The National Company Law Appellate Tribunal, Principal Bench, New Delhi (“NCLAT”), in its judgement dated December 8, 2023, in the matter of CA Jai Narayan Gupta v. Radhasiriya Properties Private Limited [Company Appeal (AT) (Insolvency) No. 1473 of 2023], has held that a liquidator is not entitled to charge any fee from a scheme proponent who has submitted a scheme under Section 230 (Power to compromise or make arrangements with creditors and members) of the Companies Act, 2013 (“Companies Act”) read with Regulation 2B (Compromise or arrangement) of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (“Liquidation Regulations”).

Facts

On January 24, 2022, the liquidation process of M/s. Barcle Enterprises Limited (“Corporate Debtor”) was initiated and CA Jai Narayan Gupta (“Appellant”) was appointed as the liquidator in terms of Section 33(2) (Initiation of liquidation) of the Insolvency and Bankruptcy Code, 2016 (“IBC”). Pursuant to this, Radhasiriya Properties Private Limited (“Respondent”) sent an intimation to the Appellant expressing its interest to submit a scheme of compromise and arrangement. On March 15, 2022, the Respondent submitted the scheme to the Appellant, and the scheme was accepted by the Appellant on May 12, 2022. An interlocutory application was filed by the Appellant before the National Company Law Tribunal, Kolkata (“NCLT”) seeking directions from NCLT for conducting a meeting of the creditors of the Corporate Debtor in terms of Section 230 of the Companies Act read with Regulation 2B of the Liquidation Regulations.

Thereafter, the Appellant sent several reminders to the Respondent demanding payment towards the cost and fee incurred by the Appellant, and for depositing the estimated amount under the scheme. Upon various requests, the Respondent paid the Appellant an amount equal to INR 23,88,280/- for the time period between April 20, 2022 to February 28, 2023.

On February 17, 2023, the Appellant convened a meeting of the creditors of the Corporate Debtor, wherein the Respondent’s scheme was rejected. Consequently, the Respondent filed an application before NCLT to direct the Appellant to refund the amount of INR 23,88,280/- paid by the Respondent towards the Appellant’s fee and liquidation costs (“Application”). The Appellant in his reply to the Application, attempted to justify the payments received by him from the Respondent, and pleaded that he was entitled to receive his fees amounting to INR 23,88,280/- for the period of compromise and arrangement in terms of the Liquidation Regulations.

The NCLT, vide its order dated October 3, 2023 (“Impugned Order”), held that the Appellant was not entitled to receive any fee from the Respondent given that the creditors of the Corporate Debtor had rejected the Respondent’s scheme. NCLT therefore directed the Appellant to refund the entire amount of INR 23,88,280/- to the Respondent.

Owing to the above, the Appellant filed the present appeal to NCLAT challenging the Impugned Order by relying on the provisions of Regulation 4(2)(a) (Liquidator’s fee) read with the proviso to Regulation 2B(3) of the Liquidation Regulations.

Issues

• Whether the Appellant’s claim to retain the amount received from the Respondent towards the Appellant’s fee and liquidation costs was justified.
• Whether the NCLT had committed any error in directing the Appellant to refund the said amount to the Respondent.

Arguments

Contentions of the Appellant:

The Appellant submitted that the liquidation fees had been charged by him in accordance with Regulation 4(2)(a) read with the proviso to Regulation 2B(3) of the Liquidation Regulations. The Appellant contended that Regulation 2B of the Liquidation Regulations had been enacted to encourage only serious proposals of compromise or arrangements, and where such compromise or arrangement was not sanctioned by the adjudicating authority, the scheme proponent of such compromise or arrangement (the Respondent in this case) ought to have been burdened with the cost.

The Appellant further contended that if such liquidation fee and costs were not imposed on the Respondent, several non-serious parties or parties with vested interest and mala fide motives would propose schemes for compromise and arrangement, thereby halting the liquidation process without any pecuniary consequences on them.

The Appellant submitted that he was not required to work free of cost during the period of consideration of the scheme of compromise and arrangement, and it was the Respondent who was liable to bear the liquidation fee. Therefore, NCLT was utterly unjustified in depriving the Appellant of his legitimate fee and passing the Impugned Order against the provisions of IBC and the Liquidation Regulations.

Contentions of the Respondent:

The Respondent contended that the amount of INR 23,88,280/- was paid by it upon being pressurised to do so at the insistence of the Appellant. Moreover, even upon the scheme being rejected by the creditors of the Corporate Debtor in their meeting held on February 17, 2023, the Appellant accepted such amount from the Respondent.

