PAYMENT OF PERFORMANCE LINKED INCENTIVE FEES TO RESOLUTION PROFESSIONAL

[Mr. M. GOVINDARAJAN]

The Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 provides for the payment of resolution process cost.  The fee of the Resolution Professional shall be added to this cost and which is to be paid at priority.  Regulation 34 B was inserted vide Notification No.IBBI/2022-2023/GN/REG091, dated 13.09.2022 that provides for the quantum of fees payable to the interim resolution professional/resolution professional.

The fee of the interim resolution professional or the resolution professional, appointed on or after 01.10.2022, shall not be less than the fee specified in clause 1 for the period specified in clause 2 of Schedule-II.  The applicant or the committee may decide to fix higher amount of fee for the reasons to be recorded, taking into consideration market factors such as size and scale of business operations of corporate debtor, business sector in which corporate debtor operates, level of operating economic activity of corporate debtor and complexity related to process.   The Regulation also provides that for the resolution plan approved by the committee on or after 01.10.2022, the committee may decide, in its discretion, to pay performance-linked incentive fee, not exceeding Rs. 5 crores in accordance with clause 3 and clause 4 of Schedule-II or may extend any other performance-linked incentive structure as it deems necessary.

Clause 3 of Schedule II provides where the resolution plan is submitted before the Adjudicating Authority within the stipulated period from the insolvency commencement date, performance linked incentive fees for timely resolution, may be paid to the resolution professional as detailed below-

• Less than or equal to 165 days - performance fee @ 1% of realizable value;
• More than 165 days but less than 270 days - performance fee @ 0.75% of realizable value;
• More than 270 days but less than 330 days - performance fee @ 0.50% of realizable value.

The performance-linked incentive fee for value maximization may be paid to the resolution professional at the rate of 1% of the amount by which the realizable value is higher than the liquidation value, after approval of the resolution plan by Adjudicating Authority on commencement of payment to creditors by the resolution applicant.

The issue to be discussed in this article is as to whether the performance fee claimed by the Resolution Professional may be rejected by the Adjudicating Authority. 

In RAVINDRA KUMAR GOYAL VERSUS COMMITTEE OF CREDITORS OF YASHASVI YARNS LIMITED, INSOLVENCY AND BANKRUTCY BOARD OF INDIA - 2023 (7) TMI 771 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL , PRINCIPAL BENCH , NEW DELHI, corporate insolvency resolution process was initiated against the corporate debtor Yasahavi Limited under section 7 of the Insolvency and Bankruptcy Code, 2016 before the Adjudicating Authority.  The Adjudicating Authority admitted the application on 26.04.2022 and appointed Shri Ravindra Kumar Goyal (the appellant) as interim resolution professional later he was confirmed as Resolution Professional.  The Adjudicating Authority extended the process by 90 days on 24.10.2022.   The resolution plan was approved by the Committee of Creditors on 01.12.2022.

The appellant claimed performance linked incentive along with his fees as detailed below-

• Rs.21,33,000/- as performance linked incentive for timely resolution; and
• Rs.11,64,256/- as performance linked incentive for value maximization.

The claim of the appellant  was considered by the Committee of Creditors on 01.12.2022 for timely resolution and value maximization.  The said fee was not approved by the Committee of Creditors with 91.55% of vote.   Therefore the appellant filed an application before the Adjudicating Authority with the following prayers-

• to pass appropriate order for payment of performance linked payment incentive fees to the Applicant as per Regulation 34B of the Regulations, inter alia, for successfully completing corporate insolvency resolution process and approval of resolution plan by Committee of Creditors  in 247 days (i.e., 26.04.2022 (admission order) to 29.12.2022 (voting on resolution plan completed), and for achieving value maximization; and/or
• such other and further reliefs(s) as may deem fit in the interest of justice.

The Adjudicating Authority dismissed the application filed by the appellant.  Therefore the appellant filed the present appeal before the National Company Law Appellate Tribunal (‘NCLAT’ for short) challenging the order of Adjudicating Authority.  The appellant submitted the following before the NCLAT-

• The Adjudicating Authority failed to consider the decision of the Committee of Creditors rejecting the claim which was not based on any reasonable basis.
• The power given in the Regulation to the Committee of Creditors to take a decision to pay performance linked incentive fee has to be on the basis of relevant criteria and material and cannot be arbitrarily taken.
• When the Resolution Professional was able to maximize the value of Corporate Debtor he was entitled to performance linked incentive fee.
• The decision of the Committee of Creditors refusing to accept the claim of the Appellant for performance linked incentive fee is not in accordance with the Regulation 34(B).

NCLAT considered the submissions made by the appellant.  NCLAT analyzed the provisions of Regulation 34B and Schedule II to the Regulations.  NCLAT observed that the Appellant in the Application has claimed incentive fee of Rs. 21,33,000/- as performance linked incentive fee for timely resolution and Rs. 11,64,256/- as performance linked incentive fee for value maximization.  The Committee of Creditors did not approve the performance fee of the appellant with 91.55% of voting. 

NCLAT analyzed Regulation 34(B) which provides that the Committee may decide, in its discretion to pay performance linked incentive fee.  This makes it clear that the provision is enabling provision which vests discretion in the Committee of Creditors to pay performance linked incentive fee. When Committee of Creditors is given discretionary power it implies a freedom of choice to the Committee of Creditors to consider the claim of performance fee. 

NCLAT observed that the decision of the Committee of Creditors is a business decision while approving the resolution plan including the payments which have to be made to the various creditors, stakeholders as well as to the Insolvency Professional Cost, which have to be deliberated and voted upon by the Committee of Creditors.  If performance linked incentive is paid to the appellant it shall be part of the Insolvency Resolution Cost which affects the entitlement of stakeholders when the Insolvency Resolution Cost is increased by adding performance linked incentive fee it is bound to reduce the payment which is to be received by the various stakeholders under the Resolution Plan, since the amount which is proposed in the Resolution Plan is a fixed amount.  The law is well settled that the commercial decision of the Committee of Creditors has to be given due credence and the Adjudicating Authority or the Appellate Authority is not to interfere in the commercial decision of the Committee of Creditors unless it does not fulfill the requirement of Section 30 of the Code.

Then NCLAT considered whether the Adjudicating Authority has the jurisdiction of judicial review on the commercial decision taken by the Committee of Creditors.  NCLAT relied on the judgment of Supreme Court in KALPRAJ DHARAMSHI & ANR. VERSUS KOTAK INVESTMENT ADVISORS LTD. & ANR. - 2021 (3) TMI 496 - SUPREME COURT in which the Supreme Court held that the limited judicial review which is available to the Adjudicating Authority and Appellate Authority can in no circumstances entitle to review the business decision arrived at by the majority of the Committee of Creditors.

NCLAT held that the decision taken by the Committee of Creditors in not approving the payment of performance linked incentive fee to the Appellant thus cannot be faulted and is in accordance  with the discretionary power vested with the Committee of Creditors under Regulation 34B. When claim is considered and not approved, Appellant has no right to claim that he was mandatorily entitled for payment of performance linked incentive fee.

NCLAT found no merits in the appeal and dismissed the appeal.