Insolvency regulator mulls performance-based fee for insolvency professionals
The Insolvency regulator in order to avoid the disputes related to the correct remuneration of Insolvency Professionals has suggested a two-tiered fee structure – 1) a minimum fixed (floor) fee of IP in CIRP; and 2) a performance linked fee structure – in a consultation paper floated by the Insolvency and Bankruptcy Board of India (IBBI).
A minimum Fixed Fee
The fixed fee proposed by insolvency regulator would be the minimum (floor) fees payable to the insolvency professional, and applicants/CoC would remain free to consider higher amount of fees for IP, depending on the merits of the case. The fee under this structure would be based on the quantum of claims admitted
| Quantum of claims admitted | Fee (Rs lakh per month |
| Up to Rs 50 crore | 1.5 |
| More than Rs 50 cr-up to Rs 100 cr | 2 |
| More than Rs 100 cr-up to Rs 500 cr | 2.5 |
| More than Rs 500 cr-up to Rs 1000 cr | 3.0 |
| More than Rs 1000 cr-up to Rs 2500 cr | 3.5 |
| More than Rs 2500 cr-up to Rs 10,000 cr | 5.0 |
| More than Rs 10,000 cr | 7.5 |
According to the Insolvency regulator, the fixed fee structures (with floor fee) for insolvency professionals would help avoid disputes between the parties and save considerable time of parties involved as well as adjudicating authorities in dealing with litigations in relation to fees payable to IP. It will ensure certain minimum amount of payment of fees to the IP for the services rendered by him.
It also proposes that a performance-linked component would help achieve the core objectives of the Code such as timely resolution and value maximisation. Further, the escrow account mechanism would also help eliminate uncertainty of payment of fees to IP.
Performance-linked fee
Proposing a performance-linked fee structure for insolvency professionals, the consultation paper says insolvency professionals may also be incentivized to channelise their efforts to ensure that that a corporate insolvency resolution process (CIRP) is resolved within the prescribed timelines and the company under insolvency gets the best value from the prospective buyers.
Only in 116 of the 306 cases resolved under the insolvency law, banks have been able to recover more than the fair value of the insolvent company. In the rest 190, the realisation has been less than the fair value.
Therefore, to incentivise timely resolution and value maximisation, the consultation paper suggests variable fee calculated at the rate of 1% of the positive difference between the actual realisable value and fair value subject to maximum amount not exceeding to Rs.5 crore.
Though the paper says that the proposed performance-linked fee is indicative in nature, and Committee of Creditors may devise any other incentive structure, or it may decide not to give such incentive.
The insolvency regulator also proposes a variable fee for timely completion of an insolvency process. For example, if the resolution is achieved with 180 days, the insolvency professional may receive 1% of the actual realisable value as fee, 0.75% if resolved with between 180 and 270 days, and 0.5% if resolved between 270 and 330 days.
Also Read: Why IBBI is keeping a close eye on fees charged by insolvency professionals
