Why IBBI is keeping a close eye on fees charged by insolvency professionals

The fees charged by the insolvency professional (IP) either in his/her role as a resolution professional, interim resolution professional or a liquidator continue to be under the scrutiny  of the insolvency regulator – Insolvency and Bankruptcy Board of India (IBBI).

In a recent letter to the IPs, Insolvency Professional Entities (IPEs) and Insolvency Professional Agencies (IPAs), the regulator has raised a certain concerns on the way fees are charged by the IPs and paid to the professionals engaged by them during the Corporate Insolvency Resolution Process (CIRP).

There have been many cases where the regulator has found the IPs over-charging fee for his/her role as resolution professional or liquidator. The regulator has found that in a few cases, fees payable to IPs were not fixed beforehand and IPs drew fees on their own without approval of such fees from the competent authority, in contravention of the provisions of law. In some cases, it has found the IPs including certain fees in the CIRP costs which were not supposed to be part of that cost.

The IBBI has also raised concern over the lack of transparency in the manner in which certain professionals have been engaged by the insolvency professionals and the fees paid to them. For instance, the regulator says: “Any payment of fee for the services of an IP or any other professional appointed by the IP to any person other than the IP or such other professional, as the case may be, does not form part of the insolvency resolution process cost (IRPC). There are, however, a few instances where fee was paid to a person other than the IP or the professional concerned.”

It, therefore, conclude that such behaviours impact transparency and cleanliness of the process while diluting professional accountability.

It particularly pointed out IPs failure to disclose the fee payable to professionals engaged by him as well as his relationship with the professionals engaged by him.

The IBBI says: “It is the duty of an IP to disclose the fee payable to him as well as the fee payable to professionals engaged by him while performing the duties as an IP. It is also his duty to disclose the relationship he has with the professionals engaged by him. This ensures transparency and enables the stakeholders to take informed decisions. Failure to disclose these details creates a suspicion in the mind of stakeholders about impartiality and objectivity of the IP and possibly, conflict of interests, he may have.”

Penalizing for breach

The regulator has been not too soft on IPs not following the code of conduct for IPs and the rules laid out for charging fee.

In a recent case, it debarred insolvency professional Anil Goel, founder and chairman of AAA Insolvency Partners, for three months for contraventions including that for over-charging liquidation fee.

Goel, as the Liquidator of Varrsana Ispat was found to have collected his fee from the assets of the company which formed part of the liquidation estate. Goel had charged fee, as per the provisions of IBC, on the realized and distributed amount. However, the regulator found that the amount realised and amount distributed, as claimed by the Liquidator while calculating his fee, is not covered under the meaning of the terms amount realised and amount distributed under the provisions of the Liquidation Regulation.

Accordingly, it found the liquidator breaching a fiduciary duty prescribed under the Code and the duty of the Liquidator to preserve and protect the assets of the corporate debtor.

There have been other instances like Mukesh Mohan, the resolution professional in CIRPs of Carnation Auto, Athena Demwe Power, etc, was found including the cost of public announcement in the CIRP cost, which again is not allowed under the provisions of the law.

In another case, Ashwini Mehra, in the Educomp Solution CIRP, had included the fee of law firm Shardul Amarchand Mangaldas, which was appointed by the Committee of Creditor (CoC), in the CIRP cost. The disciplinary committee observed that CIRP fee does not include such costs, which are incurred by the members of the COC directly.

Ashwini Mehra was also found to be not disclosing his relationship with a professional that he engaged in the CIRP of Educomp Solution. He had appointed Duff & Phelps, where he was a Partner, for providing infrastructure and back office support for monthly fees of Rs. 18 lakhs (excluding out of pocket expense and applicable taxes). Besides, Kroll a division of Duff & Phelps was appointed as a Forensic Auditor for this matter not just once but twice. The disciplinary committee of the IBBI found that the position as the RP was in clear conflict with his position as a partner of Duff & Phelps.