Supreme Court clarifies the process for determining Resolution Professional fees in Corporate Insolvency: Devarajan Raman vs. Bank of India Limited (05 January 2022)

Date of the Judgment: 05 January 2022
Citation: Civil Appeal No 3160 of 2020
Judges: Dr Dhananjaya Y Chandrachud, J and A S Bopanna, J.
Can an adjudicating authority arbitrarily reduce the fees of a Resolution Professional (RP) without proper justification? The Supreme Court of India addressed this crucial question in a recent judgment, clarifying the process for determining the fees and costs of RPs during the Corporate Insolvency Resolution Process (CIRP). The court emphasized the need for a reasoned approach, particularly when the financial creditor has already agreed to the fees. This judgment, authored by Justice Dr. Dhananjaya Y Chandrachud, sets aside the orders of the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT), highlighting the importance of proper scrutiny and reasoning in such matters.

Case Background

The case revolves around the appointment of Mr. Devarajan Raman as an Interim Resolution Professional (IRP) for Poonam Drums and Containers Private Limited. Bank of India Limited, a financial creditor, initiated the CIRP against the Corporate Debtor by filing a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC). The NCLT admitted the Corporate Debtor into the insolvency resolution process on 20 September 2019, appointing Mr. Raman as the IRP. However, this order was later set aside by the NCLAT on 19 December 2019, at the behest of the Directors of the Corporate Debtor, and the matter was remitted to the NCLT to decide on the fees and costs of the CIRP incurred by the IRP.

Following the NCLAT order, Mr. Raman submitted a statement of fees and costs amounting to Rs 14,75,660. The Bank of India reimbursed Rs 5,66,667, leaving a balance of Rs 9,08,993. Mr. Raman then approached the NCLT to release the remaining amount. The NCLT, however, directed the Bank of India to pay all expenses and a consolidated fee of Rs 5,00,000 plus GST, without scrutinizing the submitted costs or giving any reasons. This order was challenged by Mr. Raman before the NCLAT, which upheld the NCLT’s decision, stating that the fee was not unreasonable.

Timeline

Course of Proceedings

The National Company Law Tribunal (NCLT) initially admitted the Corporate Debtor into the Corporate Insolvency Resolution Process (CIRP) and appointed the appellant as the Interim Resolution Professional (IRP). However, this order was overturned by the National Company Law Appellate Tribunal (NCLAT), which remitted the proceedings back to the NCLT to determine the costs and fees payable to the IRP. The NCLT then directed the respondent (Bank of India) to pay the expenses incurred by the IRP and a consolidated fee of Rs 5,00,000 plus GST. The appellant challenged this order before the NCLAT, which dismissed the appeal, stating the fee was not unreasonable.

Legal Framework

The judgment primarily revolves around the interpretation of Section 60(5)(c) of the Insolvency and Bankruptcy Code, 2016 (IBC), which grants the adjudicating authority the power to deal with any question of law or fact arising in relation to the insolvency resolution. It also considers Regulation 34 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, which defines “insolvency resolution process cost” to include the fees of the resolution professional and other professionals appointed by the RP.

The relevant extract of Section 60(5)(c) of the IBC is as follows:


“Notwithstanding anything to the contrary contained in this Code or any other law for the time being in force, in case of a corporate debtor undergoing a corporate insolvency resolution process or a liquidation process, the National Company Law Tribunal shall have jurisdiction to entertain or dispose of—(c) any question of law or facts arising out of or in relation to the insolvency resolution or liquidation proceedings.”

The relevant extract of Regulation 34 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 is as follows:


“34. Resolution professional costs.—The committee shall fix the expenses to be incurred on or by the resolution professional and the expenses shall constitute insolvency resolution process costs. Explanation.—For the purposes of this regulation, “expenses” include the fee to be paid to the 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 resolution professional.”

Arguments

Appellant’s Submissions:

• The appellant argued that the fee and expenses claimed were based on the technical and financial bid submitted initially.
• The appellant asserted that the Committee of Creditors (CoC) had ratified all expenses up to 30 November 2019.
• The appellant highlighted that the respondent, Bank of India, had verified and agreed to the fees and expenses, stating they were admissible.
• The appellant contended that the NCLT did not examine the factual position and arbitrarily awarded a fee of Rs 5,00,000, which was also upheld by the NCLAT.
• The appellant pointed out that he worked as an IRP for three months, which is half the period for completing the process.
• The appellant relied on the decision in Alok Kaushik v Bhuvaneshwari Ramanathan [(2021) 5 SCC 787], arguing that the adjudicating authority has jurisdiction under Section 60(5)(c) of the IBC but improperly exercised it.

