The National Company Law Appellate Tribunal, Principal Bench, New Delhi (“NCLAT”) has in its judgment dated September 20, 2021 (“Judgement”), in the matter of Mr. Jayesh N. Sanghrajka v. The Monitoring Agency nominated by the Committee of Creditors of Ariisto Developers Private Limited [Company Appeal (AT) (Insolvency) No.392 of 2021], held that ‘Success Fees’ which is more in the nature of contingency and speculative is not part of the provisions of the Insolvency and Bankruptcy Code, 2016 (“IBC”) and the Insolvency and Bankruptcy Board of India (“IBBI”) (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“Regulations”), and the same is not chargeable.

Facts

The corporate insolvency resolution process (“CIRP”) of Ariisto Developers Private Limited (“Corporate Debtor”) was initiated on November 20, 2018. In the first Committee of Creditors (“CoC”) meeting, Mr. Jayesh N. Sanghrajka was appointed as the resolution professional (“Resolution Professional”/“Appellant”). The ‘Monitoring Agency’ of the Corporate Debtor is the respondent herein (“Respondent”).

The NCLAT referred to the agenda of the 20th CoC meeting dated November 12, 2019, and the adjourned CoC meeting dated November 13, 2019, regarding evaluation of resolution plans, to finalize the distribution matrix and way forward. The ‘Item No.7 of the Agenda’ was relevant for the present matter, which was to ratify CIRP expenses incurred as on November 10, 2019, and decide the way forward. The amicus curiae (defined below) submitted that all copies of minutes of the CoC meetings were collected from the Appellant and he could not verify if the chart provided therein was part of the agenda circulated earlier, since the agenda did not have any link to the said chart. If the chart made available by the Resolution Professional was perused, the fine print had various entries of CIRP expenses including one entry ‘Success Fees*’ and a footnote stating that ‘Amount of Success Fees to be decided by the COC’.

Thereafter, the Appellant filed an application for approval of the resolution plan before the National Company Law Tribunal, Mumbai (“NCLT”). The NCLT by an order dated March 23, 2021 (“Impugned Order”), though approved the resolution plan submitted by Prestige Estates Projects Limited (“Resolution Applicant”), it disagreed with the CoC which had approved ‘Success Fees’ of an amount of INR 3 Crores to the Resolution Professional and directed distribution thereof. Consequently, the appeal was filed by the Resolution Professional to challenge certain observations made in the Impugned Order passed by the NCLT. The Respondent stated that, the approval of the ‘Success Fees’ was a commercial decision of the CoC and the NCLT could not have interfered while approving the resolution plan.

The NCLAT had on June 07, 2021, observed that it being more of a legal issue, it is not necessary to call the response of the Respondent or the CoC, as the CoC had expressed itself in the minutes of the meeting. Thus, to assist NCLAT, Advocate Mr. Sumant Batra was appointed as “Amicus Curiae” by an order dated June 14, 2021.

Issue

Whether ‘Success Fees’ was chargeable by the Appellant.

Arguments

Contentions raised by the Appellant:

The Appellant referred to various efforts undertaken as the resolution professional during the course of CIRP, such as, assets of the Corporate Debtor worth INR 1,089 Crores were handled and safeguarded, he convened 20th CoC meeting, pursued more than 20 hearings before the NCLT, NCLAT and the Supreme Court (“SC”) having different classes of stakeholders which included approximately, 100 financial creditors, 400 homebuyers, arranged various meetings between homebuyers and Resolution Applicant to harmoniously resolve the issues and concerns of homebuyers, further that the Appellant got CoC’s approval on the Resolution Plan. Further, the Appellant referred judgments of Committee of Creditors of Essar Steel India Limited Through Authorised Signatory v. Satish Kumar Gupta and Others [Civil Appeal No. 8766-67 of 2019] and K. Sashidhar v. Indian Overseas Bank and Others [MANU/SC/0189/2019], to argue that the NCLT or the NCLAT cannot interfere with the commercial decision of the CoC. It was claimed that the ‘Success Fee’ approved was part of commercial wisdom of the CoC. Hence, only the CoC can consider if the ‘Success Fee’ is to be paid and quantum of the ‘Success Fee’. Thus, the issue before NCLT or NCLAT could only be reasonableness of ‘Success Fees’. Further argued that, if the NCLT did not agree with the fee approved it should have sent back the Resolution Plan to the CoC. However, the Appellant accepted that there is no judgment of the SC which had considered whether or not quantum of fees accepted, is or not a commercial decision.

