Conundrum of Success Fees under IBC

(Amarpal Singh is a 4^th year B.B.A. LL.B. (Hons.) student at School of Law, UPES, Dehradun)

Introduction

There is no express definition of the term success fees or a provision which state that resolution professionals (“RPs/RP“) can charge success fees, under the Insolvency and Bankruptcy Code, 2016 (“IBC”) and the regulations framed thereunder. However, in the case of Mr. Jayesh N. Sangrajhka, the erstwhile Resolution Professional of Ariistio Developers Pvt. Ltd. v. The Monitoring Agency Nominated by the Committee of Creditors of Arristo Developers Pvt. Ltd. (2021) ibclaw.in 436 NCLAT, the National Company Law Appellate Tribunal (“NCLAT”) had the opportunity to deal with the issue of whether an RP can charge success fees with regard to cases under IBC and the manner in which it should be charged. This article aims to provide a brief overview and an analysis of the said case.

Facts

In this case, the corporate insolvency resolution process (“CIRP”) was initiated against Arristio Developers Pvt. Ltd. (“Corporate Debtor”) and Mr. Jayesh N Sangrajhka (“Appellant”) was appointed as an RP by the Committee of Creditors (“COC”) in its first meeting in accordance with the provisions of the IBC. Subsequently, in the last meeting of the COC, the COC had to evaluate the resolution plan, take the decision with respect to the distribution matrix, and the way forward. For evaluating the distribution matrix, the COC also had to decide on the ratification of the CIRP costs and expenses incurred till date, and the success fees of the RP in accordance with the chart provided by the Appellant (i.e., the RP of the Company) to the COC. The chart provided for an entry with regard to payment of the success fee to the RP of the company, with an asterisk stating that the same was to be decided by the COC.

Consequently, the matter was discussed in the COC meeting, where  the resolution plan was also being considered and the COC after a detailed discussion had approved INR 3 crores as the success fee of the RP for bringing a successful resolution plan. After the approval of the resolution plan by the COC, it was submitted to the Adjudicating Authority (“AA”) for its approval as per the IBC. The AA approved the resolution plan but disallowed the success fees of RP on the ground that the approved success fee is unreasonable. Further, the AA also observed that by disallowing the success fees, the AA is not interfering with the commercial wisdom of COC as required by the IBC.

The RP challenged the part of the order of AA disallowing the success fee before the NCLAT and contended that deciding the success fees of RP is part of the commercial decision of COC. It was further contended by the RP that if the AA found the success fees to be unreasonable it should have sent the resolution plan back to COC for reconsideration rather than disallowing it. The following issues therefore, arose in the matter for consideration by the NCLAT:

Issues

1. Whether an RP can charge success fees for approval of the resolution plan and if yes, what is the appropriate way it can be charged?
2. Whether deciding the success fees of RP is a commercial decision of COC and accordingly, whether AA has the jurisdiction to interfere with the decision of COC? 

Decision

Issue-1

The NCLAT held that the IBC and regulations framed thereunder do not provide for payment of success fees, nor do they provide for any quantum of success fees that can be paid or charged by an RP. However, the scheme of IBC provides for the manner according to which an RP can charge fees for their professional service. The relevant provisions of the IBC as noted by the NCLAT are as under:

• Under section 208 (2) of the IBC, the RP should ensure that the fees payable to him is reasonable.
• Para 25 of the Code of Conduct for Insolvency Professionals (“IPs”) stated in Schedule 1 to the Insolvency and Bankruptcy Board of India (Insolvency Professional) Regulations, 2016 states that the an RP should charge his fees in a transparent manner, and it should be reasonable reflection of his work.
• Regulation 34 of the IBBI (CIRP) Regulations, 2016 also permits the COC to fix expenses to be incurred on and by the RP, which also includes success fees of the RP.
• Further, regulation 34 A of the CIRP Regulations provides that RP should provide an item-wise disclosure of costs.

In view of the above, the NCLAT observed that the RP decided to squeeze in the success fee at the last meeting of COC when the resolution plan was being approved. On the contrary, the fees of the RP should be decided at the first meeting of the COC.

