Written By: Aakriti Gupta
Success fees is a payment arrangement based on the contingency on the positive outcome of an event. The National Company Law Appellate Tribunal (“NCLAT”) in the recent case of Mr. Jayesh N. Sanghrajka v. The Monitoring Agency nominated by the Committee of Creditors of Ariisto Developers Pvt Ltd[1] held that success fees cannot be levied by a Resolution Professional on acceptance of a Resolution Plan. The aim of this article is to analyze the decision of the NCLAT.
FACTS OF THE CASE
The appeal was filed by the Resolution Professional of the Corporate Debtor of Ariisto Developers Pvt. Ltd. against the order of the National Company Law Tribunal, Mumbai. In the impugned order, NCLT disagreed with the Committee of Creditors (CoC) which had approved success fees of INR 3 Crore to the Resolution Professional in the Resolution Plan.
POINTS OF CONSIDERATION
1. Commercial Wisdom of the CoC
The appellant argued that the decision of payment of the success fees was a commercial decision of the CoC and therefore the NCLT did not have the power to amend the decision. The appellant argued that the NCLT should have sent the Resolution Plan back to the CoC, if it disagreed with the decision of the CoC. The appellant stated that under the Regulation 34 of the Insolvency and Bankruptcy Board of India (Insolvency Professional) Regulations, 2016, the power to fix the expenses to be incurred by the Resolution Professional, including the fees of the Resolution Professional.
In an earlier case of Mr. Devaranjan Raman, Resolution Professional Poonam Drum & Containers Pvt Ltd v. Bank of India Ltd[2], the NCLAT has held that the decision of fees of the Resolution Professional is not a decision of commercial wisdom of the CoC. The NCLAT held that even of the success fees was not set aside by the same would have been distributed among other creditors. The NCLAT also took a note of the case of Alok Kaushik v. Bhuvaneshwari Ramanathan & Ors[3], in which it was held by the Supreme Court of India that the NCLAT has got the power to determine fees and expenses etc payable to a professional. In this case, although the fees of the registered valuer was already ratified by the CoC, the Supreme Court held that the Adjudicating Authority has the power to determine the amount payable to an expert valuer as an intrinsic part of the CIRP.
2. Remuneration and Costs of the CIRP
Relying of Paras 25 to 27 of the Code of Conduct of Schedule 1 of the Regulations, it was submitted that the Resolution Professional can charge remuneration only in a transparent manner and such remuneration should be a reasonable reflection of the work. It was thus held that fees introduced at the last moments when the resolution plan is being approved is against the principles of transparency.
3. Nature of Success Fees
The NCLAT held that success fee is more in the nature of contingency and speculative. It does not form a part of the provisions of the Code or its regulations and the same is not chargeable. Moreover, if the success fees is claimed when the Resolution Plan is going through or after the Resolution Plan is approved, it would be in the nature of a gift or a reward. Such a reward is against the principles of determination of fees of the Resolution Professional as laid down by the IBBI time and again.
4. Primary principles of determination of fees of a Resolution Professional
In the light of various Regulations and circulars issued by the IBBI, the NCLAT observed that the primary principles for the determination of the fees of a resolution Professional are the following:
- a) It should be reasonable
- b) It should be directly related to and necessary for the CIRP
- c) It should be determined on an arms’ length basis
- d) it should not include fee or other expenses not directly related to CIRP
CONCLUSION
The NCLAT rightly pointed out that a Resolution Professional is merely a facilitator of the CIRP and success fees amounted to a gift to him. Such a gift at the cost to the creditors cannot be held to be reasonable. However, the NCLAT has left the question of success fees open ended. It was also stated that the general rule was that success fees, which is more in the nature of a contingent fees is not payable to the Resolution Professional and was not a part of the regulations. However, even if it was payable, in the light of the facts of this case, it will not be payable as it was pushed to the last minute and the quantum was both improper and incorrect. At the same time the NCLAT also noted that if such a success fees is fixed at the initial stage of the CIRP, it would interfere with the independence of the Resolution Professional.
[1] Company Appeal (AT) (Insolvency) No. 392 of 2021
[2] Company Appeal (AT) (Insolvency) No. 64 of 2020
[3] (2015) 5 SCC 787
