Remuneration of Insolvency Professionals – A Progressive and Performance Oriented Approach  

An Insolvency Professional (IP) is entrusted with the management and administration of a Corporate Debtor’s affairs throughout the Corporate Insolvency Resolution Process (CIRP). He is responsible for managing, operating, and running the Corporate Debtor as a going concern during the said period by taking over the day-to-day affairs of the Corporate Debtor, complying with all the applicable laws, etc. An IP is also entrusted with the obligation of calling for the Resolution Plans, putting them before the Committee of Creditors (CoC) and having the best of all the Resolution Plans approved by the CoC, putting in his best efforts while doing so, and then by the Adjudicating Authority (AA). His obligations necessitate the highest level of professionalism, dexterity, and honesty. Therefore, taking into account his abilities, obligations, and responsibilities that he discharges, he needs to be compensated fairly for the professional services he provides.

Insolvency Professional’s Remuneration in Foreign Jurisdictions

Different jurisdictions have different frameworks for dealing with the insolvency matters arising in their jurisdictions. As a result, it is only natural for such jurisdictions to have different parameters for determining fees for their IPs (or the person equivalent to or performing the functions and duties of Indian IP in their jurisdictions).

In the United Kingdom (UK), matters relating to insolvency are dealt with under the Insolvency (England and Wales) Rules, 2016. The said rules provide for the determination of the “administrator, liquidator or trustee” (the IP equivalent) on the basis of either a percentage of the value of the property realised or distributed, or time spent in attending to the matter, or a fixed amount, or any combination of the aforesaid three parameters. In the United States of America (US), Section 326 of the US Bankruptcy Code provides that a court may allow a reasonable compensation to the “trustee” (the IP equivalent) that should not be more than a varied percentage of the amount disbursed or turned over by him to the creditors. While the US and UK follow a variable fee model, in Canada, the law relating to insolvency provides that the trustee’s (the IP equivalent) fees are to be fixed by the creditors by way of an ordinary resolution and in case the creditors fail, the trustee shall be entitled to a maximum of 7.5% of the amount remaining after the secured creditors have been paid out of the amount realised from the properties of the Corporate Debtor.

Insolvency Professional’s Remuneration in India

In India, the relevant provisions having a bearing on fees and other expenses of CIRP are envisaged under the Insolvency and Bankruptcy Code, 2016 (the Code) and regulations made thereunder. Section 5(13) & Section 208(2) of the Code, regulations 31, 33, 34 and 34A of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, (CIRP Regulations) clauses 16, 25, 25A, 26, and 27 of the First Schedule (under regulation 7(2)(h)) to Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016, and the circulars issued by the Insolvency and Bankruptcy Board of India (the IBBI) dated 16th January 2018 bearing no. IBBI/IP/004/2018 and 12th June 2018 bearing no. IBBI/IP/013/2018 deal with the fees of IPs.

While the sections and regulations lay down what costs amount to the CIRP Cost and how such costs including an IP’s fees are to be dealt with, the circulars mainly provide that an IP shall render services for a fee that is a “reasonable reflection” of his work, raise bills/invoices in his name towards such fees, and have such fees paid to his bank account. However, none of the provisions or the circulars provide for a specific parameter to determine the IP’s fees. The fixation of the fees of the IPs, therefore, is a duty cast upon the Applicant and the CoC and that of the AA upon their failure. In the absence of a specific parameter and proper definition of “reasonable reflection”, the AA is often faced with cases involving fee disputes between IP and Applicant and IP and the CoC. The AA had been issuing various directives to the Board, directing it to fix the fees of the IP and to consider issuing guidelines or preparing a reasonable fee structure.

