9911796707
TMI Blog2021 (9) TMI 984X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. The IBBI has power to take disciplinary action in the event of misconduct or breach by Insolvency Professional. In the absence of such power with Adjudicating Authority, the matter of fees would be completely unchecked and devoid of scrutiny. Para 30 of the Written Submissions filed by the Learned Amicus Curiae may be reproduced. 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 ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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. No costs. Therefore, we believe that by disallowing the success fees to the RP, we are not intruding in the commercial wisdom of the COC. Further, we believe the success fe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of Appellant was approved by the CoC as Resolution Professional. The proposal and resolution in this regard of the first CoC meeting can be seen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 upfront receipts, which was initially ₹ 200 Crores offered by Keystone Realtors Pvt Ltd a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4/2019 for approval of the Resolution Plan and when the order approving the Resolution Plan came to be passed the impugned order with para 23 was passed by the Adjudicating 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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, 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 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 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... il, 2018 seeking comments thereon. The comments received from stakeholders have been considered in consultation with the Insolvency Professional Agencies. 6. Keeping the above in view, the IP is directed to ensure that:- (a) the fee payable to him, 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 ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onic platform within three working days of receipt of the same; (b) monitor disclosures made by its IPs and submit a monthly summary of non-compliance by its IPs with this circular to the IBBI by 7th of the succeeding month; (c) take appropriate measures to ensure compliance by its IPs. 11. This circular is issued in exercise of the 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 Bankr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... professional shall not accept any fees or charges other than those which are disclosed to and approved by the persons fixing his remuneration. 27. An insolvency professional shall disclose all costs towards the insolvency resolution process costs, liquidation costs, or costs of the bankruptcy process, as applicable, to all relevant stakeholders, and must endeavour to ensure that such costs are not unreasonable. . III. The IBBI (Insolvency 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 directl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e reflection of his work, raise bills / invoices in his name towards such fees, and such fees shall be paid to his bank account. Any payment of fees for the services of an insolvency professional to any person other than the insolvency professional shall not form part of the insolvency resolution process cost. 4. Similarly, any other professional appointed by an insolvency professional shall raise bills / invoices in his / its (such as registered valuer) name towards such fees, and such fees shall be paid to his / its bank account. (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- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exity of the case, (d) exceptional responsibility falling on the insolvency professional, (e) the effectiveness with which the insolvency professional carries out her duties. Illustration: X, an insolvency professional, may choose to charge higher fee if- (a) the properties of the corporate debtor are in multiple locations all over the country (nature of property), (b) key trade suppliers are also unpaid creditors and thus hostile (complexity of the case), or (c) if the existing management is not capable which requires him to expend unusual effort to run the business as a going concern (exceptional responsibility). (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 fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to be paid to the Resolution Professional. The Resolution Professional later on found that the fees fixed by the Adjudicating Authority was inadequate and filed another Appeal and at that occasion, this Tribunal stated that fixation of fees is not a business decision depending upon the commercial wisdom of the CoC. Thus, it is claimed that the observations of this Tribunal in that matter could not have been relied on for interfering with the decision of the CoC. Relying on judgments in the matter of Committee of Creditors of Essar Steel India Limited Through Authorised Signatory vs. Satish Kumar Gupta Ors. [Civil Appeal No. 8766-67 of 2019] and K. Sashidhar vs. Indian Overseas 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which are disclosed to and approved by the persons fixing his remuneration. 27. An insolvency professional shall disclose all costs towards the insolvency resolution process costs, liquidation costs, or costs of the bankruptcy process, as applicable, to all relevant stakeholders, and must endeavour to ensure that such costs are not unreasonable. 25. The submissions are that the Resolution Professional can charge remuneration only in a transparent manner and the remuneration should be a reasonable reflection of the work and should not be inconsistent with the Regulations. It is stated that all the Regulations in this regard are based on reasonableness . It is stated that with regard to fees payable, 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 squeeze ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e]; f. The RP shall take reasonable care and diligence while performing his duties associated with charging fees and process associated therewith.; and [Refer Section 208(2) of the Code]; and g. There shall be item wise disclosure by RP to all stakeholders [Refer Regulation 27 of Code of Conduct, IP Regulations] and to IBBI [Refer Regulation 34A of CIRP Regulations]. 