Insolvency & BankruptcyNational Company Law Tribunal & NCLATInsolvency Professional Fees: In a Fix?

NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI

Mr. Devarajan Raman Vs. Bank Of India Ltd.

CA (AT) (Ins) No. 646 of 2020 | 30th July 2020

FACTS

An application under Section 7 of the Insolvency and the Bankruptcy Code, 2016 (‘Code”) was filled by Bank of India Limited, (“Financial Creditor”) for initiating Corporate Insolvency Resolution Process (“CIRP”) against Poonam Drums and Containers Private Limited (hereinafter referred to as (“Corporate Debtor”) before the National Company Law Tribunal, Mumbai Bench, (“Adjudicating Authority”). 

According to the Financial Creditor, they had given different credit facilities for an amount of ₹37 crores to the Corporate Debtor on 25^th February 2006. To secure the credit facilities, a charge was created by Hypothecation of Stocks and Book Debts and Equitable Mortgage over fixed the assets of the Corporate Debtor.

However, the Corporate Debtor defaulted on 11^th June 2015 and was liable to pay ₹55, 75, 16,707.33/- including penal interest effective from the date when the Corporate Debtors’ account was classified as Non-Performing Asset.

The Adjudicating Authority after hearing both the parties and on perusal of documents allowed the application and appointed Mr Devarajan Raman as Interim Resolution Professional (“Appellant”) whose fees was to be paid by the Financial Creditor.

The Adjudicating Authority vide impugned order dated 7^th February 2020 directed the Financial Creditor to pay all the expenses incurred by the Appellant and ₹5 Lakhs plus GST towards the fee of the Appellant.

Aggrieved by the impugned order passed by the Adjudicating Authority, the Appellant approached the Appellate Tribunal on the ground that the fee is inadequate and should be determined by the Committee of Creditors. 

ISSUE BEFORE THE APPELLATE TRIBUNAL

The Appellate Tribunal considered the following issue:

Whether fees of Resolution Professional are within the scope of commercial wisdom of the Committee of Creditors?

CONCLUSION 

The Appellate Tribunal rejected the assertion of the Appellant that the the payment was inadequate and that the fees of the Resolution Professional were subject to the commercial judgment of the Committee of Creditors.

 The  Appellate Tribunal after considering that the Appellant had worked for 3 months observed that, “Since the expenses have been allowed in full and the consolidated amount of Rs.5 Lakh + GST has been allowed as fee of the Resolution Professional for entire period, we find the same is not unreasonable.” 

The Appellate Tribunal held that fixing the fee of the Resolution Professional is not a business decision, depending on the commercial wisdom of the Committee of Creditors.

Henceforth, the Appellate Tribunal dismissed the appeal on lack of merits and upheld the decision of the Adjudicating Authority, directing the Financial Creditor to pay a consolidated sum for all the expenses incurred by Appellant and ₹5 Lalkhs plus GST towards the fee of the Appellant.

AMLEGALS REMARKS 

In the exercise of its functions, the Resolution Professional inevitably entails expenditure. Such expenses borne by the Resolution Professional when fulfilling its duties, including fees as RP of the Corporate Debtor is referred to as ‘Insolvency Resolution Process Costs’, and has to be paid in priority.

However, the Code does not define the amount of the fee to be payable to the RP for its services in a specific process. It is partly because of predominant economic theory that the market should lay down a price and partly because of logistical problems because no two CIRPs need the same standard and quantity of services or no two RPs provide homogenous services.

Significantly, the Regulation 33 and 34 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 provide for the authority of the Committee of Creditors in fixing and ratifying the CIRP cost which includs the fees payable to the RP for the services it renders.

The Appellate Tribunal’s decision is not in accordance with the settled position of law and limits the scope of the commercial wisdom of the Committee of Creditors as elaborated by the Hon’ble Supreme Court in Committee of Creditors of Essar Steel India Limited vs. Satish Kumar Gupta and Ors., 2019 SCCOnLine SC 1478, where it was held that the ultimate decision of what to pay and how much to pay to each class as provided under the resolution plan lies with the financial know-how of the majority of the Committee of Creditors which are governed by Section 30(2) of the Code.

This judgment, therefore, takes a different approach with regards to the scope of the Adjudicating Authority’s power and restricted the business decisions of the Committee of Creditors.

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