The IBBI has dealt with the AA’s references with respect to the fixation of IP’s fees on a case-to-case basis up until now. However, to avoid unnecessary disputes between the parties leading to litigation and to save the time of the parties as well as the AA from it, on 9th June 2022, the IBBI issued a discussion paper addressing the issue of fees payable to the IPs acting as IRPs and RPs. The paper proposes amendments to regulations 34A and the insertion of regulations 34B and Schedule II in the CIRP Regulations, specifying a model fee structure for the IPs. The fee structure proposes not only to resolve the issue with respect to the fixation of fees but also encourages IPs to facilitate timely resolution of a Corporate Debtor keeping in mind the maximisation of its value through the introduction of performance linked incentive fees, while very aptly mentioning in the discussion paper that “Maximisation of value does not mean maximum recovery from the assets during the process of liquidation. It is a concept that helps CD to get a fair valuation in return.”

Fixed Fee Structure

The proposed regulation 34A provides that the Applicant, the AA and the CoC shall fix the IP’s fee that shall be payable to him from the date of his appointment till the submission of the Resolution Plan before the AA after approval of the CoC, in accordance to the following minimum fee: –

 

Quantum of Claims Admitted

 

Minimum Fee Per Month

(Rs. Lakh)

(i)     

<= Rs. 50 crores

1.50

(ii)   

> Rs.50 crore < = Rs.100 crores

2.00

(iii)           

 > Rs.100 crore < = Rs.500 crores

2.50

(iv)  

> Rs.500 crore < = Rs.1,000 crores

3.00

(v)    

> Rs.1,000 crore < = Rs.2,500 crores

3.50

(vi)  

> Rs.2,500 crore < = Rs.10,000 crores

5.00

(vii)          

> Rs.10,000 crores

7.50

The regulation also enables the CoC to ratify an amount higher than the amount envisaged in the aforesaid table. It further provides that the CoC may also decide the fee for the interregnum period between the submission of the Resolution Plan before the CoC and its approval by the CoC.

 

Performance Linked Fee

Since time is the essence of the Code, the IPs must adhere to the timelines and facilitate a time-bound process as envisaged under the Code read with regulations made thereunder. Keeping in mind the timely resolution of a Corporate Debtor and maximization of its value, in addition to the aforesaid, the amendment further proposes that an IP may also be paid a performance linked fee to ensure timely completion of the CIRP in the following manner: –

 

Timelines

Fee as % of actual realizable value

(i)     

<= 180 days

1.00

(ii)   

> 180 days < = 270 days

0.75

(iii)           

 > 270 days < = 330 days

0.50

(iv)  

 > 330 days

0.00

The amendment further provides that the aforesaid performance linked fee shall form a part of the CIRP Cost and the same shall in no case exceed Rs.5 crore. However, the discussion paper states that the said performance linked fee is only of indicative nature, and that the CoC may devise any other incentive structure, or it may decide not to give such incentive at all. 

Escrow account mechanism

According to the IBBI, in addition to determining fees, the applicant or the CoC, is also responsible for ensuring that any amounts payable to IP are paid. As a result, an escrow account system has been proposed to ensure the timely payment of the fee to the IP.

At the first CoC meeting, IP must provide an estimate of the fixed fee and expenditure on hiring other professionals, support services, and so on, and the CoC will either contribute to an escrow account or secure interim financing for the estimated fees and expenses for the first six months. It, therefore, proposes the following additions to the CIRP Regulations through the insertion of regulation 34B.

Immediately upon his appointment as an IRP, an IP shall open an escrow account in the name of the Corporate Debtor in respect of his fee and the fee for the RP. Within 72 hours following the submission of the statement by the IP, the applicant or the CoC, as the case may be, shall deposit in the escrow account, or arrange for interim finance for deposit in the escrow account, amount fixed under regulation 34A. The IRP or the RP may withdraw money from the escrow account to cover his fee, and they must disclose the withdrawals to the CoC in the statement prepared under regulation 34A. The balance in the escrow account, if any, will be released upon approval of a resolution plan under section 31 or the passing of an order for Corporate Debtor’s liquidation under section 33.

