Liquidator’s Fees - Relevant Provisions in IBC
A. Insolvency and Bankruptcy Code, 2016.
# 5. Definitions. –
(16) “liquidation cost” means any cost incurred by the liquidator during the period of liquidation subject to such regulations, as may be specified by the Board;
Blogger’s Comments; As per the Code “Liquidation Cost” means any cost incurred by the liquidator during the period of liquidation. Definitely, cost incurred by liquidator does not include his own fees, by any stretch of imagination.
# 34. Appointment of liquidator and fee to be paid. -
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(8) An insolvency professional proposed to be appointed as a liquidator shall charge such fee for the conduct of the liquidation proceedings and in such proportion to the value of the liquidation estate assets, as may be specified by the Board.
(9) The fees for the conduct of the liquidation proceedings under sub-section (8) shall be paid to the liquidator from the proceeds of the liquidation estate under section 53.
Blogger’s Comments; The questions here arise
Whether the Board (IBBI) can delegate his authority under section 34(8) for specifying liquidator’s fees to CoC (Regulation 39D of CIRP Regulations) and/or to SCC [Regulation 4(1A) of Liquidation Regulations].
Whether the CoC & SCC under the delegated authority can fix the fees of the liquidator on a monthly basis.
SCI (2015,04.09) in P. Pramila and others Vs. State of Karnataka and another . [Criminal Appeal No. 152 Of 2012] held that;
# 53. Distribution of assets. -
(1) Notwithstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force, the proceeds from the sale of the liquidation assets shall be distributed in the following order of priority and within such period as may be specified, namely: -
(a) the insolvency resolution process costs and the liquidation costs paid in full;
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(2) Any contractual arrangements between recipients under sub-section (1) with equal ranking, if disrupting the order of priority under that sub-section shall be disregarded by the liquidator.
(3) The fees payable to the liquidator shall be deducted proportionately from the proceeds payable to each class of recipients under sub-section (1), and the proceeds to the relevant recipient shall be distributed after such deduction.
Explanation. – For the purpose of this section-
(i) it is hereby clarified that at each stage of the distribution of proceeds in respect of a class of recipients that rank equally, each of the debts will either be paid in full, or will be paid in equal proportion within the same class of recipients, if the proceeds are insufficient to meet the debts in full; and
# 238. Provisions of this Code to override other laws. -
The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.
# 240. Power to make regulations. –
(1) The Board may, by notification, make regulations consistent with this Code and the rules made thereunder, to carry out the provisions of this Code.
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B. Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.
39D. Fee of the liquidator; While approving a resolution plan under section 30 or deciding to liquidate the corporate debtor under section 33, the committee may, in consultation with the resolution professional, fix the fee payable to the liquidator, if an order for liquidation is passed under section 33, for -
the period, if any, used for compromise or arrangement under section 230 of the Companies Act, 2013;
the period, if any, used for sale under clauses (e) and (f) of regulation 32 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016; and
the balance period of liquidation.
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C. Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016.
# 2. Definitions.
(ea) “liquidation cost” under clause (16) of section 5 means-
(i) fee payable to the liquidator under regulation 4;
(ii) remuneration payable by the liquidator under sub-regulation (1) of regulation 7;
(iii) costs incurred by the liquidator under sub-regulation (2) of regulation 24;
(iv) costs incurred by the liquidator for preserving and protecting the assets, properties, effects and actionable claims, including secured assets, of the corporate debtor;
(v) costs incurred by the liquidator in carrying on the business of the corporate debtor as a going concern;
(vi) interest on interim finance for a period of twelve months or for the period from the liquidation commencement date till repayment of interim finance, whichever is lower;
(vii) the amount repayable 5[***] under sub-regulation (3) of regulation 2A;
(viii) any other cost incurred by the liquidator which is essential for completing the liquidation process:
Provided that the cost, if any, incurred by the liquidator in relation to compromise or arrangement under section 230 of the Companies Act, 2013 (18 of 2013), if any, shall not form part of liquidation
# 4.Liquidator’s fee.
(1) The fee payable to the liquidator shall be in accordance with the decision taken by the committee of creditors under regulation 39D of the Insolvency and Bankruptcy Board of India Insolvency Resolution Process for Corporate Persons) Regulations, 2016.
(1A) Where no fee has been fixed under sub-regulation (1), the consultation committee may fix the fee of the liquidator in its first meeting.
