Section 5(13) of the Insolvency and Bankruptcy Code 2016 (hereinafter referred to as the ‘Code’) defines the insolvency resolution process cost as follows:

• Any amount of interim finance and costs incurred in raising such finance,
• The fees payable to any person acting as resolution professional,
• Any costs incurred by resolution professional in running the business of the corporate debtor as going concern,
• Any costs incurred at the expense of the Government to facilitate the insolvency resolution process,
• Any other cost as may be specified by the Insolvency and Bankruptcy Board of India shall be treated as “Corporate Insolvency Resolution Process Cost, In addition to the items listed in Section 5(13) of the Code, certain other items can be included in calculating the amount of “insolvency resolution process costs”;
• All amounts owed to suppliers which are deemed to part of insolvency resolution process costs,
• All expenses incurred by or on behalf of the corporate debtor, in running its business and operations as going concern during the insolvency resolution process period;
• All amounts due any person whose rights are prejudicially affected on account of the moratorium-imposed u/s 14(1) of the Code;
• All amounts accruing to the interim resolution professional which are deemed to be part of insolvency resolution professional costs; and
• All amounts accruing to the resolution professional

Who shall pay the costs of the Interim Resolution Professional (IRP)?

There is an ambiguity regarding reimbursement of all expenses incurred towards fees of the Insolvency Resolution Professional, costs for taking over the Corporate Debtor’s assets, cost for the public announcement, initial expenses for the first meeting of the Committee of Creditors, which are indeed part of the corporate insolvency resolution process cost and all of which are incurred before the Committee of Creditors is constituted.

The committee of creditors at its first meeting is to ratify the expenses incurred by the IRP to carry out its functions as an IRP until convening of the meeting of committee of creditors. The amount of expenses ratified by the committee of creditors is treated as insolvency resolution process costs. Such costs take precedence over all others in a resolution plan and also in the event a corporate debtor is liquidated.

Regulation 33 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulation, 2016 states that;

• The Applicant shall bear the expenses which shall be reimbursed by the committee to the extent it ratifies.
• The amount of expenses ratified by the committee shall be treated as insolvency resolution process costs.
• A resolution plan shall identify specific sources of funds that will be used to pay the insolvency resolution process costs and provide that the insolvency resolution process costs will be paid in priority to any other creditor

Clause 8 (b) of the IBBI circular bearing no IBBI/IP/013/2018 dated 12th June 2018 clarifies that insolvency resolution process cost shall not include any fee or other expenses beyond the amount approved by Committee of Creditors, where such approval is required.

Clause 8(d) of the circular states any expense incurred by a creditor, claimant, resolution applicant, promoter or member of the Board of Directors of the corporate debtor must be in relation to CIRP;

The Code does not provide for a remedy in the event the expenses incurred by the IRP are not ratified by the committee of creditors in full. In such event, the applicant at whose instance the insolvency petition was instituted and admitted is left to bear the costs and the applicant does not have the right to be reimbursed for such expenses from the assets of the corporate debtor or by the committee of creditors.

When a corporate debtor undergoes corporate insolvency resolution process, an IRP is immediately vested with the management of the affairs and he starts managing its operations as going concern. He has to comply with the applicable laws on behalf of the corporate debtor. The responsibilities of an IRP require professional excellence, dexterity and integrity and there is a need to be compensated for professional services commensurate to his / her ability, duties and responsibilities. The IRP also incurs expenses for the CIRP and/or managing the operations of the corporate debtor as going concern. Expenses may include making provisions for protection of assets of a Corporate Debtor or taking over the assets from a non-cooperating management of a Corporate Debtor, all of which ultimately is for the advantage of the creditors of the Corporate Debtor.

Section 208(2)(a) of the code provides the obligation of an insolvency professional to take reasonable care and diligence while performing his duties, including incurring expenses. He must, therefore ensure that not only fee payable to him is reasonable, but also other expenses incurred by him are reasonable. What is reasonable is context specific and not amenable to a precise definition. However, the Society of Insolvency Practitioners in India, in its statement of best practices on “payment of corporate insolvency resolution process costs” observes:

“Insolvency Professionals must ensure that the costs incurred are reasonable. To determine the reasonability of these costs, they should consider if the costs are:

• Directly related to the insolvency resolution process,
• Necessary for meeting the objectives of the insolvency resolution process, and the code,
• Proportional to the work required to be done and and the assets of the corporate debtor, and
• Determined on an arms’ length basis, in consonance with the requirements of integrity and independence”

Therefore, a clarification or provision is required to provide for circumstances where a genuine expense incurred by the IRP for CIRP is not ratified as insolvency resolution process cost by Committee of Creditors as neither the Code nor the IBBI provides for any remedy available to an applicant creditor if any expense made by creditor is not ratified as insolvency resolution process cost by the Committee of Creditors and a single applicant creditor is left to bear the burden even though the expenses were genuinely incurred for CIRP of a Corporate Debtor and the benefits of such expenses is ultimately enjoyed by all the creditors.