The Appellant referred to IBBI Discussion Paper dated April 01, 2018 (“Discussion Paper”), to submit that therein the IBBI had discussed the aspect with regard to the resolution fees payable to the resolution professional and the question was left open. The Appellant accepted that such Discussion Paper did not have any reference to ‘Success Fees’.

The Appellant relied on Regulation 34 of the Regulations to state that, the CoC had to fix the expenses to be incurred by the Resolution Professional including fee which will constitute CIRP costs. Thus, Appellant submitted that Para 23 of the Impugned Order cannot be maintained. Further, the Appellant referred the Impugned Order and submitted that, the NCLT did not mention that the ‘Success Fee’ could not be charged.

Submissions of the Amicus Curiae and observations of the NCLAT

The Amicus Curiae submitted that in the IBC and the Regulations, there is no express provision for grant of ‘Success Fee’. The Amicus Curiae referred to Section 208(2) of the IBC to submit that the Resolution Professional had to abide by the code of conduct mentioned therein and therefore, the Appellant was duty bound to take reasonable care and diligence while performing his duties. The Amicus Curiae also referred to the provisions of the Circular dated June 12, 2018 (“Circular”) and the Paras 25 to 27 of the Code of Conduct, First Schedule below IBBI (Insolvency Professionals) Regulations, 2016 (“Code of Conduct”). Further, the Amicus Curiae submitted that in the scheme of the IBC, the resolution professional was appointed in the first CoC meeting as per Section 22 of the IBC, at which stage, invariably and transparently the fee gets fixed. The NCLAT noted that, with regard to fees payable, there is no express provision in the IBC and the Regulations prescribing/quantifying or prohibiting the remuneration nor as to the form in which fees can be charged or paid. The NCLAT further noted that, it is against the principle of transparency if at the last moment, when the Resolution Plan is being approved, higher amounts as fees are squeezed in it.

The Amicus Curiae submitted that a harmonious reading of the relevant provisions of the IBC and the Regulations clarified that the charging of fees by the resolution professional and manner/ method of payment shall be subject to the following:-

• Approval of the CoC by prescribed majority;
• Fee should be a reasonable reflection of the work necessarily and properly undertaken;
• Fee should be charged in a transparent manner and the resolution professional shall maintain written contemporaneous record of decision taken in respect of fees;
• The resolution professional shall take reasonable care and diligence while performing his duties associated with charging fees and process associated therewith;
• There shall be item wise disclosure by resolution professional to all stakeholders; and
• Not be inconsistent with the applicable regulations.

The Amicus Curiae stated that the Circular only guides the stakeholders as to what could constitute “reasonable” in the matter of charging fees and it does not provide, prescribe, recommend, promote, endorse or sanctify payment of ‘Success Fee’. Accordingly, the claim of the Appellant that the Circular provides for payment of ‘Success Fee’ was misplaced.

The provisions of the IBC and the Regulations read with the Code of Conduct, indicate that the IBC and the Regulations intend to control the manner in which resolution professional charged fees. The NCLAT noted that, according to Amicus Curiae, the quantum of fees payable could be fixed by the CoC but it was justiciable before the NCLT. Further, the NCLAT noted that, the judgments relied on by the Appellant, did not bar the jurisdiction of the NCLT to review the quantum of fees charged by the Resolution Professional or that approved by the CoC. It was noted that, had this not been so, there would have been no need of sections and regulations referred in the Circular harping on transparency and reasonableness and it could have been blankly left for CoC to decide fees, which is not the case. The NCLAT noted that, the IBBI has power to take disciplinary action in the event of misconduct or breach by insolvency professional. In the case of Parish Tekriwal v. VRG Digital Corporation Private Limited [C.P. (IB) No. 859 of 2019] the NCLT held that fixation of the fees of professionals does not come within the domain of the commercial wisdom of CoC and hence is justiciable.

