Is there a need for basic guidelines on fixing insolvency professionals’ fee?

The subjective nature of regulations governing the fee charged by insolvency professionals (IPs) often leads to undue scrutiny of IPs, and also brings damage to personal and professional image of the IPs.

In a recent order in the case of insolvency professional Vijay Kumar Garg, the disciplinary committee of the Insolvency and Bankruptcy Board of India (IBBI) has reiterated that it is the duty of the IP to ensure reasonable fee as well as appoint only those professionals which were required on need basis.

Vijay Kumar Garg was appointed as the interim resolution professional and subsequently the resolution professional of Mehul Choksi-owned Gitanjali Gems Limited in November 2018.

Garg engaged Duff & Phelps (D&P) as ‘professional’ and paid exorbitant fee, 19 times the fee he as an insolvency professional used to charge.

According to the disciplinary committee, engaging D&P at an exorbitant cost by the IRP/RP appears to be an attempt to siphon off or draw out money from an already ailing corporate debtor.

Vijay Kumar Garg had shown Rs 3.57 crore as CIRP cost in the Geetanjali Gems case.

The disciplinary committee has noted that charging such exorbitant fee would be contrary to the letter and spirit of the code as it amounted to bleeding the corporate debtor further when such high costs are not needed.

The disciplinary committee went to the extent of saying that Vijay Kumar Garg ‘converted the noble insolvency profession into a business, manipulated the market for insolvency professional services, acted under the influence of one creditor and contravened various provisions of the code.

A larger issue

Vijay Kumar Garg’s is not the first case when the allegations of insolvency professionals charging unreasonable fee have come to the fore.

The issue of remuneration by IPs has been discussed in the recently published Handbook on Ethics for Insolvency Professionals: Ethical and Regulatory Framework.

It cites several instances of IPs charging a fee inconsistent with the work done by them.

For example, it cites an example where the RP charged an unreasonable professional fee of Rs 50 lakh plus out-of-pocket expenses, with the applicant (operational creditor) who had a claim of Rs.13.76 lakh.

In this case, while the RP had submitted before the disciplinary committee that the amount of fee charged by him was clear reflection of the work, the DC found that the IRP acted in violation of the code of conduct by claiming unreasonable CIRP costs and also the fee claimed by the RP do not reflect the work to be undertaken.  As a result the registration of the RP as an insolvency professional was suspended for two years.

In another case, the RP appointed various law firms and advocates paying them exorbitant fees when a law firm was already appointed for legal assistance at exorbitant cost.

In yet another case, the RP appointed a firm to conduct forensic audit of the corporate debtor which submitted its report. Thereafter, the same firm was again appointed to conduct Forensic Audit with an enhanced scope of five years upon the directions of CoC.  

A large amount has been cumulatively paid for conduct of two forensic audits (Rs 17,00,000 + Rs.50,74,000 = Rs. 67,74,000) despite the fact that the initial bid made by the firm was Rs 28,50,000 with taxes for a review period of 5 years.

In another case, the RP charged hefty fees for his services as RP/IRP and ensured that his related parties get the works during CIRP without any due diligence.

Lack of clear guidelines

The problem could stem from the fact that the Insolvency Code and the regulations in India do not stipulate any basis for fixing of remuneration for the services of the IPs unlike the UK where the Insolvency (England and Wales) Rules, 2016 stipulate the principles for fixing the basis of remuneration.

According to the Handbook on Ethics for Insolvency Professionals, Section 5(13) of the Code defines Insolvency Resolution Process Costs which include fees payable to any person acting as a Resolution Professional. Regulation 34 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 stipulates that the committee of creditors (CoC) should fix the fee to be paid to resolution professional.

“There is no mention of any limitations, principles or basis for fixing such fee to resolution professional in these regulations,” says the handbook on ethics.

So, while several courts have maintained that CoC’s commercial wisdom cannot be questioned in th matters of resolution, the same does not seem to apply in case of fixing of RP/IRP’s fee. Is it, therefore, time for the insolvency regulator to think of some basic guidelines for fixing such fees on the lines of UK insolvency laws or does the idea smack of a nanny state?

UK Rules on Insolvency Practioners

In the UK, Rule 18.16 of the Insolvency (England and Wales) Rules, 2016 prescribe the following principles for determining the basis of remuneration of the office-holder by the Committee Creditors: * The complexity (or otherwise) of the case; * Any respects in which, in connection with the company’s or bankrupt’s affairs, there falls on the office-holder, any responsibility of an exceptional kind or degree; * The effectiveness with which the office-holder appears to be carrying out, or to have carried out, the office-holder’s duties; and *The value and nature of the property with which the office-holder has to deal. Also, the same rule stipulates the following three bases of remuneration or combination thereof, to be fixed for office-holder: * As a percentage of the value of the property with which the administrator has to deal, or the assets which are realised, distributed or both realised and distributed by the liquidator or trustee; or * By reference to the time properly given by the office-holder and the office-holder’s staff in attending to matters arising in the administration, winding up or bankruptcy; or * As a set amount In addition to the above, where the basis of remuneration is not fixed by the Committee of Creditors, then the office-holder has the right to apply to the Court to get it to be fixed.

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