In a significant order, the National Company Law Appellate Tribunal (NCLAT) says the success fee paid to the resolution professional (RP) is more of a contingency and not part of the Insolvency and Bankruptcy Code (IBC).
While dismissing an appeal, the bench of justice AIS Cheema and Dr Alok Srivastava observed, "By pushing in a big amount at last moment in the name of success fees for the resolution professional and making it part of Corporate Insolvency Resolution Process (CIRP) costs at the time of approval of the resolution plan, does not make the same a commercial decision of the committee of creditors (CoC)."
"... 'success fees' which is more in the nature of the contingency and speculative is not part of the provisions of the IBC and the regulations and the same is not chargeable. Apart from this, even if it is to be said that it is chargeable, we find that in the present matter, the manner in which it was last minute pushed at the time of approval of the resolution plan and the quantum are both improper and incorrect," NCLAT says.
The case relates to an order passed by the Mumbai bench of the National Company Law Tribunal (NCLT). While approving the resolution plan submitted by Prestige Estates Projects Ltd for Ariisto Developers Pvt Ltd, the adjudicating authority disagreed with the CoC, which has approved 'success fees' of Rs3 crore to the resolution professional.
Jayesh N Sanghrajka, the erstwhile RP of Ariisto Developers, had filed the appeal before NCLAT. He contended that the approval of the success fees was a commercial decision of the CoC and the adjudicating authority could not have interfered with it, while approving the resolution plan and directing the distribution of the amount set apart for success fees.
During a previous hearing in June this year, NCLAT had observed that "it was not necessary to call response from CoC as it had already (supposedly) expressed itself in the minutes of the meeting." It then decided to appoint advocate Sumant Batra as an amicus curiae.
In its first meeting, the CoC for Ariisto Developers approved Mr Sanghrajka, a chartered accountant (CA), as RP by paying a monthly fee of Rs3 lakh plus taxes and a fixed fee cost of Rs5 lakh.
Senior counsel Dhruv Mehta appearing for Mr Sanghrajka submitted that the RP successfully convened the CoC meeting and got CoC's approval on the resolution plan, which can be only reasonableness of 'success fees'. He also contended that only the CoC could consider if the success fee is to be paid and the amount and the adjudicating authority cannot look into this aspect as it is part of the commercial wisdom of the CoC.
Mr Mehta also contended that if the adjudicating authority did not agree with the success fees, the resolution plan should have been sent back and the adjudicating authority could not have meddled with the CIRP costs that are part of the resolution plan.
Advocate Batra, the amicus curiae, pointed out that in the IBC and the regulations, there is no express provision for grant of a success fee.
NCLAT noted, "The CoC can fix the quantum of fees, but it would be subject to scrutiny by the adjudicating authority as what is reasonable fee is context-specific and it is not part of the commercial decision of the CoC. The CoC exercised commercial decision with regard to the resolution plan, which is required to be approved and although CIRP costs are required to be paid on priority, the reasonableness of fees is not part of the commercial decision."
"In our view, if the resolution professional seeks to have success fee at the initial stage of CIRP, it would interfere with the independence of resolution professional, which can be at the cost of the corporate debtor. If a success fee 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 reward. 'Success fee'- the term is contrary to what the Insolvency and Bankruptcy Board (IBBI) provided in its circular dated 16 January 2018 that insolvency professional should render services for a fee which is a reasonable reflection of his work. The fee has to be related to acts performed or to be performed for the furtherance of the CIRP, for dues or expenses actually incurred," the bench stated.
Advocate Batra, the amicus curiae, also argued that if the minutes of item No5 of the 20th CoC meeting are perused, it is a case of approving a significant gift for the resolution professional, which can be only at the cost of creditors waiting in line and whose percentage of dues would consequently get reduced.
"It is rightly argued that this would be a bad precedent. The alleged acts performed were handsomely paid for in the month to month "fee' taken. According to the Amicus Curiae, the success fee given in addition to the big amount of Rs8 lakh per month is only in the nature of gift or reward. We agree with the Amicus Curiae," NCLAT says.
The appellate tribunal also noted, "The interest of interim resolution professional (IRP) or resolution professional cannot be equated with the interest of the corporate debtor and other stakeholders, creditors. Fees cannot be disproportionate to eat into the percentage of others."
It then dismissed the appeal filed by CA Sanghrajka, the erstwhile RP for Ariisto Developers.