Further, as section 30 (2) of IBC provides that insolvency resolution costs (that included the success fees of the RP) should be paid in priority of other debts, the other stakeholders who were not present at the meeting of COC would not be even aware of what was being hived off from the beneficiaries of the resolution plan. Accordingly, the success fees was contingent and speculative in nature and not part of the provisions of the IBC. Thus, the RP should not charge success fee. It was further held by the NCLAT that even if the success fees was chargeable in the present case, both the quantum and manner it was charged was incorrect and improper.

Issue-2

The NCLAT referred to the judgement of the Supreme Court of India in the case Alok Kaushik v. Bhuvaneshwari Ramanathan (2021) ibclaw.in 90 SC wherein it was held that the AA has the power to determine the fees payable to an expert valuer as an intrinsic part of CIRP. Thus, the AA has the jurisdiction to interfere with the fees of RP, if it is unreasonable.

Consequently, the appeal filed by the RP was dismissed by NCLAT.

Analysis

 The Hon’ble Judicial Member of NCLAT specifically held that “even if the success fee is chargeable in the present matter, it was pushed at the time of approval of the resolution plan and the quantum are both incorrect and improper”. Hence, the NCLAT did not clearly clarify whether an RP can charge a success fee for the approval of the resolution plan.

It is also important to note that the IBBI (Disciplinary Committee) (“DC“) has recognized the concept of success fees in various decisions. For instance, in the matter of Ms. Charu Sandeep Desai, it was held by the DC that “success fees based on the milestone has not been barred by the IBC or the regulations issued thereunder”. Further, Annexure B of Circular No. IBBI/IP/013/2018, which enumerates the various factors to be considered by the IPs in determining whether the fees charged by them is reasonable or not, recognizes the concept of success/contingency fees.

Hence, the lack of clarity in this regard may lead to confusion.

Contingency fees under the Bar Council of India Rules, 1975

In India, advocates are barred from stipulating fees which is contingent on the result of the litigation according to rule 21 of Part II, Chapter II of the Bar Council of India Rules, 1975. In the case of Mr. G., A Senior Advocate of the Supreme Court, it was held that stipulating for or receiving remuneration proportional to the result of the litigation, in the form of a share in the subject matter, percentage or otherwise, by the legal practitioner would amount to misconduct. Similarly, in the case of V. C. Rangadurai v. D. Gopalan, it was held by the Supreme Court that the relationship between a lawyer and a client is fiduciary in nature, which requires high fidelity and good faith.

In light of the above and given that the nature of the relationship between the RP and COC is also fiduciary in nature as is true for the advocate and his client, the RP is responsible for carrying on the business of the corporate debtor as a going concern during CIRP and guiding the COC to take appropriate decisions.

On the other hand, it may be argued that the success fees will incentivize the RPs and help in the quick resolution of the corporate debtor. If this argument is accepted, it may lead to concentration and monopoly of assignments under IBC with few RPs only.

The Way Forward

According to an article in the Business Standard titled “Success fee gaining currency among insolvency professionals” , it was reported that success fees is becoming a popular way of payment among RPs for carrying out CIRP assignments, and the range of fees ranges from 0.1% to 2% of the winning bid amount. The only solution to RPs charging such high fees is to take lessons from other countries and put a cap on the fees of RPs. In the United Kingdom, an amendment to the Insolvency Rules was made and the UK Insolvency (Amendment) Rules, 2015 were passed by the legislature. The rules require the RPs to provide a summary of estimated costs, the work which will be undertaken by RP. If the RP decides to charge on an hourly basis, then an estimate of the time should be provided to the creditors at the outset of the CIRP. The estimate provided by the RP serves as cap and subsequently the fees can only be changed with the approval of creditors.

Conclusion 

Similarly, in India too, it may be helpful to incorporate a framework like the UK Insolvency Amendment Rules, 2015 into the IP Regulations and do away with the concept of success fees. This will help to incentivize the RPs for the work done by them and also improve the confidence of the creditors in the CIRP. At the same time, it will also eliminate any room for ambiguity with regard to whether RPs can charge a success fee and the manner in which it should be charged.