Respondent’s Submissions:

• The respondent argued that the appellant accepted the NCLAT order remitting the proceedings back to the NCLT for determination of costs and fees.
• The respondent contended that the payment made to the RP was commensurate with the work done over three months.

Appellant’s Response to Respondent’s Submissions:

• The appellant clarified that he did not challenge the NCLAT order remitting the proceedings as it was not necessary.
• The appellant stated that the main grievance is that the claim was not assessed based on the initial agreement and the circular of the Insolvency and Bankruptcy Board of India dated 12 June 2018.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues but addressed the following key question:

1. Whether the NCLT and NCLAT were justified in reducing the fees of the Resolution Professional without proper scrutiny and reasoning, especially when the financial creditor had agreed to the claimed amount?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

Cases Relied Upon:

• Alok Kaushik v Bhuvaneshwari Ramanathan [(2021) 5 SCC 787] – Supreme Court of India: The Court relied on this case to emphasize that the adjudicating authority has jurisdiction under Section 60(5)(c) of the IBC to determine the amount payable to an expert valuer as part of the CIRP costs.

Legal Provisions Considered:

• Section 60(5)(c) of the Insolvency and Bankruptcy Code, 2016 (IBC): This section grants the NCLT jurisdiction to deal with any question of law or fact arising out of or in relation to the insolvency resolution process.
• Regulation 34 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016: This regulation defines “insolvency resolution process cost” to include the fees of the resolution professional and other professionals appointed by the RP.

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

✓ Alok Kaushik v Bhuvaneshwari Ramanathan [(2021) 5 SCC 787]*: The Supreme Court followed this judgment to affirm the jurisdiction of the adjudicating authority under Section 60(5)(c) of the IBC to determine the amount payable to an expert valuer as part of the CIRP costs. It was used to establish that the NCLT has the power to decide on the fees of the RP.

✓ Section 60(5)(c) of the Insolvency and Bankruptcy Code, 2016 (IBC): The Court interpreted this provision to affirm the adjudicating authority’s jurisdiction to decide on matters related to the insolvency resolution process, including the fees of the resolution professional.

✓ Regulation 34 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016: The Court used this regulation to define “insolvency resolution process cost,” which includes the fees of the resolution professional and other professionals appointed by the RP.

What weighed in the mind of the Court?

The Supreme Court emphasized the need for a reasoned approach by the adjudicating authority while determining the fees of the Resolution Professional. The Court noted that the NCLT and NCLAT failed to provide any justification for reducing the fees claimed by the appellant, particularly when the financial creditor had already agreed to the amount. The Court highlighted that the adjudicating authority should consider the technical and financial bid, the ratification by the CoC, and the agreement of the financial creditor before deciding on the fees. The Court also emphasized the importance of considering the circular of the Insolvency and Bankruptcy Board of India dated 12 June 2018, which requires that the fees payable to the insolvency professional during the CIRP are reasonable.

Logical Reasoning:

The Court found that the NCLT and NCLAT had not provided any reasons for reducing the fees of the RP, and therefore, the orders were set aside. The Court emphasized that the adjudicating authority must consider all relevant factors, including the initial agreement, the ratification by the CoC, and the agreement of the financial creditor, before determining the fees.

The Court observed:

“The order of the NCLT, however, reveals that none of the submissions of the appellant have been considered. The adjudicating authority merely directed the respondent to pay the expenses incurred and an amount of Rs 5,00,000 plus GST towards the fee of the RP. Neither the basis of the claim nor its reasonableness has been considered by the adjudicating authority.”

The Court further stated:

“Both the orders suffer from an abdication in the exercise of jurisdiction. In the absence of any reasons either in the order of the NCLT or the appellate authority, it is impossible for the Court to deduce the basis on which the payment of an amount of Rs 5,00,000 together with expenses has been found to be reasonable.”

The Court also noted:

“It is material to note that the appellant had addressed a letter to the respondent on 13 December 2019 prior to the filing of the application to which the respondent responded on 24 January 2020 stating that, upon verification, the costs and fees were found in conformity with both the technical and financial bid, based on which the assignment was awarded.”

