Interest fee

IBBI Prescribes Fee Structure for Insolvency Practitioners

Under the Insolvency and Bankruptcy Code 2016 (the Code), the resolution professional or interim resolution professional (collectively referred to as RP) is vested with the responsibility of managing the business of the company debtor as a going concern and to conduct the process of resolving the insolvency of the company. (CIRP). The PR must also ensure that the CIRP is conducted on time and that the value of the debtor company’s assets is maximized during the process.

The Insolvency and Bankruptcy of India (Insolvency Resolution Process for Corporate Bodies) Regulations 2016 (Regulations) stipulates that the expenses incurred by the RP are determined by the person applying for CIRP ( claimant) or the creditors’ committee (CoC) which is the decision-making body during the CIRP. The only limited guidance available to the applicant or the CoC comes from circulars issued under the Code which state that the fees paid to the PR must be a “reasonable reflection” of the work. Insolvency courts have repeatedly observed that it is necessary to provide guidelines for setting a fee structure for the RP. In light of the same, see Circular dated 13th September 2022 (available here), Indian Board of Insolvency and Bankruptcy (IBBI) has amended the Regulations to provide fair compensation to the RP for the exercise of his functions. In this update, we have provided a summary of the Amended Settlement.

Minimum fees

The amendment prescribed a fee structure for determining the fees payable to the PR. A minimum fee per month has been set according to the quantum of claims accepted by the RP, as indicated in the table below:

The applicant or the CoC may set higher fees for the RP based on factors such as the size and scale of the debtor company’s business and the complexity of the CIRP. It should be noted that the minimum flat rate is applicable until the occurrence of the first of the following events:

  • RP applying to the insolvency court for withdrawal of the CIRP;
  • RP applying to the insolvency court for approval of the resolution plan;
  • RP asks the insolvency court to liquidate the debtor company; Where
  • An insolvency court order closing the CIRP.

Performance-based incentive fee

The Regulations were amended to provide performance-based incentive compensation to the RP after the resolution plan was approved by the insolvency courts on the following two factors:

(a) Quick resolution: the Regulation provides that a percentage of the realizable value of the assets varying from 0.5% to 1% can be paid to the PR in the event of resolution within the deadlines of the debtor company; and

(b) Value Maximization: the Regulation provides that an incentive commission of 1% of the difference between the realizable value and the liquidation value of the assets of the debtor legal entity may be paid to the PR.

It should be noted that the maximum amount that can be granted as a performance incentive to the PR is INR 50 million. In addition, the fees paid will be part of the cost of the CIRP.

Our thoughts

To ensure that a PR performs their duties with integrity and efficiency, fair and adequate compensation is necessary. Given the excessive delays in the CIRP, the minimum and performance-related fees may incentivize the PR to act quickly in the interest of the debtor company and the CoC. To this extent, creditors may also be willing to accept a haircut for rapid CIRP resolution. Another valuable feature of the Rules is that they do not prescribe a standardized fee formula and instead give the CoC the discretion to determine the PR fees after taking into account the complexity of the resolution process.

However, it should be noted that PR is not solely responsible for the relaunch of businesses or the expeditious closure of the CIRP. The amendment may encourage PRs to make reasoned decisions during CIRP instead of referring them to insolvency courts. However, the CIRP lead time can only be reduced if decisions are made quickly by the PRs and the relevant CoC. Only matters of significant importance which are not sufficiently covered by law may be brought before the insolvency courts by the RP. This can ease the burden on insolvency courts and speed up the settlement process for corporate debtors.