27. Referring to the Circular dated 12.06.2018 (Diary No.28625- Document 11, Page 771), it is stated by the Learned Amicus Curiae that this Circular only seeks to guide the stakeholders as to what could constitute reasonable in the matter of charging fees. According to him, it does not provide, prescribe, recommend, promote, endorse or sanctify payment of 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 unreason ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilation filed by Amicus Curiae]. 13. It is apparent from reading of the Circular that reference to SIPI Best Practices in the Circular is only to illustrate factors to be considered in determination of what is 'reasonable'. This is further clear from the title of Annexure B of the Circular, namely What is Reasonable Cost and Reasonable Fee . 14. Reference to success fee in SIPI Best Practices and its extract in Annexure B of the Circular to illustrate the factors to be considered in determination of what is 'reasonable', cannot be read to suggest that IBBI Circular provides for payment of success fees to IP. 15. In any case, IBBI cannot, by way of a circular, provide for charging success fees when no such provision exists in the 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 justi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofessional Poonam Drum Containers Pvt. Ltd. Vs. Bank of India Ltd being Civil Appeal (AT) (IB) No. 646 of 2020 passed by. the Hon'ble NCLAT on 30.07.2020 (refer Pg. 328 of Vol.II of Compilation filed by Amicus Curiae). It was held that fixation of fee of the Resolution Professional is not a business decision depending upon the commercial wisdom of the Committee of Creditors.] [Parish Tekriwal vs VRG Digital Corporation Pvt. Ltd being IA. No. 1099 of 2020 in C.P. (IB) No. 859 of 2019 passed by the Hon ble Adjudicating Authority (Mumbai Bench) on 7.01.2021 (refer Pg. 330 of Vol. II of Compilation filed by Amicus Curiae) It was held that fixation of the fees of IRP/RP does not come within the domain of the commercial wisdom of COC and hence is justiciable. The 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ows: Insolvency and Bankruptcy Board of India Press Release 1st April, 2018 IBBI invites suggestions on regulation of fee payable to insolvency professionals and other process costs under Corporate Insolvency Resolution Process. Today, the Insolvency and Bankruptcy Board of India (IBBI) released a discussion paper on regulation of fee payable to insolvency professionals (IPs) and other process costs under Corporate Insolvency Resolution Process (CIRP). The discussion paper is available at www.ibbi.gov.in. 2. IBBI invites suggestions and comments on the issues discussed in the paper, including the following: i. Whether the elements of costs listed in the paper are comprehensive? Are the elements of costs / fee classified / grouped appropriately? Please suggest 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 Agen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but the directions are as given in Paras 6 to 10 of the Circular. We have already referred to the Circular and if these paragraphs are considered, in substance the IBBI has directed the Insolvency Professional that the fee payable to them should be reasonable; that the same should be directly related to and necessary for the CIRP ; that the fee should be determined on an arms length basis, in consonance with the requirements of integrity and independence; that it should not include fee or other expenses not directly related to CIRP. Section 208(2) (a) of the IBC requires the Insolvency Professional to take reasonable care and diligence while performing his duties, including incurring expenses. Regulation 34 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 permits the CoC to fix 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 Profe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... costs in such manner as may be required by the Board. It is stated that the Circular has Annexure-C showing as Cost Sheet for Insolvency Resolution of Corporate Debtor which is a format. The Learned Amicus Curiae submitted that even if Regulation 34A is relevant for the said purpose reference to Section 196(1) (h) was not correct. The Learned Senior Counsel for the Appellant submitted that reference to wrong provision would not effect as the correct provision was Section 196(1) (aa) which relates to promoting the development of, and regulating the working and practices of, insolvency professionals. It is argued that under Section 196(1) (p), IBBI can issue necessary guidelines to the insolvency professionals and the Circular should be read in that context. Although the reference to wrong clause can be ignored, still 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cant and it is their efforts which leads to the Resolution Plan getting settled down so as to be approved. The Amicus Curiae rightly argued that if the minutes of Item No.5 of the 20th CoC meeting are perused, it is a case of approving a big gift for the Resolution Professional which can be only at the cost of Creditors waiting in line and whose percentage of dues would consequently get reduced. It is rightly argued that this would be a bad precedent. The alleged acts performed were handsomely paid for in the month to month fee taken. The success fee given in addition to the big amount of ₹ 8 Lakh per-month is only in the nature of gift or reward according to the Amicus Curiae. We agree with the Learned Amicus Curiae. 36. The Learned Amicus Curiae submitted that there are many instances of exorbitant charging of fees by the Resolution Professional 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 Resolutio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered valuer and his professional fees and expenses had been ratified by the CoC. NCLAT had set aside the CIRP and matter was remitted to NCLT to decide CIRP costs. NCLT determined the fees payable to the IRP but not regarding fee payable to the Appellant who had been appointed as registered valuer as the valuer had been paid ₹ 50,000/- by the Resolution Professional after reducing fees. When Appellant moved Adjudicating Authority it declined to exercise jurisdiction. The Hon ble Supreme Court, inter alia referred to Regulation 31 of the IRP Regulations and clause (c) which reads as under:- 31. Insolvency resolution process costs. Insolvency resolution process costs under Section 5(13)(e) shall mean xxx xxx xxx (c) expenses incurred on or by the resolution professional to the extent ratified under regulation 33 .. It was noted 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
