Rigorous Scrutiny for Resolution Professional Fee Claims in Insolvency Proceedings: Supreme Court Sets Precedent

Introduction

The case of Devarajan Raman (S) v. Bank Of India Limited (S) adjudicated by the Supreme Court of India on January 5, 2022, addresses pivotal issues surrounding the payment of fees and expenses incurred by Resolution Professionals (RPs) during the Insolvency Resolution Process (IRP) under the Insolvency and Bankruptcy Code, 2016 (IBC). The appellant, Devarajan Raman, served as the Interim Resolution Professional (IRP) for Poonam Drums and Containers Private Limited, while Bank of India Limited acted as the financial creditor. The crux of the dispute centered on the determination and payment of remuneration and costs claimed by the RP, leading to a legal tussle across various tribunals culminating in the Supreme Court's intervention.

Summary of the Judgment

The Supreme Court, presided over by Justice D.Y. Chandrachud and Justice A.S. Bopanna, heard the appeal filed by Devarajan Raman against the decision of the National Company Law Appellate Tribunal (NCLAT) dated July 30, 2020. The appellant contested the reduced fees (Rs. 5,00,000 plus GST) awarded by the National Company Law Tribunal (NCLT) for his services as the RP, arguing that his actual claims were significantly higher and supported by the technical and financial bid accepted by the financial creditor. The NCLAT had upheld the NCLT's decision, deeming the awarded fees reasonable. However, the Supreme Court found procedural lapses and lack of substantive consideration in the lower tribunals' decisions.

Ultimately, the Supreme Court set aside the orders of the NCLT and NCLAT, directing a remand back to the NCLT for a fresh and thorough adjudication of the fee and costs claim, emphasizing the necessity for meticulous examination of the claims in alignment with the IBC provisions and regulatory guidelines.

Analysis

Precedents Cited

The judgment prominently references the case of Alok Kaushik v. Bhuvaneshwari Ramanathan (2021) 5 SCC 787. In this precedent, the Supreme Court elucidated the jurisdictional boundaries under Section 60(5)(c) of the IBC, affirming that adjudicating authorities possess the requisite power to determine payments to professionals involved in the CIRP, even if the process is subsequently set aside. This case underscored the imperative for tribunals to exercise due diligence in assessing the validity and reasonableness of professional fees, ensuring alignment with the regulatory framework.

By invoking Alok Kaushik, the Supreme Court in the present case reinforced the necessity for precise adherence to procedural propriety in fee determination, emphasizing that mere acceptance by a creditor does not absolve the tribunals from their duty to scrutinize claims comprehensively.

Legal Reasoning

The Supreme Court's legal reasoning hinged on the principle that the adjudicating authority under the IBC must exercise its jurisdiction with thorough consideration of the claims presented. The Court identified that both the NCLT and NCLAT failed to adequately assess the appellant's claims, merely defaulting to an arbitrary fee determination without substantiating the rationale behind deeming Rs. 5,00,000 plus GST as reasonable. This oversight constitutes an abdication of judicial responsibility, undermining the procedural safeguards envisaged under the IBC.

Furthermore, the Court highlighted the significance of Regulation 34 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, which delineates the inclusions and responsibilities concerning RP costs. The Supreme Court stressed that the Resolution Professional's fees must reflect the actual work undertaken and be validated against the technical and financial bid submitted during appointment. The Court criticized the lower tribunals for ignoring the agreement between the appellant and the financial creditor, as evidenced by correspondence and annexed documents, thereby failing to apply mind to the factual matrix of the case.

Impact

This judgment sets a critical precedent for future insolvency proceedings in India. It underscores the judiciary's commitment to upholding procedural integrity and ensuring that Resolution Professionals are compensated fairly based on verifiable and reasonable claims. The remand to the NCLT mandates a reevaluation of fee assessments, compelling tribunals to adopt a more meticulous and evidence-based approach in determining professional remuneration. This decision is poised to enhance transparency and accountability in the insolvency resolution process, fostering a more equitable environment for all stakeholders involved.

Moreover, the emphasis on adhering to regulatory guidelines reinforces the framework established by the IBC, signaling to financial creditors and Resolution Professionals alike the importance of compliance and substantiation in their financial dealings within CIRPs.

Complex Concepts Simplified

Insolvency Resolution Process (IRP)

The Insolvency Resolution Process (IRP) is a structured procedure under the Insolvency and Bankruptcy Code, 2016, aimed at rehabilitating insolvent companies. It involves appointing an Insolvency Professional (IP) to manage the process, which includes restructuring the company's debts or, if necessary, liquidating its assets to repay creditors.

Resolution Professional (RP)

A Resolution Professional is a licensed individual responsible for overseeing the IRP. The RP's duties encompass managing the company's affairs, resolving disputes among stakeholders, and formulating a resolution plan to address the company's insolvency.

Committee of Creditors (CoC)

The Committee of Creditors comprises all financial creditors of the insolvent corporate entity. The CoC plays a pivotal role in approving decisions related to the IRP, including the appointment of the RP and the assessment of costs and fees associated with the insolvency process.

Section 60(5)(c) of the IBC

This section grants adjudicating authorities the power to determine the amount payable to professionals involved in the IRP, ensuring that their remuneration is justified and in accordance with the regulatory provisions.

Conclusion

The Supreme Court's decision in Devarajan Raman v. Bank of India Limited reinforces the necessity for judicial scrutiny and adherence to procedural propriety in determining Resolution Professionals' fees within insolvency proceedings. By setting aside the lower tribunals' arbitrary fee reduction and remanding the case for a detailed analysis, the Court has underscored the importance of fairness, transparency, and regulatory compliance in the IBC framework. This judgment not only safeguards the interests of professionals diligently working within the IRP but also fortifies the integrity of the insolvency resolution mechanism, ensuring that it remains robust and equitable for all parties involved.