Updated: September 22, 2021 12:58:04 pm
The National Company Law Appellate Tribunal (NCLAT) has raised doubts over the legality of success fees paid to resolution professionals upon the completion of a successful corporate resolution under the Insolvency and Bankruptcy Code (IBC).
Resolution Professionals (RPs) and agencies hired by them to assist in management of resolution proceedings in some cases charge success fees contingent on a successful resolution for the company as part of their payment structure instead of higher upfront monthly fees. According to experts these fees can range from 0.1 per cent to 1 per cent of total recoveries based on the assets of the corporate debtor.
“… we hold that ‘success fees’ which is more in the nature of contingency and speculative is not part of the provisions of the IBC and the Regulations and the same is not chargeable,” the NCLAT held in a judgment on Monday. The NCLAT upheld an order by the NCLT to disallow the payment of success fees to the Resolution Professional of Ariisto Developers Pvt Ltd (ADPL) noting particularly that even if success fee is to be chargeable, the introduction and approval of success fee at the time of approval as was done in by the creditors of ADPL was “improper and incorrect.”
Experts said that success fees offered a valuable payment option to creditors. Anoop Rawat, partner at Shardul Amarchand Mangaldas and Co said success fees were a great way in which creditors could get services of quality experts without having to pay very high monthly fees for a process which may drag on without a successful resolution for a long period of time.
Anoop Rawat, partner at law firm Shardul Amarchand Mangaldas and Co. said that success fees were a great way in which creditors could get the services of quality experts without having to pay very high monthly fees for a process that may drag on without a successful resolution for a long period of time.
“This order could potentially lead to some disputes in ongoing cases and even dissuade RPs/IP support agencies with valuable experience from participating in the resolution processes going forward. I hope going forward the applicability of the order is limited to the peculiar facts of the case,” Rawat added.
“A success fee is only another form of remuneration,” said Dinkar Venkatasubramanian, partner and national leader – turnaround and restructuring services, EY adding that the option for success fees “helps in situations where there aren’t enough cash flows during the CIRP and the RP can be fairly compensated via a success fee upon success resolution.”
Venkatasubramanian added that the use of success fees as a payment structure is not an issue given the objective of all stakeholders and that the RP is a successful resolution as long as such fees are transparently discussed and agreed upfront.
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