The IBBI has invited comments from the public on the aforesaid amendment and the last date for submission of the same is June 30, 2022. Once approved, the new regulations would resolve the long pending issue with respect to the fee payable to the IP and with it, it would also decrease the number of litigations arising out of the said issue, thereby, further cutting down on the unnecessary and avoidable time consumption in the CIRP process. The performance linked fee would further encourage the IPs to work towards the maximization of value of the Corporate Debtor, reduce the amount of time consumed in the process, and keep the IPs motivated towards work.

Conclusion

Apart from decreasing the number of litigations related to IP fees, thereby reducing time consumed in the CIRP and keeping the IPs motivated towards maximisation of value of Corporate Debtor’s assets in a time bound manner, the proposed amendments would resolve several other issues.

Be it any profession, it becomes difficult to balance the efficiency, quality of work and professionalism when the remuneration of the professional involved is not decided upon or still being negotiated upon, due to which the beneficiary of the work being or proposed to be performed suffers. There have been several instances where during the CoC meetings the CoC and the IP either hard-negotiate upon the IP’s fees or the expense incurred by the IP, due to which the Corporate Debtors suffer. The proposed fixed fee structure that provides for a minimum amount to be paid as fees to the IP, if enforced, would leave no room for such hard-negotiations. By guaranteeing a minimum fixed amount to be paid to the IP based on the quantum of claims admitted, the proposed regulation ensures that the IPs as well as the CoC waste no time in fee-bargaining, thus creating more room for conducting the CIRP in a time bound manner.

Further, the proposed fixed fee structure based on the quantum of claims admitted by the IP would also ensure that the fees being paid to him are equitable and commensurate with the amount of work done by him. The professionals who were reluctant to agree to take up the baton of CIRP of the Corporate Debtors that had Creditors with a history of haggling with the IPs for their fees would also pitch to take up the CIRP of such Corporate Debtors, thereby, providing a better opportunity of resolution to such Corporate Debtors.

The CIRPs under the Code are plagued with slow progress with most of the cases extending beyond the 180 days period and several cases crossing the 330 days’ period. The proposed provision with respect to the performance linked fee would encourage the IPs to endeavour and finish the entire CIRP within a time bound period by providing an additional maximum performance-based remuneration to them for the completion of the entire CIRP within 180 days as compared to no additional remuneration for the completion of the CIRP after the expiration of 330 days.

The amendment proposed with respect to the escrow account would resolve the issue where the CoC of the Corporate Debtors do not contribute to the running CIRP cost due to various reasons, thus slowing down, and in some cases halting, the entire resolution process. The said inclusion of regulation 34B would ensure that the IPs actually get their fees and that they have the finances to conduct the CIRP at all times. This would drastically reduce the number of litigation with respect to the payment of IP’s fees before AA and save the time wasted in pursuing such litigation.

The proposed amendments have certain drawbacks too. The fixed fee structure provides for the determination of the minimum fees based on the quantum of claims admitted. The duty to admit or reject the claim is that of the IP which, in some cases, might be affected inasmuch as some of the IPs may be encouraged to admit a larger number of claims.

Insofar as the provision relating to the performance linked fee is concerned, the same is otiose inasmuch as it provides that the performance linked fee is indicative in nature, and that the CoC may devise any other incentive structure, or it may decide not to give such incentive at all. By giving the CoC the authority to devise other incentive structures or to not give any incentive at all, the said provision would only be a toothless tiger, for in most of the cases the CoC will try to bring down such amount substantially if not completely wriggle out of paying it.

Further in addition to the aforesaid performance linked fee, to maximise the value of the assets of the Corporate Debtor, the IBBI may consider providing for value linked fee in cases where the IPs bring about resolution under which the realisable value of the Corporate Debtor is appreciably higher than the liquidation value of the Corporate Debtor. A percentage of the difference between the realisable value and the liquidation value may be paid to such IPs. This would ensure the value maximisation of a Corporate Debtor to its core.

Image Credits: Photo by FIN on Unsplash

By guaranteeing a minimum fixed amount to be paid to the IP based on the quantum of claims admitted, the proposed regulation ensures that the IPs as well as the CoC waste no time in fee-bargaining, thus creating more room for conducting the CIRP in a time bound manner.

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