BY SANYAM GUPTA, FOURTH YEAR AT NLIU, BHOPAL

Introduction

Since the advent of the Insolvency and Bankruptcy Code (“the Code”) in 2016, the Code has been evolving through various dictums given by the judiciary and regulations by the Insolvency and Bankruptcy Board of India (“the Board”) to ensure that it works in tandem with the current economic situation of the nation. These regulators ensure that the main spirit of the Code, i.e., value maximization and speedy resolution in a ‘creditor-in-control model’ is upheld and its scope is enhanced. In order to maximize the payment of the debt to the relevant stakeholders, it becomes incumbent to minimize the Insolvency Resolution Process Cost (“IRPC”). The remuneration of the Insolvency Professional (“IP”) forms a relevant portion of the IRPC; therefore, it must be regulated.

The IP plays a crucial role in the Corporate Insolvency Resolution Process (“CIRP”). He not only acts as the catalyst facilitating resolution but also runs the Corporate Debtor (“CD”) during the CIRP. It is his expertise that ensures the successful and profitable resolution of the CD. In the case of Essar Steel, the CD reported a profit gain of 5% during the CIRP and reported the highest production as well, under the supervision of the Resolution Professional (“RP”), which further lead to most Financial Creditors realizing 100% of their principal outstanding and 90% of their claim. The credit for this can surely be given to the RP running the CD.

The Adjudicating Authority (“AA”) has on numerous occasions reiterated that there should be some regulations w.r.t. the remuneration of the IPs.  Starting from the case of Madhucon Projects Limited, wherein the fees of the Interim Resolution Professional (“IRP”) were 5 crores by the first meeting of the Committee of Creditors, while the total amount of debt was 4.45 crores; to the case of Variscon Engineering Services Pvt. Ltd. Vs. Pier-One Constructions Pvt. Ltd. wherein the AA specifically pointed out the need for regulations governing fees of the IPs. There are also instances wherein the IP quotes fewer fees in order to get the CIRP assigned to them, following which they add substantial miscellaneous expenses through advisors/support staff to inflate their dues. All this leads to further unnecessary bleeding of the CD. Thus, regulations and guidelines to regulate the remuneration of the IP become quintessential.

The Board introduced such regulations and guidelines by uploading a discussion paper titled, “Discussion Paper on Remuneration of an Insolvency Professional” which discusses various aspects of how the Board plans on regulating the remunerations of the IPs. The contents of this paper further went on to amend the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“IRP Regulations”), to provide incentives to meet the spirit of the code i.e. timely resolution and value maximization in addition to providing for a base pay for IRPs and IPs. The author of this article has criticized this approach of the Board of setting a base pay, while not regulating the extensive expenses charged by IPs that lead to unnecessary bleeding of the CD. The author further goes on to analyze the ‘ratio of cost of the process to recovery rate’ of insolvency proceedings in India, highlights the problems in the amendment, and provides solutions to improve the same.   

The Regulation

The Board, vide notification No. IBBI/2022-23/GN/REG091 published the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Third Amendment) Regulations, 2022 (“Amendment”) on September 13, 2022. By this notification, the Board has amended IRP Regulations, in order to facilitate the regulation on the remuneration of IRPs and IPs, appointed on or after 1^st October 2022.  The Board has followed a two-pronged structure, wherein a minimum/base pay is set up on the basis of the quantum of claims admitted, followed by incentivizing the fees based on performance towards; i) timely resolution and ii) value maximization. The minimum pay scale will be as follows:

Quantum of Claims Admitted	Minimum Fee (Rs. Lakh) per month
(i) <= Rs. 50 crore	1.50
(ii) > Rs.50 crore < = Rs.100 crore	2.00
(iii) > Rs.100 crore < = Rs.500 crore	2.50
(iv) > Rs.500 crore < = Rs.1,000 crore	3.00
(v) > Rs.1,000 crore < = Rs.2,500 crore	3.50
(vi) > Rs.2,500 crore < = Rs.10,000 crore	5.00
(vii) > Rs.10,000 crore	7.50

Since time efficiency and value maximizations are the essence of the Code and the IPs play a major role in its realization, the board has added that apart from the minimum or floor fees, the IPs would be incentivized on the basis of i) resolution of CD in the prescribed timelines as given in the Code, and ii) achieving value maximization of CD. Thus, the Amendment provides a performance-linked fee structure for the timely completion of CIRP, wherein a certain percentage of actual realizable value shall be given to the IP as an incentive based on the time taken to resolve the CD. This ranges from 1% for resolution in less than or equal to 180 days to 0% for resolution after 330 days. Furthermore, a variable fee of 1% of the positive difference between the actual realizable value and fair value will be paid as an incentive to IPs who work towards value maximization. These sums must not exceed Rs. 5 crores and must be approved by the CoC. 

