Success Fees in a CIRP not chargeable – Or is it?

[By Divyanshi Srivastava

The author is a law graduate of Guru Gobind Singh Indraprastha University.

The Insolvency and Bankruptcy Code, 2016 (“IBC”/ “Code”) was enacted to fix an ailing system. Due to the multiple contrary and complex legal arrangements, a simple, coherent, and effective framework was the need of the hour, and the IBC is a denouement of the same. However, despite its exhaustive nature, the journey of the Code, since its birth has been a bittersweet symphony, traversing numerous challenges. While the Code is a specialized and dynamic piece of legislation, given its young age, the jurisprudence around it is still inchoate. In this respect, where Section 5(13) of the IBC provides that “insolvency resolution process costs” would include any fees payable to resolution professional (“RP”) and any costs incurred by the RP in running the business of the Corporate Debtor (“CD”). The section is silent about the success fee. Further, the Code also does not have any provision stipulating that RPs can charge a success fee.

In this respect, when in a recent case of Jayesh N. Sanghrajka, erstwhile R.P. of Ariisto Developers Pvt. Ltd. v. Monitoring Agency nominated by Committee of Creditors of Ariisto Developers Pvt. Ltd., the Hon’ble National Company Law Appellate Tribunal (“NCLAT”) was presented with an issue surrounding success fees charged by RP and whether the same formed part of the commercial wisdom of the Committee of Creditors (“CoC”), the NCLAT categorically held otherwise. And further laid down that success fee which is more in the nature of the contingency and speculative cannot be charged by the RP.

Conspectus of the Case

The judgment emanated from an appeal filed by the RP (“Appellant”) of Ariisto Developers Pvt. Ltd. (“Corporate Debtor”) against the observation of the National Company Law Tribunal (“NCLT”/ “Adjudicating Authority”). Since in the matter, the Respondent was the Monitoring Committee – a formal party – and the issues were primarily legal in nature, the Appellate Tribunal appointed an Amicus Curiae, as the response of the Respondent was not necessary. In the impugned order, the Adjudicating Authority had approved the resolution plan submitted by Prestige Estates Projects Ltd. for the CD but disallowed the success fees amounting to Rs. 3 Crores charged by the RP as unreasonable. Aggrieved by the same, the Appellant filed an appeal and contended that the approval of the success fees by the CoC was a commercial decision of the CoC, and hence, could not have been interfered with.

The Appellant, as ammunition to its argument, referred to an IBBI Circular, dated 12/06/2018 and relied upon Regulation 34 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 stating that the CoC has to fix the expenses which will be incurred by the RP and such expenses include the fee for the RP. The Amicus Curiae per contra, referred to Section 208(2) of the Code and submitted that the Insolvency Professional is required to abide by the code of conduct stipulated in the said section and therefore, has to take reasonable care and diligence while performing his duties. The Amicus Curiae also referred to the said circular and submitted that as per the provisions, it is clear that the remuneration charged by the RP need to be “a reasonable reflection of the work undertaken”. Moreover, the Amicus Curiae contended that reliance upon the said IBBI Circular by the Appellant was misplaced as the same did not provide, prescribe, recommend, promote, endorse or sanctify payment of success fees. The Amicus Curiae even argued that a perusal of the provisions surrounding the subject makes it clear that RPs have to perform their duties objectively.

The Appellate Tribunal, at the outset, iterated that the Code or Regulations thereunder have not provided for any fee on a speculative basis and the term “success fee” itself is contradictory to the fundamental principle that insolvency professionals shall render their services for a fee which is a “reasonable reflection of their work.” The NCLAT also noted that irrespective of the stage at which the success fee is claimed, charging such a fee would only have an adverse impact on the insolvency resolution process, as RPs are required to perform their duties under the Code independently and disinterested.

Further, the Appellate Tribunal, agreeing with the submission of the Amicus Curiae that a Circular cannot be equated with the Rules and Regulations framed under the provisions of the Code, noted that even the Circular dated 12/06/2018 does not make success fee or contingency fee payable and an indirect reference to the same cannot be understood to mean that success fee is legally chargeable or payable. Furthermore, the NCLAT also approved the Amicus Curiae’s reliance on the decision in Alok Kaushik v. Bhuvaneshwari Ramanathan &Ors., wherein it was held that the NCLAT has the power to determine the fee and expenses payable to a professional; and finally held that success fee in the instant matter could not be charged and “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.”

Analysis

The said decision of the Appellate Tribunal that success fee which is contingent and speculative is not chargeable, is not only pertinent but also in harmony with the Bar Council of India Rules, 1975. For as per Rule 21of Chapter II of Part VI of the said Rules, advocates are barred from stipulating fees which is contingent on the result of the litigation. Moreover, the Hon’ble Supreme Court in the case of V.C. Rangadurai v. D. Gopalan has held that the relationship between a lawyer and their client is fiduciary in nature, and therefore, lawyers have to act in the best interest of their clients. At the same time, the relationship between the RP and CoC is fiduciary in nature is rather apparent and therefore, incontrovertible; and since the RP has to manage the affairs of the CD in a proper and fair manner, alongside guiding the CoC, a position of law that thwarts any possibility of bias is certainly favourable.

However, it must be noted that while the decision of the NCLAT made it clear that “success fees” which is contingent and speculative does not form part of the provisions of IBC and is, therefore, not chargeable, it did not clarify whether “success fees” otherwise can be claimed by the RP or not. The absence of a clear-cut position in this regard would undoubtedly give rise to confusion in the future, for the reason that, the concept of success fees is not completely alien to the insolvency resolution process and has been dealt with rather often by the IBBI (Disciplinary Committee) in its decisions.

For instance, in the matter of Mr. Dushyant C. Dave, Insolvency Professional, along with the payment to the RP and Puneet Advisory Services Pvt. Ltd. (“PAS”) – a corporate advisory centre appointed to assist in the corporate insolvency resolution process- for their respective services, PAS was to be paid success fee of 2% of the value of the resolution plan. While the Disciplinary Committee deliberated upon the reasonability of the total amount charged, the question of payment of success fee did not arise in the matter as no resolution plan was received. Regardless of the same, the position that the success fee was claimed and the same was not instantly and categorically rejected indicates that success fees can be claimed in an insolvency resolution process. Similarly, in another matter of Ms. Charu Sandeep Desai, Insolvency Professional, the Disciplinary Committee even noted that “the charging of success fee linked to the milestones has not been barred in the Code, Regulations or the Circular issued thereunder.”

Conclusion

The jurisprudence around any legislation develops gradually, nevertheless, in order to provide utility to any rule, unambiguity is vital. In the present matter, while the NCLAT has settled the uncertainty around contingent and speculative success fees, an infrastructure that delineates the intention of the legislature and does not give rise to ambiguity in relation to success fees otherwise, is needed now more than ever due to the rise in the practice of charging the same.

In this respect, where, the provisions of the Code and Rules thereunder, require that the fee charged by the RP should be reasonable, not inconsistent with applicable regulations, the manner transparent, and done with reasonable care and diligence, with a proper record of the decisions; a framework that puts a cap on the fee that can be charged by RPs would be beneficial. Further, given the extensive nature of the responsibilities undertaken by RPs, detailed estimation of the remuneration would enable the Committee of Creditors to make an informed assessment. And therefore, a provision that enjoins the RPs to prepare a report outlining the tasks performed and planned, along with costs of such tasks, would certainly help avoid unreasonable claims.

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