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Compromise Scheme: Proponent Not Liable to Pay Liquidator’s Fee

Recently, the National Company Law Appellate Tribunal (NCLAT) held that the appellant liquidator was not entitled to claim any fee from the scheme proponent (respondent in the present case) who submitted the scheme for compromise and arrangement under Section 230 of the Companies Act, 2013, for the period during which such scheme was under consideration.[1]

The scheme of compromise and arrangement presented by the respondent company was accepted by the appellant liquidator in May 2022 but was, later on, rejected by the creditors in February of this year. Seeking a refund of the amount paid towards the liquidation cost and liquidator’s fee, the respondent approached the Adjudicating Authority (National Company Law Tribunal, Kolkata) which allowed the application and directed a refund of the entire amount paid, (i.e., Rs.23,88,280.00) holding that the liquidator was not entitled to any fee as the NCLT did not have any scope to sanction the scheme since the same was rejected by the creditors, and therefore no case made out by the liquidator for invoking proviso to Regulation 2B(3) of the Liquidation Regulations.

Thereafter, an appeal came to be filed before the NCLAT challenging the said decision of the Adjudicating Authority.

Cost incurred towards Compromise or Arrangement vs. Liquidator’s Fee

Regulation 2B(3) of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016, specifies that if the compromise or arrangement is sanctioned by the Tribunal, the cost has to be borne by the corporate debtor and if it is not so sanctioned, the cost has to be borne by the parties who proposed the compromise or arrangement. Here, it is necessary to mention that the said Regulation does not refer to any fee that can be charged by the liquidator from the scheme proponent.

Accordingly, the Tribunal distinguished between the cost incurred towards compromise or arrangement under Regulation 2B and the fee of the liquidator payable under Section 34(8) and (9) of the Insolvency and Bankruptcy Code, 2016, and Regulation 4 of the 2016 Regulations.

The fee payable to the liquidator for the conduct of liquidation proceedings has to be out of the proceeds of the liquidation estate as per Section 34(9) of the Code. Further, the provision contained in Regulation 4 would apply with respect to such fees.

To the appellant’s contention that if the fee were not to be imposed, the same would lead to the submission of compromise and arrangement proposals intended to halt the liquidation process, the Tribunal pointed out that Regulation 2B mandates that the consideration of scheme has to be completed within 90 days of the order of liquidation. Hence, delay couldn’t be caused by misuse of the provisions.

The Decision

Finally, the Tribunal ruled that the appellant liquidator was not entitled to claim any fee from the respondent for the period during which the scheme of compromise and arrangement was under consideration. Deducting the expenses incurred towards compromise and arrangement (amounting to Rs.1,11,172.00), the Tribunal ordered the refund of Rs.22,77,108.00 in favour of the respondent.

Noting that the conduct of the appellant liquidator raised questions with respect to understanding of the legal provisions pertaining to the liquidation process, the Tribunal considered it necessary to bring it to the attention of the IBBI. Hence, a copy of the order was directed to be forwarded to the Board for appropriate action.

In this case, Partner, Swati Dalmia and Associate, Safura Ahmed, under the guidance of Co-Managing Partner, Shourya Mandal and Partner, Orijit Chatterjee from Fox Mandal & Associates LLP represented the respondent. They were joined by Adv. Palzer Moktan from I.G. & Associates.

[1] CA Jai Narayan Gupta vs. Radhasiriya Properties Pvt. Ltd. [Company Appeal (AT) (Insolvency) No.1473 of 2023]