Why approval of fees of a professional is not treated as commercial wisdom of CoC
By Arvind Mangla
In a recent judgement the Supreme Court of India in Alok Kaushik Vs Bhuvaneshwari Ramanathan and Others held that the Adjudicating Authority is sufficiently empowered under Section 60(5)(c) of the IBC to make a determination of the amount which is payable to an expert valuer as an intrinsic part of the CIRP costs. Regulation 34 of the IRP Regulations defines ‘insolvency resolution process cost’ to include the fees of other professionals appointed by the RP. Whether any work has been done as claimed and if so, the nature of the work done by the valuer is something which need not detain this Court, since it is purely a factual matter to be assessed by the Adjudicating Authority.
The Court also held that the availability of a grievance redressal mechanism under the IBC against an insolvency professional does not divest the NCLT of its jurisdiction under Section 60(5)(c) of the IBC to consider the amount payable to the appellant. In any event, the purpose of such a grievance redressal mechanism is to penalize errant conduct of the RP and not to determine the claims of other professionals which form part of the CIRP costs.
Facts of the case
1. The National Company Law Tribunal, Bengaluru (NCLT or Adjudicating Authority) initiated the Corporate Insolvency Resolution Process (“CIRP”) against the Corporate Debtor by its order dated 21 March 2019. By an order dated 26 August 2019, the first respondent was appointed as the Resolution Professional (RP).
2. By a letter dated 16 September 2019, the first respondent (RP) appointed the appellant as a registered valuer (RV) of the Plant and Machinery of the Corporate Debtor.
3. The appellant’s appointment fee (Rs 7.50 lakhs plus applicable GST) and other expenses were ratified by the Committee of Creditors (“CoC”), led by the second respondent, in its meeting held on 9 December 2019.
4. The NCLAT set aside the initiation of CIRP against the Corporate Debtor by an order dated 18 December 2019. The NCLAT remanded the matter back to the NCLT to decide on the issue of CIRP costs.
5. By an order dated 20 December 2019, the NCLT decided on the fee of the RP and reduced it by 20% from the fee ratified by the CoC.
6. In view of the order dated 18 December 2019 of the NCLAT, the first respondent (RP) cancelled the appointment of the appellant on 19 December 2019. In relation to the fee payable to the appellant (RV), the first respondent (RP) requested him to consider a waiver. In return, the appellant (RV) agreed to reduce his fee by 25% from the fee ratified by the CoC, along with the expenses payable. However, on 2 March 2020, the first respondent (RP) informed the appellant (RV) that the fee as ratified could not be paid, and paid a sum of Rs 50,000.
7. The appellant (RV) then filed an application under Section 60(5) of the Insolvency and Bankruptcy Code, 2016 (IBC) before the NCLT challenging the non-payment of the fees. However, the NCLT dismissed the application by an order dated 29 June 2020 concluding that it had been rendered functus officio. In appeal, the NCLAT by an order dated 13 October 2020 rejected the contention of the appellant, noting that an amount of Rs 50,000 had already been paid over. The appellant moved Supreme Court in an appeal under Section 62 of the IBC, for challenging the order of the NCLAT.
Now the following questions arise:
- Whether the approval of the fees of a professional by CoC during CIRP is to be treated as commercial wisdom of the CoC and not-justiciable, or is justiciable as ordered by NCLAT in the above referred case.
- Who is required to pay the CIRP cost in case the National Company Law Appellate Tribunal (NCLAT or Appellate Authority) set aside the initiation of CIRP against the Corporate Debtor.
In the following cases the decisions of CoC on various matters had been held as commercial wisdom of the CoC, as such not-justiciable.
a. Supreme Court of India in K. Sashidhar vs. Indian Overseas Bank & Ors. held that if the opposition to the proposed resolution plan is purely a commercial or business decision, the same, being non-justiciable, is not open to challenge before the Adjudicating Authority (NCLT) or for that matter the Appellate Authority (NCLAT). The court also held that the legislature has not envisaged challenge to the “commercial / business decision” of the financial creditors taken collectively or for that matter their individual opinion, as the case may be, on this count.
b. NCLAT in Naveen Kumar Jain Vs. CoC of K.D.K Enterprises Pvt. Ltd. & Ors held that it was well-settled that the commercial wisdom of the Committee of Creditors which covers matters including the replacement of the Resolution Professional does not fall within the limited scope of judicial review and is not justiciable.
