Position of ‘Fees of the Resolution Professional’ under the Insolvency Resolution Process

By: Pulkit Khare


INTRODUCTION

Recently an issue with respect to the payment of remuneration for services rendered by an Interim Resolution Professional (hereinafter IRP) was witnessed by Insolvency Bankruptcy Board of India (hereinafter Board).  A Complaint was filed by a Resolution Professional (hereinafter RP) against an erstwhile IRP highlighting the illegal transfer of the ‘remuneration for the services of the IRP’ which were received by a Limited Liability Partnership on IRP’s behalf. The transfer of the remuneration was violating various provisions of the Insolvency and Bankruptcy Code, 2016 (hereinafter ‘Code’) and the matter was referred to the Disciplinary Committee of the Board under the IP regulations.

FACTS 

JEKPL Private Limited had filed an application under section 10 of the Code before NCLT for initiating corporate insolvency resolution process (hereinafter ‘CIRP’) proposing Mr. Dinkar T. Venkatasubramaniam’s name as an Insolvency Professional. NCLT admitted the case and appointed Mr. Venkatasubramaniam as the IRP.

The complaint

Later, the CoC resolved to replace the IRP and appoint another insolvency professional to act as the RP which was confirmed by NCLT. Mr. Mukesh Mohan (replaced RP) made a complaint against the erstwhile IRP that his professional fee was illegally paid to M/s E & Y LLP [hereinafter ‘LLP’, (appointed IRP was a Partner of the LLP)] raising concerns of avoiding personal income tax liability. He highlighted to the Board that by making the payment of IRP’s professional fee in the name of a third party (the LLP) Insolvency resolution process costs[1] were being appropriated for performing illegal transactions.

CoC members’ response

Subsequently, in a meeting of the CoC, members confirmed that no LLP had been appointed for any professional work relating to the CIRP of JEKPL Pvt Ltd and the payments were made merely on the instructions of the then IRP.

The replaced RP sought interference by the Board for taking necessary disciplinary action against the actions of the IRP. The said complaint along with the CoC members’ response to the issue was taken up by the Board and referred to the Disciplinary Committee (hereinafter ‘DC’). The DC issued Show Cause Notice to the IRP under Regulation 7(2) of IP regulations as to the violations of the Code.

The Situation

Pursuant to the Show Cause Notice, the IRP revealed to the DC that he had entered into a “Fee Acknowledgement Letter” with the LLP for performing services to assist him in connection with CIRP of the Payer. Under the said agreement, IRP had authorised the LLP to raise invoices on payer for his ‘fees and other expenses’ for work undertaken by him in connection with CIRP in respect of JEKPL Private Limited. This situation led to the raising of the fundamental issue of the case.

ISSUE RAISED

Whether an IRP/RP can authorise a firm/company (in which he/she is a partner/director) to raise invoices for his professional fee on his behalf?

FINDINGS BY THE DC

The present case can be understood by breaking the issue raised into three questions:

  • Whether an LLP can raise bills/ invoices for a partner’s professional fees?
  • Who can direct them for the settlement of the Bills of IRP?
  • Whether the role of Insolvency professional can be treated as an employment under an entity?

On the first question

Section 206 of the Code provides that only a person registered as an insolvency professional with the Board can render services as an insolvency professional under the Code. Section 23 read with Section 5(27) of the Code requires that an insolvency professional, who is appointed as an interim resolution professional or a resolution professional, shall conduct the entire corporate insolvency resolution process, including fast-track process. In terms of Section 5(13) of the Code, ‘the fees payable to any person acting as a resolution professional’ is included in ‘insolvency resolution process cost’.

In light of the provisions, it is settled under the Code that the ‘remuneration of an Insolvency professional’ is a part of the Insolvency resolution process cost and since only a person registered with the Board as per the IP regulations can be an IRP/RP conducting CIRP, any fees for the services rendered can only be raised by such professional. It was clarified that an LLP can’t enroll as Insolvency professional. The DC further clarified that since the LLP remains a separate and independent legal entity and it is the professional and not the LLP rendering service, raising fee invoices on behalf of services of IRP/RP will be in violation of the basic notion of ‘fee’.