The Respondent submitted that as per Regulation 2B(3) of the Liquidation Regulations, the costs in relation to the compromise and arrangement is to be borne by the parties who propose such compromise and arrangement. The term ‘cost’ only indicates costs incurred by the liquidator in respect of such compromise and arrangement, and no other cost as sought to be asserted by the Appellant could have been paid. Further, in cases where the scheme of arrangement submitted by the scheme proponent is rejected, then the scheme proponent would be liable to contribute towards the expenses in relation to such compromise or arrangement. The Respondent contended that the Appellant would be entitled to his fee as per the provisions of Section 34(9) (Appointment of liquidator and fee to be paid) of IBC, for conducting the liquidation proceedings, out of the proceeds of the liquidation estate. The Respondent submitted that the Appellant had incorrectly and inaptly interpreted Regulation 2B of the Liquidation Regulations, and had wrongfully withheld the amount remitted by the Respondent. Hence, the appeal filed by the Appellant was liable to be dismissed by the NCLAT.

Observations of the NCLAT

The NCLAT observed various provisions of IBC and the Liquidation Regulations governing the payment of fees and costs of liquidation. From a reading of Sections 34(8) and 34(9) of IBC, it was clear that the liquidator’s fee for conducting the liquidation proceedings ought to be paid from the proceeds of the liquidation of estate assets. Further, the proviso to Regulation 2(1)(ea) (Definitions) of the Liquidation Regulations, which defines the term ‘liquidation cost’, clearly provides that any cost incurred by a liquidator in relation to compromise or arrangement under Section 230 of the Companies Act does not form part of the liquidation cost.

The NCLAT further observed that Regulation 2B(3) of the Liquidation Regulations provides that any costs incurred by a liquidator in relation to compromise or arrangement is to be borne by the corporate debtor, where such compromise or arrangement is sanctioned by the adjudicating authority under Section 230(6) of the Companies Act, and in cases where such compromise or arrangement is not sanctioned by the adjudicating authority under Section 230(6) of the Companies Act, such costs are to be borne by the parties who proposed the compromise or arrangement. Thus, the statutory provision is clear that the Appellant could have claimed for costs only from the parties who proposed the compromise or arrangement. The NCLAT observed that while Regulation 2B of the Liquidation Regulations deals with the costs incurred by a liquidator in relation to a compromise and arrangement, Regulation 4 of the Liquidation Regulations deals with the liquidator’s fee. The rule making authority is fully aware of the difference between the terms cost and fee. Moreover, Regulation 2B of the Liquidation Regulations does not indicate that liquidator’s fee can be charged from a scheme proponent.

The NCLAT observed that the Appellant was entitled to claim fee as per the statutory provisions of Sections 34(8) and 34(9) of IBC read with Regulation 4 of the Liquidation Regulations. No fee could have been charged from the Respondent, who has submitted the scheme under Section 230 of the Companies Act read with Regulation 2B of the Liquidation Regulations.

With respect to the Appellant’s contention that if the fee was not imposed on the Respondent, the same would lead to the submission of compromise and arrangement proposals by non-serious scheme proponents intended to halt the liquidation process, the NCLAT observed that Regulation 2B of the Liquidation Regulations mandates that the consideration of the scheme of compromise or arrangement must be completed within 90 days from the order of liquidation. Since the statutory provision itself provides a period for completion of the compromise or arrangement, a delay could not be caused by misuse of the provisions. Hence, the submission of the Appellant that the Respondent ought to be saddled with the liquidation fee was contrary to the statutory scheme of the Liquidation Regulations.

In NCLAT’s view, the Appellant was not entitled to claim any liquidation fee from the Respondent for the period during which the compromise and arrangement scheme was under consideration, and was only entitled to receive, at the highest, the expenses that the Appellant had incurred towards the compromise and arrangement. The NCLAT observed that the NCLT had rightly directed the Appellant to refund the amount which was wrongfully claimed from the Respondent.

Decision of the NCLAT

In view of the above, the NCLAT modified the refund amount payable to the Respondent and ordered the Appellant to refund an amount of INR 22,77,108 /- in favour of the Respondent, after deducting the expenses incurred by the Appellant towards the compromise and arrangement. The NCLAT found no other reason to interfere with the Impugned Order and dismissed the appeal filed by the Appellant.

VA View:

In this judgement, the NCLAT has rightly observed that while Regulation 2B of the Liquidation Regulations specifies that if the compromise or arrangement is not sanctioned by the adjudicating authority, the costs in relation to compromise or arrangement has to be borne by the parties who proposed the compromise or arrangement, it does not make reference to any fee that can be charged by the liquidator from the scheme proponent.

The NCLAT, has emphasized on the distinction between the cost incurred under: (i) Regulation 2B of the Liquidation Regulations; and (ii) the fee of the liquidator payable under Sections 34(8) and 34(9) of IBC and Regulation 4 of the Liquidation Regulations payable out of the proceeds of the liquidation estate. Hence, the NCLAT has rightly held that Appellant was not entitled to claim any fee from the Respondent for the period during which the scheme of compromise and arrangement was under consideration.

For any query, please write to Mr. Bomi Daruwala at [email protected]

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