Insolvency professionals back success fee, warn against over-regulation
The success fee of resolution professionals (RPS) coming under the scanner has sent worrying signals in the industry concerned about over-regulation, which could be detrimental to the corporate insolvency resolution process.
“It is a proven method and is followed in other jurisdictions. Marketing of assets, quality of information memorandum requires good expertise and comes at a cost,” said Anoop Rawat, partner, Insolvency & Bankruptcy at Shardul Amarchand Mangaldas & Co.
Raising questions of the legality of the success fees, the national company appellate tribunal said in its recent order that the role of the RP has to be like a dispassionate person concerned with performance of his duties under the code for reasonable fees, and it cannot be result-oriented.
The NCLAT held that success fee is more in the nature of contingency and speculative it is not part of IBC provisions and is not chargeable.
“As a concept, payment of incentives to professionals is a well-established practice in more mature regimes for maximisation of value. This order may further deter quality experts from this profession and also increase fixed costs for creditors. As long as fees are agreed upfront by the COC, it should be left to their commercial wisdom, since every case is unique,” said Ashish Chhawchharia, partner and national head, restructuring advisory, Grant Thornton Bharat.
The appellate tribunal, however, added that even if the success fee was chargeable, “the manner in which it was pushed at the last minute during the time of approval of the Resolution Plan and the quantum are both improper and incorrect”.
This mention by NCLAT has given hope to RPS that the judgment was an aberration.
“Success fee is not a norm and happens in some cases. If success is assured, the COC may decide to give a nominal fixed fee. Cases where there is a doubt about assets — lenders may consider putting a success fee,” Rawat said.
IBC practitioners say if the RP’S fee is fixed, lenders may be incurring more cost, regardless of whether the corporate debtor is resolved.
The IBC regulations talk of a reasonable fee to be given to RPS without quantifying it and say it should be determined on an arm’s-length basis.
A June 2018 circular by the Insolvency and Bankruptcy Board of India (IBBI) mentions that an insolvency professional may use one or a combination of bases to charge a fee for carrying out different tasks. One of these is success or contingency fee, which is to be charged only to the extent that it is consistent with the requirements of integrity and independence of insolvency professionals.
The NCLAT, however, held that the list of such charges by IBBI is only illustrative.
Some RPS feel the success fees align the purpose of COC with the intention of RPS. However, does it take away the focus of RP from running the day-today affairs of the company? “That remains a statutory duty. In fact, the success fee improves the preservation of operation since the success fee is directly related to the value of business that depends on the quality of assets and operations,” Rawat added.
One IBC lawyer said if there was a success fee, RPS will be more vigilant. “The RP will work to keep the corporate debtor a going concern, preparing an impactful information memorandum by digging also the reasons as to what went wrong that the corporate debtor is in CIRP and what kind of resolution applicant will be able revive it,” said Daizy Chawla, senior partner, Singh & Associates.