Whether, the cost incurred pre-admission with the approval of CoC will form part of IRPC.

Clause D(vi) of  “Statement of Best Practices” on “Payment of Corporate Insolvency Resolution Process Costs”  of Society for Insolvency Practitioners of India (SIPI),  reads as under;

• # Clause 4(vi) An insolvency professional should endeavour only  pay costs incurred pre-admission with the approval of the committee of creditors. However, if incurring these costs are integral to keep the corporate debtor a going concern, these costs may be paid without approval of the  committee of creditors.

Why are we discussing the “Statement of Best Practices” issued by a private organization, SIPI ? Insolvency & Bankruptcy Board of India vide circular No. IBBI/IP/013/2018 dated 12th June, 2018, has adopted the “Statement of Best Practices” on “Payment of Corporate Insolvency Resolution Process Costs” of Society for Insolvency Practitioners of India (SIPI). Annexure B of the said circular reads as under;

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

The Board, by specifically  mentioning the “Statement of Best Practices” on “PAYMENT OF CORPORATE INSOLVENCY RESOLUTION PROCESS COSTS” of SIPI & providing link to the said statement in the circular, has given credence to the entire “Statement of Best Practices” of SIPI,  as guidelines  of the Board under section 196(p).

Following are the provisions of the Code & Regulation on Insolvency Resolution Process Cost (IRPC). 

# Section 3(32) “specified” means specified by regulations made by the Board under this Code and the term “specify” shall be construed accordingly;

# Section 5(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 going concern;

(d) any costs incurred at the expense of the Government to facilitate the insolvency resolution process; and

(e) any other costs as may be specified by the Board;

# Regulation 31. Insolvency resolution process costs.

“Insolvency resolution process costs” under Section 5(13)(e) shall mean-

(a) amounts due to suppliers of essential goods and services under Regulation 32;

(aa) fee payable to authorised representative under sub-regulation (8) of regulation 16A;

(ab) out of pocket expenses of authorised representative for discharge of his functions under section 25A;

(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.

# Regulation 32. Essential supplies.

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 essential supplies for drinking and sanitation purposes, and not for generation of hydro-electricity.

# Regulation 33. Costs of the interim resolution professional.

(1) The applicant shall fix the expenses to be incurred on or by the interim resolution professional.

(2) The Adjudicating Authority shall fix expenses where the applicant has not fixed expenses under sub-regulation (1).

(3) The applicant shall bear the expenses which shall be reimbursed by the committee to the extent it ratifies.

(4) The amount of expenses ratified by the committee shall be treated as insolvency resolution process costs.

Explanation. - For the purposes of this regulation, “expenses” include the fee to be paid to the interim resolution professional, fee to be paid to insolvency professional entity, if any, and fee to be paid to professionals, if any, and other expenses to be incurred by the interim resolution professional.

# Regulation 34. Resolution professional costs.

The committee shall fix the expenses to be incurred on or by the resolution professional and the expenses shall constitute insolvency resolution process costs.

Explanation. - For the purposes of this regulation, “expenses” include the fee to be paid to the resolution professional, fee to be paid to insolvency professional entity, if any, and fee to be paid to professionals, if any, and other expenses to be incurred by the resolution professional.

From the above it can be observed that neither the Code, nor the Regulations permit the pre-admission cost to be included in the IRPC. Thus the guidelines of the Board are in contravention of the provisions of the Code.

In my opinion the Board should immediately issue clarification in the matter. The Board, in the first place should not have mentioned & provided the link in the circular, of a document issued by a private organisation.

Disclaimer: The sole purpose of this blog is to create awareness on the subject and must not be used as a guide for taking or recommending any action or decision. A reader must do his own research and seek professional advice if he intends to take any action or decision in the matters covered in this blog.