The NCLAT also observed that in so far as the issue regarding fee is concerned, the Adjudicating Authority has rightly observed that under Regulation 33(3) of the IBBI, fee has been fixed by the Committee of Creditors at Rs.50,000/- which does not brook interference.
c. NCLAT in Committee of Creditors of LEEL Electricals Ltd. Vs Leel Electricals Ltd. through its IRP, Arvind Mittal held that appointment of RP is governed by Section 22 which provides that the first meeting of CoC shall be held within 7 days of constitution of CoC and the CoC may by a majority vote of not less than 66% of the voting share of Financial Creditors either resolve to appoint the IRP as a Resolution Professional or to replace the IRP by another Resolution Professional. It is now well settled that the decision in regard to appointment of IRP as RP or replacement of IRP by another RP falling within the ambit of Section 22 of I&B Code is a decision based on commercial wisdom of CoC which is not amenable to judicial review.
Author’s comments: When appointment/replacement of IRP/RP is a decision based on commercial wisdom of CoC which is not amenable to judicial review, how come the fees of professionals approved by CoC can be justiciable or amenable to judicial review
d. NCLAT in Committee of Creditors of EMCO Limited Vs Mrs. Mary Mody & Sundaresh Bhat, Resolution Professional of EMCO Limited held that keeping in view all the aforenoted reasons and the ratio of the Hon’ble Supreme Court in ‘K. Sashidhar’ (Supra) that the commercial or business decision of the CoC is non-justiciable, and at best, the Adjudicating Authority may cause an enquiry on limited grounds, and does not have Jurisdiction to undertake scrutiny of the justness of the opinion expressed by the CoC when it has voted by a majority share, we are of the opinion that this ratio is applicable to the facts of this case as the CoC has by a majority vote rejected to raise any ‘Interim Funds’ and the Adjudicating Authority cannot direct the CoC to do the same.
The NCLAT also maintained that it is well established that the commercial or business decisions of the CoC are non-justiciable.
Now let’s look into the concerned CIRP Regulations about the fees of the professionals;
- # Regulation 33. Costs of the interim resolution professional.
- (1) The applicant shall fix the expenses to be incurred on or by the interim resolution professional.
- (2) The Adjudicating Authority shall fix expenses where the applicant has not fixed expenses under sub-regulation (1).
- (3) The applicant shall bear the expenses which shall be reimbursed by the committee to the extent it ratifies.
- (4) The amount of expenses ratified by the committee shall be treated as insolvency resolution process costs.
- Explanation. – For the purposes of this regulation, “expenses” include the fee to be paid to the interim resolution professional, fee to be paid to insolvency professional entity, if any, and fee to be paid to professionals, if any, and other expenses to be incurred by the interim resolution professional.
From the regulations it can be seen that even the fees of IRP fixed by the Adjudicating Authority needs to be ratified by CoC for to be treated as Insolvency Resolution Process Cost. Thus AA has no role to play in fixation of the fees of the professionals and also cannot sit in judgement for the fees of the professionals fixed /approved by CoC.
Now the second question arises as to who is to bear the cost of CIRP in the present situation when NCLAT or set aside the initiation of CIRP against the Corporate Debtor
a. Supreme Court of India in S3 Electricals and Electronics Private Limited Vs Brian Lau & Anr. held that a bare reading of Regulation 33(3) indicates that the applicant is to bear expenses incurred by the RP, which shall then be reimbursed by the Committee of Creditors to the extent such expenses are ratified. We are informed that, in this case, no Committee of Creditors was ever appointed as the interim resolution process did not reach that stage. In these circumstances, it is clear that whatever the Adjudicating Authority fixes as expenses will be borne by the creditor who moved the application.
b. NCLAT in M/s. Kotak Resources Vs Dharmendra Dhelaria & Ors. held that Admittedly, Mr Dharmendra Dhelaria was nominated as ‘Interim Resolution Professional’ by the Appellant (Financial Creditor) who was subsequently confirmed as ‘Resolution Professional’ by the ‘Committee of Creditors’. He managed the operations of the ‘Corporate Debtor’ as a going concern. ARCIL was included in the ‘Committee of Creditors’ upon its constitution by the ‘Resolution Professional’ with its consent. The ‘resolution cost’ of Rs.12,12,831 was ratified and approved by the ‘Committee of Creditors’ in its meeting dated 7th August, 2018.
According to NCLAT, since the Committee of Creditors comprised of both, Appellant and ARCIL, the ‘corporate insolvency resolution process costs’ had necessarily to be borne by them in equal proportion.
It is indisputable that the ‘Corporate Debtor, maintained the appellate tribunal, could not be saddled with the liability of the ‘corporate insolvency resolution process costs’. It would be preposterous to hold that the whole amount of the ‘corporate insolvency resolution process cost’ should have been reimbursed by the ARCIL alone to the ‘Resolution Professional’.
The Author is an insolvency professional and an ex-banker. The article first appeared on https://ip-arvindmangla.blogspot.com/2021/04/why-approval-of-fees-of-professional-by.html.
Also Read: Can a CoC member be asked to contribute towards CIRP cost?
