In a recent judgement the Appellate Authority (NCLAT) held that fixation of fees of IRP / RP is not commercial wisdom of the CoC.
NCLAT (2020.07.30) in Devarajan Raman, RP vs. Bank of India Ltd. [Company Appeal (AT) (Insolvency) No. 646 of 2020] upheld the orders of AA for fixing of the fees of RP.
# 3. On a query, learned counsel for the Appellant replied that the Resolution Professional has worked for about three months. Since the expenses have been allowed in full and the consolidated amount of Rs.5 Lakh + GST has been allowed as fee of the Resolution Professional for entire period, we find the same is not unreasonable. 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.
Time & again, in various orders Appellate Authority had directed the Adjudicating Authority to fix the fees of Interim Resolution Professional or Resolution Professional, mainly in the following type of cases.
Withdrawal applications under section 12A.
Setting aside the orders of AA for admission of insolvency application.
Now the question arises,
Whether the fees & expenses of IRP fixed by the applicant under regulation 33(1) is a contractual obligation on the part of the applicant ?
Can the Professional Fees of IRP agreed to by the applicant, can be questioned at the later stage ?
Whether judicial review of the professional fees agreed to & fixed by the applicant is permissible under the provisions of the Code, if yes, on what grounds.
Let’s look at provisions of the Code & Regulations on this aspect.
Insolvency and Bankruptcy Code, 2016.
# 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;
Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.
# Regulation 30 A. Withdrawal of application.
(2) The application under sub-regulation (1) shall be made in Form FA of the Schedule accompanied by a bank guarantee-
(a) towards estimated expenses incurred on or by the interim resolution professional for purposes of regulation 33, till the date of filing of the application under clause (a) of sub-regulation (1); or
b) towards estimated expenses incurred for purposes of clauses (aa), (ab), (c) and (d) of regulation 31, till the date of filing of the application under clause (b) of sub-regulation (1).
(7) Where the application is approved under sub-regulation (6), the applicant shall deposit an amount, towards the actual expenses incurred for the purposes referred to in clause (a) or clause (b) of sub-regulation (2) till the date of approval by the Adjudicating Authority, as determined by the interim resolution professional or resolution professional, as the case may be, within three days of such approval, in the bank account of the corporate debtor, failing which the bank guarantee received under sub-regulation (2) shall be invoked, without prejudice to any other action permissible against the applicant under the Code.
# 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 41[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 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.
# Regulation 34 A. Disclosure of Costs.
The interim resolution professional or the resolution professional, as the case may be, shall disclose item wise insolvency resolution process costs in such manner as may be required by the Board.
From Regulation 33, it can be observed that in the area of fixation of expenses ( including professional fees of IRP, as per explanation to the Regulation 33) Adjudicating Authority / Appellate Authority are not the final authority.
It is of paramount significance that even the expenses fixed by the Adjudicating Authority needs ratification of CoC, to form part of Insolvency Resolution Process Cost. CoC may choose not to ratify the expenses in whole or part thereof. Nothing in Code provides for the judicial review of the decisions of CoC. Thus CoC is only authorised to approve / ratify the expenses of IRP /RP, and the Adjudicating Authority/Appellate Authority has no role to play in this area.
Here again, as per the provisions, CoC is not required to assign reasons for not ratifying (either wholly or partly) expenses fixed by the applicant/Adjudicating Authority. Natural corollary to the same is that CoC is not authorized to question the expenses fixed by the applicant / Adjudicating Authority.
In my opinion, in absence of CoC, judicial review of reasonableness of expenses, other than professional fees of IRP/RP is permissible, whereas there are no prescribed criterias on which the reasonableness of agreed professional fees can be judicially reviewed.
It is quite intriguing, that so far I have not come across any judgement, wherein the professional fee of other professionals such as advocates, valuers, chartered accountants etc. has been reviewed by either Adjudicating Authority / Appellate Authority.
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.
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