The Amendment in the IRP Regulations ensures that all IPs are paid adequately and are incentivized for following the Code to its essence. While the same is beneficial for the creditors, it is detrimental and might lead to unnecessary bleeding of the CD.

Critique

The Bankruptcy Law Reforms Committee in its report mentioned the prodigal nature of any constraint to be imposed on the fees of the RP. It further mentions that due to a competitive market for IPs (where the lowest bidder gets the CIRP), the fees to manage the insolvency resolution process will converge to the fair market value for the size of the entity involved.

Even though the board has ensured that the IPs be paid a minimum (floor) payment for their services based on the quantum of claims, however, as stated earlier, during the process of appointment of the RP, the IPs quote fewer fees in order to get the CIRP assigned to them, following which they add substantial miscellaneous expenses through advisors/support staff to inflate their dues. Regulation 34 of the IRP Regulations provides for the fees and expenses incurred by the RP which shall be fixed by the CoC and shall be a part of IRPC. While fixing this cost, the RP indicates the approximate estimation of the expenses that would be incurred by them during the CIRP. It shall be assumed that since the RP is a professional, he would quote expenses with a reasonable understanding of the general expenses that would be incurred during CIRP. The RP’s exorbitant expenses should thus be regulated to avoid unnecessary bleeding of the CD and wrongful gains to the RP. The board should fix a maximum criterion (like 250% of the approximate cost stated) in order to ensure that the RP does not get illicit benefits. In cases wherein the RP crosses this statutory limit, they should bear these over-the-top expenses on their own, as a penalty.

The Board has also failed to address the issue of exorbitant fees charged by the IPs during the CIRP. The following is a list of countries along with their recovery rate during insolvency proceedings (cents on every dollar) as well as their cost of process on the basis of the percentage of the estate of the debtor as per data given in the Doing Business Data published by the World Bank in 2019 :

Name of the Country	Recovery rate (cents on every dollar)	Cost of the process (% of estate)
India	26.5	9%
United Kingdom	85.3	6%
United States of America	81.8	10%
Norway	92	1%
Sweden	78	9%
Slovenia	88.7	4%
Singapore	88.8	4%

It is quite evident that India has one of the highest costs of the process as well as one of the lowest recovery rates when it comes to insolvency regimes in the world. Thus, it becomes essential for the Board to regulate the IRPC as well as set a maximum limit on the remunerations filed by the RP, similar to the laws in Canada and the USA. The Board may propose different maximum limits on remuneration for different valuations of claims, similarly as it has done for minimum (floor) pay. Further, these limits can be relaxed for a speedy resolution and value maximization, as has been proposed by the Board.

The Board has also failed in providing a revision mechanism for these minimum (floor) pay scales as well as for the rate of incentivization. For the same purpose, the board may constitute a committee that may meet on an annual or bi-annual basis. The committee should analyze the prevailing market situation and the fair market value of the fees of IPs for various categories of CIRPs based on the quantum of claims, following which the minimum (floor) pay scales as well as the maximum pay scales of the IPs shall be revised by this committee. 

Conclusion

The Amendment is merely a start to regulating the fees of IPs and subsequently the IRPC, but it is a long road ahead. While the IP plays a crucial role in the running of CD during the CIRP, they also have to ensure that the CIRP is completed in a timely manner with the aim of value maximization. The Amendment has tried to ensure that the IPs get a minimum pay as well as an incentivization towards the realization of the core values of IBC. This was done in order to reduce the burden of litigation between parties and on the AA. Yet, the Board should consider practical scenarios which lead to the bleeding of CD and hamper the spirit of the code and its core values and ensure rules and regulations such as regulating the maximum fees charged by the IPs, penalty for charging exorbitant expenses after quoting minimal expenses while getting the CIRP assigned to them, ensuring that these minimum (floor) pay rates and maximum rates are revised in a timely manner to be in tandem with the prevailing market rates are put in place to avoid such scenarios.