The Discussion Paper on Remuneration of an Insolvency Professional, dated 9 June 2022, issued by the Insolvency and Bankruptcy Board of India, is a welcome step.
Remuneration and expenditure consume a significant chunk of time during meetings of the Committee of Creditors. After that, Resolution Professionals need to follow up for payment and reimbursement. Every Resolution Professional spent a good portion out of his pocket without a chance for interest payment. Higher the number of members in the Committee of Creditors, there are lesser chances of timely payment or reimbursement. The Discussion Paper rightly mentions litigations for professional fee payment and recovery of expense amount.
Since the first direction issued by the Hon’ble Adjudicating Authority in March 2018 for framing necessary regulations or guidelines regarding fixation of fees and resolution cost, the IBBI waited long for market maturity to settle this issue. Sadly, we lost the well-intentioned time due to the immaturity of the market.
The most unfortunate situation for Resolution Professional is a frequent request for postponement of the resolution for Professional fee at every meeting until the Resolution Professional exhausts most of his available (ideally less than 2500) working hours in the resolution process and loses negotiation power.
Now, we will discuss the proposed amendment.
[Proposed Regulation 34A(1)]: “The applicant, the Adjudicating Authority and the committee shall fix the fee to be paid to interim resolution professional or the resolution professional, as the case may be, under regulation 33 and 34, respectively, in accordance with the Schedule II.”
The reference of the Committee of Creditors is not required here. The Committee shall ratify and/or fix the remuneration under Proposed Regulation 34A(2).
I propose:
“The the applicant or the Adjudicating Authority shall fix or where the applicant or the Adjudicating Authority did not fix a fee, the minimum fee to be paid to the interim resolution professional or the resolution professional, as the case may be, under regulation 33, shall be in accordance with the Schedule II.”
[Proposed Regulation 34A(2)]: “The committee may ratify an amount higher than the amount fixed under clause (1) of Schedule II, as may be necessary.”
The Committee has two options. It may either ratify the fee fixed by the applicant or the Adjudicating Authority or itself fix the professional fee. The term “ratify” in the proposed draft does not convey the meaning “to fix a fee”. Here, the Committee should have the power to ratify or fix a fee.
I propose:
“The committee may ratify the fee fixed under sub-regulation (1) or may fix a fee to be paid to the interim resolution professional or the resolution professional, as the case may be, under regulation 34, , in accordance with the Schedule II.”
[Proposed Regulation 34A(3)]: An insolvency professional shall submit a statement towards estimate of his fee and fee of the resolution professional in the following manner:
(a) to the applicant immediately on his appointment as an interim resolution professional;
(b) to the Committee at its first meeting and thereafter till the appointment of the resolution professional; or
(c) to the Committee in the first meeting conducted immediately after his appointment as resolution professional.”
I understand this regulation firstly with plain reading and secondly reading with the discussion paper.
How can an Interim Resolution Professional submit a statement towards an estimate of the fee of yet to be appointed the Resolution Professional? At most, he can submit a statement of assuming his own appointment. The reasoning for this proposal is not clear. Usually, Insolvency Professionals give a well-drafted proposal estimating fee and other major expenses with their consent to act IRP or RP. There is no point in having it a recurring exercise.
If I understand it correctly, I propose:
“An insolvency professional shall submit a statement towards estimate of his fee in the following manner:
(a) to the applicant immediately on his appointment as an interim resolution professional;
(b) to the Committee at its first meeting after his appointment as an interim resolution professional; or
(c) to the Committee in the first meeting conducted immediately after his appointment as resolution professional.”
If I refer to the discussion paper again on this point, it talks about an estimate of fees and expenditure on the hiring of other professional and support providers. In such a case, I propose:
“An insolvency professional shall submit a statement towards an estimate of expenditure including his fee in the following manner:
(a) to the applicant immediately on his appointment as an interim resolution professional;
(b) to the Committee at its first meeting after his appointment as an interim resolution professional;
(c) to the Committee in the first meeting conducted immediately after his appointment as resolution professional; and
(d) to the Committee in the next meeting, where there is an upward change in the estimate of expenditure.”
Schedule II
The Discussion Paper proposed a three-tier structure:
- The fee of IP in CIRP –Fixed Fee (Minimum) Per Month;
- Performance Linked fee structure for timely completion of CIRP; and
- Performance-linked fee structure relating to Value Maximization
I have no view on the Minimum fee structure and welcome it as a good start.
The discussion paper suggests performance-linked fee structure for timely completion is a mandatory feature. However, Clause (2) of the Draft Schedule II makes this incentive optional by using the term “may”. I suggest the replacement term “may” with “shall”. This incentive is quite hard to earn but a good morale booster.
The discussion paper suggests an optional performance-linked fee structure relating to Value Maximization. I fear Insolvency Professionals will look for big value corporate debtors with good realization chances. However, best efforts should be incentivized and welcomed. I understand the Committee of Creditors may be the best judge on this.
The amount payable under clauses (2) and (3) is proposed to be capped at ₹ 5 Crore. I could not visualize much difference with or without this cap except for a few high-stake cases.
Proposed Regulation 34B(1): An insolvency professional shall create an escrow account in the name of corporate debtor, in respect of his fee, and fee for the resolution professional, immediately on his appointment as an interim resolution professional.
I welcome the intention. However, there is a practical difficulty in complying with the Draft Regulation. If the Insolvency Professional opens an escrow account in the name of the Corporate Debtor, Banks asks PAN, Address Proof and Incorporation Documents of the Corporate Debtor. Most of the time, one or more of these documents are not readily available due to non-cooperation. IBBI and RBI should discuss waiver of these documentary requirements, and the order of initiation of corporate insolvency may suffice to open this account. Alternatively, the escrow account may be in the name of Interim Resolution Professional. On the appointment of any other person as Resolution Professional, the balance amount should be transferred to the escrow account of the Resolution Professional so appointed.
Secondly, the escrow account is not only for a fee but for expenses also.
I am not suggesting any change in the draft regarding the name of the account due to a lack of my knowledge and will leave it for future developments. Except for this, I propose the following changes:
An insolvency professional shall create an escrow account, in respect of the estimate of expenditure, including Interim Resolution Professional and Resolution Professional, immediately on his appointment as an interim resolution professional.
Proposed Regulation 34B(2): The applicant or the Committee, as the case may be, shall deposit in the escrow account, or in alternate arrange for interim finance for depositing in the escrow account, the amount fixed under regulation 34A within 72 hours of submission of the statement by the insolvency professional.
I have nothing to discuss or suggest on this point.
Proposed Regulation 34B(3): The interim resolution professional or the resolution professional shall be eligible to withdraw the amount deposited in the escrow account towards his fee and shall provide the details of withdrawals to the Committee in the statement prepared under regulation 34A.
I again submit the escrow account is not only for a fee but for expenses also.
I propose:
The interim resolution professional or the resolution professional shall be eligible to withdraw the amount deposited in the escrow account towards his monthly fee approved by the Committee of Creditors and payment of other expenditures may be made as and when ratified by the Committee of Creditors.
Proposed Regulation 34B(4): The remaining amount, if any, in the escrow account shall be released upon approval of resolution plan under section 31 or passing of an order for liquidation of corporate debtor under section 33.”
I have nothing to discuss or suggest on this point.
I am publishing this on the blog for discussion purposes. I will submit my final thought with IBBI one or two days before the last date.
Disclaimer: The writer is an Insolvency Professional, and his interest may impact the outcome of this discussion.
Aishwarya Mohan Gahrana, Company Secretary and Insolvency Professional
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