Therefore, DC noted that the IRP had violated Section 5(13) and also the Code of Conduct under the IP regulations which speak of the integrity, independence and impartiality of the insolvency professional in his professional relationships. This holding by the Committee was primarily due to the authorisation done by the IRP for the collection of his fees through the LLP highlighting that the manner in which the fees was collected was through an action not forthright in professional conduct and not independent of external influences.

On the second question

Another issue was witnessed when the CoC exercised their powers conferred under Section 22 of the Code resolving to replace the IRP with the replaced RP. The replaced RP complained of the payments of the fees to have been made on the directions of the IRP which is in violation of the provisions of the Code.

As per the provisions of the Code, an IRP/RP exercises power of the Board of Directors of the Corporate Debtor during the CIRP. Upon being replaced, the erstwhile IRP can claim the bills/invoices for the services rendered during the time period he was an Insolvency professional. But the directions of the payment will have to be pre-approved by the CoC and can’t be under the powers of an IRP during CIRP. The CoC has to approve such transaction under Section 28(1)(e) for payments to be made for the remuneration of the services rendered which reads as:

Section 28. Approval of committee of creditors for certain actions

(1) Notwithstanding anything contained in any other law for the time being in force, the resolution professional, during the corporate insolvency resolution process, shall not take any of the following actions without the prior approval of the committee of creditors namely: –

………………

(e) give instructions to financial institutions maintaining accounts of the corporate debtor for a debit transaction from any such accounts in excess of the amount as may be decided by the committee of creditors in their meeting;

………………

(Emphasis Supplied)

Since in the present case, the invoices raised by the LLP on behalf of the IRP to JEKPL Private Limited were paid on the direction of the IRP during the CIRP, such stands to be a clear violation of the provision of the Code. Since an IRP/RP can’t debit any amount unless pre-approved by the CoC for a limit.

On the third question

Since the IRP was a partner of the LLP, he was bound by the LLP agreement[3] and he defended stating his Fee agreement was undertaken in pursuance to the LLP agreement which stipulated partners couldn’t earn fees outside their agreement.

After the complaint had proceeded further, on January 16, 2018, IBBI came out with a circular finally settling that “Insolvency professional shall render services for a fee which is a reasonable reflection of their work and such fees shall be paid to his bank account.” In pursuance to the circular it was defended by the IRP that since the Code along with its regulations was not prescriptive or restrictive on the position of partners of an LLP or Insolvency professional agency raising/ receiving fees earlier to the circular, he was in compliance with both the legislation the Code and LLP Act.

The DC set aside the defence raised and stated Section 238 of the Code overrides anything inconsistent with the provisions of the code and the raising of the fee by the LLP for the services rendered by IRP/RP can’t be sheltered under the provisions of LLP Act. It was held that since the invoices were raised by the LLP on behalf of the IRP, it was thereby treating the Insolvency professional as an employee of the LLP and was in violation of Section 208[4] of the Code.

CONCLUSION

The Disciplinary Committee took leniency while imposing a penalty, considering the Code is a new law and IRP was undertaking the CIRP process for the first time in the matter of JEKPL Private Limited, also that subsequent to the circular the IRP was following the provisions of the Code in letter and spirit. But the ambiguous position in regards the mode/process of payment of the fees as remuneration for the services of an Insolvency professional was finally settled by the Circular dated January 16, 2018, and the integrity, independence and impartiality of a Professional as envisaged in the Code of conduct for Insolvency Professionals was reinforced. In this light, the Insolvency professionals shall be aware of the various provisions of the Code lest they shall be held liable in violation of Section 208 and open to penal sanctions.

[1] The Insolvency and Bankruptcy Code 2016, s 5(13).

[2] Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations 2016, first sch.

[3] Limited Liability Partnership Act 2008, s 42(1) r/w sch I.

[4] Non-observance of reasonable care and diligence while performing his duties.


(Pulkit is currently a student at National University of Advanced Legal Studies, Kochi.)

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