In the field of Insolvency and Bankruptcy Code, 2016 (IBC), the term “Success Fee” has been making quite a stir. Success Fee in general would imply any Claim by a Professional calculated or payable based upon the completion of a major transaction, such as the confirmation of the Plan or the sale of all or substantially all the assets of a Debtor. Success Fees nowhere includes hourly fees, monthly allowances or other periodic fees, based upon time actually spent by a Professional rendering I services, which is generally fixed at the initiation of taking up an assignment.

It has been observed that success fee is quite popular way of additional payment among Resolution Professional (RP). The percentage of success fee charged is around 0.1 to 2 percent of the Resolution Plan, which has been approved by the members of the CoC. As a result, such a process, which appears quite lucrative, cast major doubt on the transparency, fairness and ethical manner, in which the Resolution Process is required to be carried out. Interestingly, the term “Success fee” does not find any mention in the provisions of IBC and the Rules and Regulations.

The charging of so called “Success Fees” raises several issue, amongst which the prominent one being that any additional amount, paid over and above the amount which the Resolution Professional is paid as his “fees”, creates major dent in the pocket of the Creditors. It has repeatedly been reiterated that the role of the RP is limited to act as a bridge between the stressed Corporate Debtor and its creditors, so as to ensure that it remains as a going concern and resolution is achieved. Therefore, the main objective of the Resolution Professional is to achieve resolution of the stressed Corporate Debtor, which results in bringing about new management and infusion of fresh equity in the Corporate Debtor, thereby resulting in a fresh start. Further, approval of success fees by the CoC is not in consistent with the requirements of integrity and the independence of Insolvency Professionals, which the Code provides for. It has also been reiterated in the judgments of the Hon’ble Supreme Court that the Resolution Professional is governed within the legislative framework of IBC and therefore, carrying out an act, outside the scope, cannot be deemed to be approved under the gambit of “exercise of commercial decision by COC”

In order to settle the growing practise, the Hon’ble NCLAT, in the matter of Mr. Jayesh N. Sanghrajka, Erstwhile R.P. of Ariisto Developers Pvt. Ltd Versus The Monitoring Agency nominated by the Committee of Creditors of Ariisto Developers Pvt. Ltd (Ariisto Developers), Company Appeal (AT) (Insolvency) No. 392 of 2021 has dealt with the issue of Success Fees.

In the case of Ariisto Developers, NCLT, Mumbai Bench while approving the Resolution Plan had disagreed with the Committee of Creditors, which had approved ‘success fees’ to the tune of Rs 3 Crores. The order was challenged by the Resolution Professional before the Hon’ble NCLAT, wherein the Hon’ble Bench made key observation.

It was observed by the Hon’ble NCLAT that the IBBI has in its circular, directed the Insolvency Professionals that the fees payable to them should be reasonable, directly related to and necessary for the CIRP, should be determined on an arms’ length basis, in consonance with the requirements of integrity and independence and should not include fee or other expenses not directly related to CIRP. Therefore, any amount payable to the RP for carrying out its role and responsibilities, should fall within the ambit of the framework laid down in the circular. Subsequently, Section 208(2) (a) of the IBC mandates that RP is required to take reasonable care and diligence while performing his duties, including incurring expenses. Regulation 34 of the CIRP Regulation permits the CoC to fix the “expenses” to be incurred on and by the RP. The term “expenses” also include the ‘fee’ to be paid to the Resolution Professional.

The Hon’ble Bench, while passing the judgment, compared charging Success Fees by the RP as taking a reward or gift. Further, it observed that when success fee is fixed at the initial stage of the CIRP proceedings, it would interfere with the independence/functioning of Resolution Professional and affect the stakeholders of the Corporate Debtor, as their share of amount gets further reduced. However, if success fee is claimed when the Resolution Plan is approved, it would be in the nature of a gift or reward. Thus, charging “Success fee” is contrary to what IBBI has provided in its Circular dated 16.01.2018, which clarifies that Insolvency Professional shall render services for a fee which is a reasonable reflection of his work. The same being so as the fee has to be related to acts solely performed or to be performed for furtherance of the CIRP, for dues or expenses actually incurred. It has to be directly related to acts done or expenses incurred which are necessary for the CIRP.

It was noted by the Hon’ble NCLAT that the Code or the Regulations as on date, does not provide fees on speculative basis and thus, does not make any such ‘success fee’ or ‘contingency fee’ payable. Thus, it cannot be said that charging of success fee is within the provisions of the Code or the Regulations. Moreover, the Insolvency Professionals are appointed with the role of ensuring that Resolution of the Stressed Debtor is achieved and for which their fees is also fixed. It is also ensured that fees payable to IRP/ RP are part of CIRP costs so as to safeguard their interest. Section 30(2) of IBC provides that the Resolution Plan should provide for payment of Insolvency Resolution Process costs in a manner specified by the Board in priority to the payment of other debts of the Corporate Debtor.

When the fees is payable on the basis of the work performed or to be performed, the reasonability or otherwise would be justiciable. It was held that by interjecting substantial amount in the name of success fees for the Resolution Professional and making it part of CIRP costs at the time of approval of the Resolution Plan does not make the same a commercial decision of the CoC. Interestingly it was never the intent of the Legislature to provide Success Fees to the RP. CIPR cost clearly includes only those expenses which is incurred for carrying out the resolution of the Corporate Debtor and the fees charged for the work done. It is difficult to fathom as to how success fees can be included with the ambit of CIRP cost.

Another interesting observation which fell from the Hon’ble Bench was that the Resolution Applicant and other stakeholders, who are not part of CoC, would be unaware about what is being hived off from the beneficiaries of the Resolution Plan. Therefore, the Hon’ble Bench has rightly observed that Success Fees, which is more in the nature of contingency and speculative is not part of the provisions of the IBC and the Regulations and the same is not chargeable.

It can be stated that the objective of the IBC is to restructure and resolve insolvency of corporate persons, partnership firms and individuals promptly for leveraging the maximum value of assets of such persons. Thus, it should not encourage any such acts, which results in personal gain of individuals, who are in fact given the utmost responsibility of ensuing that the objective of IBC is achieved. They should not be permitted to take any undue leverage at the cost of ensuring resolution, which puts at stake the interest of the Creditors/stakeholders of the Corporate Debtor. Further, quite difficult to fathom but success Fees, as rightly held, is nothing more than a reward or gift, given for carrying out their duties in terms of the provisions of IBC. When the RP is already being paid in priority for his service rendered and expenses incurred, it is difficult to understand as to why an additional fees needs to be paid. It is against the very structure and objective of IBC, which nowhere seeks to reward and Insolvency Professional for ensuring resolution of the stressed debtor.

The Hon’ble NCLAT accordingly dismissed the appeal preferred by the Resolution Professional.