(2) In cases other than those covered under sub-regulation (1), the liquidator shall be entitled to a fee-
(a) at the same rate as the resolution professional was entitled to during the corporate insolvency resolution process, for the period of compromise or arrangement under section 230 of the Companies Act, 2013 (18 of 2013); and
(b) as a percentage of the amount realised net of other liquidation costs, and of the amount distributed, for the balance period of liquidation, as under:
Amount of Realisation / Distribution (In rupees) | Percentage of fee on the amount realised / distributed |
in the first six months | in the next six months | thereafter |
Amount of Realisation (exclusive of liquidation costs) |
On the first 1 crore | 5.00 | 3.75 | 1.88 |
On the next 9 crore | 3.75 | 2.80 | 1.41 |
On the next 40 crore | 2.50 | 1.88 | 0.94 |
On the next 50 crore | 1.25 | 0.94 | 0.51 |
On further sums realized | 0.25 | 0.19 | 0.10 |
Amount Distributed to Stakeholders |
On the first 1 crore | 2.50 | 1.88 | 0.94 |
On the next 9 crore | 1.88 | 1.40 | 0.71 |
On the next 40 crore | 1.25 | 0.94 | 0.47 |
On the next 50 crore | 0.63 | 0.48 | 0.25 |
On further sums distributed | 0.13 | 0.10 | 0.05 |
Clarification: For the purposes of clause (b), it is hereby clarified that where a liquidator realises any amount, but does not distribute the same, he shall be entitled to a fee corresponding to the amount realised by him. Where a liquidator distributes any amount, which is not realised by him, he shall be entitled to a fee corresponding to the amount distributed by him.]
(3) Where the fee is payable under clause (b) of sub-regulation (2), the liquidator shall be entitled to receive half of the fee payable on realisation only after such realised amount is distributed.
Clarification: Regulation 4 of these regulations, as it stood before the commencement of the Insolvency and Bankruptcy Board of India (Liquidation Process) (Amendment) Regulations, 2019 shall continue to be applicable in relation to the liquidation processes already commenced before the coming into force of the said amendment Regulations.
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Clause 4(1A) was Inserted by Notification No. IBBI/2022-23/GN/REG094, dated 16th September, 2022 (w.e.f. 16-09-2022).
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D. Though provisions of section 53(1)(a) provide that “Liquidator’s Fees”, as part of liquidation cost, is to be paid in full in priority to the distribution to stakeholders from the proceeds of assets of liquidation estate, but the priority of payment of “Liquidator’s Fees”, has been expressly specified in section 53(3), that the fees payable to the liquidator shall be deducted proportionately from the proceeds payable to each class of recipients under sub-section (1), and the proceeds to the relevant recipient shall be distributed after such deduction.
The construct of the provisions under section 53(3) specifies that the the fees of the Liquidator remains as “fees payable to the liquidator” upto the stage of distribution of the proceeds of assets to stakeholders & the sourcing of the same (Liquidator’s Fees) shall be from the deductions proportionately from the proceeds payable to each class of recipients under Sub-section (1) of Section 53. Thus liquidator’s fees cannot be paid prior to the distribution to stakeholders under Section 53(1).
The legislative intent as reflected under section 34(9) read with section 53(3) is that the liquidator is not able to draw his fees prior to the distribution of proceeds of assets to the stakeholders. This incentivises the liquidator to close the liquidation process as fast as possible. Further sharing of liquidator’s fees proportionately from the proceeds payable to each class of recipients under sub-section (1) is intended to deepen & broadbase the distribution under waterfall mechanism of section 53.
This confusion about priority of payment of “Liquidator’s Fees” has arisen because IBBI under Liquidation Regulations defined “Liquidator’s Fees” as part of “Liquidation Cost”.
Thus, by defining Liquidator’s Fees as part of Liquidation Cost under Regulation 2(ea), gave rise to conflict between the provisions of the Code & Liquidation Regulations on the following counts;
Whether the Liquidator’s Fees is to be paid in priority to the distribution to stakeholders under section 53(1)(a) or to be paid under section 53(3).
Whether the Liquidator’s Fees is to be paid from the proceeds of assets in liquidation estate or is to be deducted proportionately from the proceeds payable to each class of recipients under sub-section (1), and the proceeds to the relevant recipient shall be distributed after such deduction.
Section 240(1) of the Code empowers the Board (IBBI) to make regulations consistent with the Code and the rules made thereunder, to carry out the provisions of this Code. Thus if there is conflict between the provisions of the Code with that of provisions of the Regulations, provisions of the Code shall prevail. Accordingly in my considered opinion the liquidator's fees has to be paid as per the provisions of the Code [Section 53(3)]
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E. IBBI Circular no. IBBI/LIQ/61/2023 Dated 28th September, 2023
Subject: Clarification w.r.t. Liquidators’ fee under clause (b) of sub-regulation (2) of Regulation 4 of IBBI (Liquidation Process) Regulations, 2016
2.2 Other liquidation costs:
Clarification: The “other liquidation cost” in regulation 4(2)(b) shall mean liquidation cost paid in priority under section 53(1)(a), after excluding the liquidator’s fee.