The Supreme Court set aside the orders of the NCLT and NCLAT and remanded the matter back to the NCLT for a fresh decision. The Court directed the NCLT to expedite the disposal of the matter within one month from the date of receipt of a certified copy of the order.

Key Takeaways

• The adjudicating authority (NCLT) must provide reasons for determining the fees and costs of a Resolution Professional (RP).
• The NCLT should consider the technical and financial bid, the ratification by the Committee of Creditors (CoC), and the agreement of the financial creditor while deciding on the fees.
• The NCLT cannot arbitrarily reduce the fees of an RP without proper justification.
• The circular of the Insolvency and Bankruptcy Board of India dated 12 June 2018, which requires that the fees payable to the insolvency professional during the CIRP are reasonable, should be considered.
• The judgment emphasizes the importance of a reasoned and transparent process in determining the fees of RPs.

Directions

The Supreme Court set aside the impugned judgment and order of the NCLAT dated 30 July 2020 and the order of NCLT dated 7 February 2020. The Court restored MA No 223/2020 in CP (IB) 970/MB/2019 to the file of the NCLT for a decision afresh. The NCLT was requested to expedite the disposal of the MA and to complete the process within a period of one month from the date of receipt of a certified copy of the order.

Development of Law

The ratio decidendi of the case is that the adjudicating authority must exercise its jurisdiction properly and provide reasons while determining the fees of the Resolution Professional. The judgment clarifies that the NCLT cannot arbitrarily reduce the fees without considering the relevant factors, including the initial agreement, the ratification by the CoC, and the agreement of the financial creditor. This decision reinforces the principle that judicial and quasi-judicial bodies must provide reasoned decisions and not act arbitrarily. The judgment also reinforces the principles laid down in Alok Kaushik v Bhuvaneshwari Ramanathan [(2021) 5 SCC 787].

Conclusion

The Supreme Court’s judgment in Devarajan Raman vs. Bank of India Limited clarifies the process for determining the fees of a Resolution Professional during the Corporate Insolvency Resolution Process. The Court emphasized that the adjudicating authority must provide reasons for its decisions and cannot arbitrarily reduce the fees claimed by the RP, especially when the financial creditor has agreed to the amount. The judgment sets aside the orders of the NCLT and NCLAT, remanding the matter back to the NCLT for a fresh decision, highlighting the importance of a reasoned and transparent approach in such matters.

Category

Parent category: Insolvency and Bankruptcy Code, 2016
Child categories:

• Section 60(5)(c), Insolvency and Bankruptcy Code, 2016
• Resolution Professional Fees
• Corporate Insolvency Resolution Process
• Adjudicating Authority

FAQ

Q: What is the main issue in the Devarajan Raman vs. Bank of India Limited case?

A: The main issue is whether the National Company Law Tribunal (NCLT) can arbitrarily reduce the fees of a Resolution Professional (RP) without providing proper justification, especially when the financial creditor has already agreed to the fees.

Q: What did the Supreme Court decide in this case?

A: The Supreme Court held that the NCLT and the National Company Law Appellate Tribunal (NCLAT) failed to exercise their jurisdiction properly by not scrutinizing the claim and providing reasons for reducing the fees. The Court set aside the orders and remanded the matter back to the NCLT for a fresh decision.

Q: What factors should the NCLT consider when determining the fees of a Resolution Professional?

A: The NCLT should consider the technical and financial bid submitted by the RP, the ratification of expenses by the Committee of Creditors (CoC), and any agreement by the financial creditor. The NCLT should also consider the circular of the Insolvency and Bankruptcy Board of India dated 12 June 2018.

Q: What is the significance of Section 60(5)(c) of the Insolvency and Bankruptcy Code, 2016?

A: Section 60(5)(c) of the IBC grants the NCLT jurisdiction to deal with any question of law or fact arising out of or in relation to the insolvency resolution process. The Supreme Court relied on this section to affirm the NCLT’s power to determine the fees of the RP.

Q: What is the practical implication of this judgment for Resolution Professionals?

A: This judgment ensures that the fees of Resolution Professionals are determined through a reasoned and transparent process. It protects RPs from arbitrary reductions in their fees by the adjudicating authority and emphasizes the need for proper scrutiny and justification.