Supreme Court clarifies the process for payment of Resolution Professional Fees in cases where CIRP is set aside: Devarajan Raman vs. Bank of India Limited (2022) INSC 1

Date of the Judgment: January 5, 2022
Citation: (2022) INSC 1
Judges: Dr. Dhananjaya Y Chandrachud, J and A.S. Bopanna, J.

Can a Resolution Professional (RP) be denied their rightful fees and costs if the Corporate Insolvency Resolution Process (CIRP) is later set aside? The Supreme Court of India recently addressed this crucial question in a case concerning the payment of fees to an Interim Resolution Professional (IRP). The court clarified the jurisdiction of the National Company Law Tribunal (NCLT) in such matters, emphasizing the need for a reasoned approach in determining the fees and costs payable to the RP. This judgment ensures that professionals are fairly compensated for their work, even if the CIRP is ultimately unsuccessful.

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. The Bank of India Limited, a financial creditor, initiated the CIRP against the Corporate Debtor. Mr. Raman submitted his bid on 5 February 2019 and was appointed as IRP on 20 September 2019 by the National Company Law Tribunal (NCLT). However, on 19 December 2019, the National Company Law Appellate Tribunal (NCLAT) set aside the NCLT’s order, remitting the proceedings back to the NCLT to determine the IRP’s fees and costs. Mr. Raman submitted a claim for Rs 14,75,660, out of which Rs 5,66,667 was reimbursed. The NCLT directed the Bank of India to pay all expenses incurred by the IRP and a fee of Rs 5,00,000 plus GST. Mr. Raman appealed this order to the NCLAT, which was dismissed.

Timeline:

Course of Proceedings

The National Company Law Tribunal (NCLT) initially admitted the Corporate Debtor into the insolvency resolution process and appointed Mr. Devarajan Raman as the Interim Resolution Professional (IRP). However, this order was set aside by the National Company Law Appellate Tribunal (NCLAT), which remitted the matter back to the NCLT to determine the fees and costs payable to the IRP. Subsequently, the NCLT ordered the Bank of India to pay all expenses and a fee of Rs. 5,00,000 plus GST to the IRP. The IRP appealed this order, arguing that the NCLT had not considered the actual costs and fees agreed upon. The NCLAT, however, dismissed the appeal, stating that the fee was reasonable.

Legal Framework

The Supreme Court referred to Section 60(5)(c) of the Insolvency and Bankruptcy Code, 2016 (IBC), which grants the adjudicating authority (NCLT) jurisdiction to deal with any question of law or fact arising in relation to the insolvency resolution or liquidation proceedings of a corporate debtor. The court also referred to Regulation 34 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, which defines “resolution professional costs” to include the fees of the resolution professional and other professionals appointed by the RP. The court also noted the circular issued by the Insolvency and Bankruptcy Board of India on 12 June 2018, which requires the insolvency professional to ensure that the fees payable to him during the CIRP are reasonable and the approval of the CoC for the fee or other expenses is obtained, wherever approval is required.

Regulation 34 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 states:

“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 Arguments:

• The appellant argued that the fee and expenses claimed were in accordance with the technical and financial bid submitted by him.
• The appellant stated that the Committee of Creditors (CoC) had ratified the expenses up to 30 November 2019.
• The appellant contended that the respondent had verified and agreed to the fee and expenses claimed.
• The appellant submitted that the NCLT did not verify the factual position and awarded an ad hoc figure of Rs 5,00,000.
• The appellant highlighted that he worked as an IRP for three months, which is half the period of one hundred and eighty days envisaged for completing the process.

Respondent’s Arguments:

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

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issue revolved around the correctness of the NCLT and NCLAT orders in determining the fees and costs payable to the Resolution Professional, particularly when the CIRP was set aside. The sub-issues were:

1. Whether the NCLT and NCLAT properly exercised their jurisdiction in determining the fees and costs of the RP?
2. Whether the NCLT and NCLAT considered the factual basis of the claim?
3. Whether the NCLT and NCLAT considered the reasonableness of the fees and costs in light of the technical and financial bid, and the approval of the CoC?