2.3 Amount distributed to stakeholders:
Clarification: “Amount distributed to stakeholders” shall mean distributions made to the stakeholders, after deducting CIRP and liquidation cost.
2.4 Amount of Realisation /Distribution:
Clarification: “Amount of Realisation /Distribution” shall mean cumulative value of amount realised/ distributed which is to be bifurcated in various slabs as per column 1 and thereafter the same is to be bifurcated into realisation/ distribution in various periods of time and then corresponding fee rate from the table is to be taken.
Note; Hon’ble Bombay High Court vide order dated 04th April 2024, in the matter of Amit Gupta vs. Insolvency and Bankruptcy Board of India & Union of India (Writ Petition (Lodging) No. 34701 of 2023), while confirming the validity of remaining paras of the circular, Paragraph 2.1 (‘Amount Realised’) and Paragraph 2.5 (‘Period for calculation of fee’) have been struck down.
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F. Case Law;
NCLAT (2024.04.10) in Ashok Kumar Gulla (Liquidator) Vs. State Bank of India and Ors. [(2024) ibclaw.in 242 NCLAT, Company Appeal (AT) (Insolvency) No. 786 of 2023] held that;
“# 7. We have carefully considered the submissions made by the appellant and respondents and have perused the records. The issue for decision in this case is whether any remuneration is to be paid to the liquidator for the services being rendered by him, when the assets of the corporate debtor are under attachment and cannot be auctioned.
# 11. Vide IBBI (Liquidation Process) (Second Amendment) Regulations, 2022, Sub-Regulation 1(A) was inserted, w.e.f. 16.09.2022, which reads as under:-
- 1(A) Where no fee has been fixed under sub-regulation (1), the consultation committee may fix the fee of the liquidator in its first meeting.
Also, sub-regulation- 2 was amended to add the words [and 1(A)] after the words sub-regulation-1 to give effect to the said amendment.
# 12. Regulation 31(A) of ‘Liquidation Process Regulations’ was revised and substituted by IBBI (Liquidation Process) (Second Amendment) Regulations, 2022 w.e.f. 16.09.2022. The substituted Regulation 31A provides that the Stakeholders Consultation Committee constituted by the Liquidator shall advise him on “fees of the liquidator” as per Clause (c) of sub-regulation (1). Thus, Stakeholders Consultation Committee has been empowered to advise the liquidator regarding fees of the liquidator w.e.f 16.09.2022. In IBBI (Resolution Process for Corporate Persons) Regulations 2016, Regulation 39D was inserted by IBBI (Insolvency Resolution Process for Corporate Persons) (Fourth Amendment) Regulations, 2022 w.e.f. 16.09.2022. . . . . . .
# 13. In the subsequent amendments to the ‘Liquidation Process Regulations’, Stakeholders Consultation Committee has been provided a role in fixation of fees of liquidator. While deciding the issue of liquidation fees, we have to restrict ourselves to examination of Liquidation Process Regulations as they stood on the date when the liquidation order was issued in this case. The liquidation order was issued on 15.10.2019. The Regulation 4, as it existed on the date of passing of order of liquidation is reproduced below for reference:
# 14. From perusal of the regulations as they existed on the date of liquidation order, it appears that the fees of the liquidator was to be either the fees decided by the CoC under Regulation 39D of IBBI (CIRP) Regulations, 2016 or a percentage of fee on the amount that is realised/ distributed during the liquidation process. The Regulations, as it existed at the time on the date of the liquidation order, do not envisage payment of any fees or remuneration to the liquidator on a monthly basis, if such fee is not fixed by the CoC under Regulation 39D of IBBI (CIRP) Regulations, 2016.
# 15. Considering the regulations as they existed at the time when liquidation order was issued in this case, and that no fees was fixed by the CoC, we are of the opinion that fees to be paid to the Liquidator in this case shall be as per the percentage prescribed in Regulation 4(2)(b) of IBBI (Liquidation Process) Regulations, 2016 on realization and distribution of proceeds from auction of assets. We find no reason to interfere in the order of the Adjudicating Authority. The appeal is dismissed. All pending IAs, if any, are closed. No order as to cost.”
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, commercial or otherwise. One 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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