plan has to have provisions to pay CIRP Costs on priority, this by itself does not make the quantum of the fees of the Resolution Professional a matter of commercial decision. CoC may be approving the fees but as it has to be reasonable under the provisions of the Code and Regulations, it is justiciable. We agree with the submissions of the Learned Amicus Curiae in this regard. 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 Resoluti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that this clause (c) was particularly important to the case which enunciated expenses incurred on or by the Resolution Professional to the extent ratified under Regulation 33. Para 19 of the Judgment reads as under:- "19. Though the CIRP was set aside later, the claim of the appellant as registered valuer related to the period when he was discharging his functions as a registered valuer appointed as an incident of the CIRP. The NCLT would have been justified in exercising its jurisdiction under Section 60(5)(c) of the IBC and, in exercise of our jurisdiction under Article 142 of the Constitution, we accordingly order and direct that in a situation such as the present case, the Adjudicating Authority is sufficiently empowered under Section 60(5)(c) of the IBC to make a determination of the amount which is payable to an expert valuer as an intrinsic part of the CIRP costs. Regulation 34 of the IRP Regulations defines 'insolvency resolution process cost' to include the fees of other professionals appointed by the RP. Whether any work has been done as claimed and if so, the nature of the work done by the valuer is something which need not detain this Court, since it is purely a fac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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