The NCLAT noted that, through the Circular and the Discussion Paper, in substance, the IBBI has directed the insolvency professional that the fee payable to them should be reasonable; that the same should be ‘directly related to and necessary for the CIRP’ and that the fee should be determined on an arms’ length basis, in consonance with the requirements of integrity and independence. The NCLAT noted that, Section 208(2)(a) of the IBC requires the insolvency professional to take reasonable care and diligence while performing his duties, including incurring expenses. The NCLAT further noted that, the Amicus Curiae was right in his submissions that the Circular is only a circular which cannot be equated with the rules and regulations framed under the provisions of the IBC. Apart from the fact that the IBC or the Regulations as existing do not provide for fee on speculative basis. The Circular also, in the portion where directions are given or clarification issued, does not make any such ‘Success Fee’ or ‘contingency fee’ payable. Thus, it cannot be said that charging of ‘Success Fee’ is within the provisions of the IBC or the Regulations.

The Amicus Curiae further submitted that the minutes of 20th CoC meeting recorded that it was the Resolution Professional who brought about the successful Resolution Plan. However, this cannot be accepted as a reason for the ‘Success Fee’ since as per the scheme of the IBC, the Resolution Professional is merely a facilitator. Further, it is the CoC who had to deliberate with the Resolution Applicant and it is their efforts which lead to the resolution plan getting settled down so as to be approved. The NCLAT noted that, the Amicus Curiae rightly submitted that if the minutes of the 20th CoC meeting are perused, it is a case of approving a big 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.

The NCLAT noted that, fees payable to resolution professionals have been made part of CIRP costs so as to safeguard their interests. Further that, the protection for payment of CIRP costs in priority to the payment of other debts of the Corporate Debtor under Section 30(2) of the IBC, is for the CIRP costs that are validly incurred. The Amicus Curiae relied on the judgment of Alok Kaushik v. Bhuvaneshwari Ramanathan & Others [(2015) 5 SCC 787] to submit that the SC held that NCLAT had powers to determine fees and expenses, etc. payable to a professional as an intrinsic part of the CIRP.

On the submission that, the NCLT should have sent the matter back to the CoC if it was not approving the ‘Success Fee’, the NCLAT observed that, this submission deserves to be discarded, as the NCLT, while not accepting the ‘Success Fee’, merely asked proportionate distribution which would even otherwise have happened if ‘Success Fee’ was set aside, as the money would become available improving percentage of other creditors’ dues.

Decision of the NCLAT

The NCLAT held that ‘Success Fee’ which is more in the nature of 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 was to be said that ‘Success Fee’ was chargeable, the NCLAT found that in the present matter, the manner in which it was included at the last minute at the time of approval of the resolution plan, and the quantum, are both improper and incorrect. The NCLAT did not find any substance and dismissed the appeal.

VA View:

In this judgement, the NCLAT has rightly analysed that, if the Resolution Professional sought to have ‘Success Fee’ at the initial stage of CIRP, it would interfere with independence of Resolution Professional which can be at the cost of Corporate Debtor. If ‘Success Fee’ was claimed when the Resolution Plan was going through or after the Resolution Plan was approved, it would be in the nature of gift or reward instead of being expenditure incurred on or by the Resolution Professional, as in the instant case. Further, the term “Success fee” was contrary to what the IBBI provided in its circulars, that the Resolution Professional shall render services for a fee which is a reasonable reflection of his work. The absence of a provision quantifying the fee is with the expectation that the market players will self-regulate themselves and behave in a reasonable manner.

The role of the resolution professional was to be like a dispassionate person concerned with performance of his duties under the IBC and thus it cannot be result oriented. The NCLAT observed that, the CoC exercised commercial decision with regard to approval or rejection of a resolution plan but the reasonableness of fees charged was not part of commercial decision. Therefore, when the fees have to be on the basis of the case and work related to acts performed or to be performed in furtherance of the CIRP, the reasonability or otherwise would be justiciable.

For more information please write to Mr. Bomi Daruwala at [email protected]

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