Treatment of the Issue by the Court

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

Authorities

The following authorities were considered by the court:

1. Alok Kaushik v Bhuvaneshwari Ramanathan (2021) 5 SCC 787: The Supreme Court of India held that the adjudicating authority has jurisdiction under Section 60(5)(c) of the IBC to determine the amount payable to an expert valuer as an intrinsic part of the CIRP costs.
2. Section 60(5)(c) of the Insolvency and Bankruptcy Code, 2016: This provision grants the adjudicating authority (NCLT) jurisdiction to deal with any question of law or fact arising in relation to the insolvency resolution or liquidation proceedings of a corporate debtor.
3. Regulation 34 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016: Defines “resolution professional costs” to include the fees of the resolution professional and other professionals appointed by the RP.
4. Circular of the Insolvency and Bankruptcy Board of India dated 12 June 2018: Requires the insolvency professional to ensure that the fees payable to him during the CIRP are reasonable and the approval of the CoC for the fee or other expenses is obtained, wherever approval is required.

Judgment

How each authority was viewed by the Court?

• Alok Kaushik v Bhuvaneshwari Ramanathan (2021) 5 SCC 787* – The Supreme Court relied on this case to establish that the adjudicating authority has jurisdiction to determine the amount payable to an expert valuer as part of CIRP costs.
• Section 60(5)(c) of the Insolvency and Bankruptcy Code, 2016 – The Court used this provision to establish the jurisdiction of the NCLT in determining the fees and costs of the RP.
• 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 what constitutes “resolution professional costs.”
• Circular of the Insolvency and Bankruptcy Board of India dated 12 June 2018 – The Court used this circular to emphasize the need for reasonableness in the fees payable to the RP.

What weighed in the mind of the Court?

The Supreme Court was primarily concerned with ensuring a fair and reasoned process for determining the fees and costs of the Resolution Professional. The Court emphasized the need for the adjudicating authority to consider the factual basis of the claim, the reasonableness of the fees, and the relevant provisions of the IBC and its regulations. The Court found that both the NCLT and NCLAT had failed in this regard, leading to an abdication of their jurisdiction.

The Court rejected the argument that the NCLT and NCLAT’s orders were reasonable, emphasizing that they did not provide any reasoning for the ad hoc fee of Rs. 5,00,000. The Court noted that the NCLT failed to scrutinize the factual position and simply awarded a figure without considering the basis of the claim. The Court also rejected the NCLAT’s reasoning that the amount was reasonable, as it was also not based on any factual analysis or legal reasoning.

The Supreme Court observed, “Neither the basis of the claim nor its reasonableness has been considered by the adjudicating authority.” The court also stated, “Both the orders suffer from an abdication in the exercise of jurisdiction.” Further, the court noted, “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.”

There were no majority or minority opinions in this case. The judgment was delivered by a two-judge bench consisting of Dr. Dhananjaya Y Chandrachud, J and A.S. Bopanna, J.

Key Takeaways

• The adjudicating authority (NCLT) must provide reasoned orders when determining the fees and costs payable to a Resolution Professional.
• The NCLT must consider the factual basis of the claim, including the technical and financial bid submitted by the RP, and any agreements made with the financial creditor.
• The NCLT must consider the reasonableness of the fees and costs, taking into account the work done by the RP and the relevant regulations and circulars issued by the Insolvency and Bankruptcy Board of India.
• The NCLT cannot simply award an ad hoc figure without providing any reasons or basis for the decision.
• This judgment reinforces the importance of a fair and transparent process for determining the fees and costs of professionals involved in the insolvency resolution process.

Directions

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

Development of Law

The ratio decidendi of this case is that the adjudicating authority (NCLT) must provide reasoned orders when determining the fees and costs payable to a Resolution Professional, and must consider the factual basis of the claim, the reasonableness of the fees, and the relevant provisions of the IBC and its regulations. This judgment clarifies the jurisdiction of the NCLT in such matters and ensures that professionals are fairly compensated for their work.

Conclusion

The Supreme Court’s judgment in Devarajan Raman vs. Bank of India Limited clarifies the process for determining the fees and costs of a Resolution Professional when the Corporate Insolvency Resolution Process (CIRP) is set aside. The Court emphasized the need for a reasoned approach by the NCLT, requiring it to consider the factual basis of the claim, the reasonableness of the fees, and the relevant provisions of the Insolvency and Bankruptcy Code, 2016. This judgment ensures that professionals are fairly compensated for their work and sets a precedent for future cases involving similar issues.