The Insolvency and Bankruptcy Board of India issued a Circular on 28th September, 2023 to provide Clarification w.r.t. Liquidators’ fee under clause (b) of sub-regulation (2) of Regulation 4 of IBBI (Liquidation Process) Regulations, 2016.
Regulation 4 of the IBBI (Liquidation Process) Regulations, 2016 (“Liquidation Regulations”) provides for Liquidator’s fee. Sub-regulation (1) and (1A) provide that the fee payable to the liquidator be decided by the Committee of Creditors (CoC) or Stakeholders’ Consultation Committee (SCC), as the case may be. If liquidators’ fee is not fixed under sub-regulation (1) and (1A), clause (b) of sub-regulation (2) of Regulation 4 provides that the liquidator shall be entitled to a fee as a percentage of the amount realised net of other liquidation costs, and of the amount distributed, for the balance period of liquidation, as mentioned therein.
The following clarifications were issued-
2.1 Amount realised: Regulation 4(2)(b) provides that the fee shall be “as a percentage of the amount realised net of other liquidation costs, and of the amount distributed, for the balance period of liquidation….”
Clarification: “Amount realised” shall mean amount realised from assets other than liquid assets such as cash and bank balance including term deposit, mutual fund, quoted share available on start of the process after exploring compromise and arrangement, if any.
2.2 Other liquidation costs:
Clarification: The “other liquidation cost” in regulation 4(2)(b) shall mean liquidation cost paid in priority under section 53(1)(a), after excluding the liquidator’s fee.
2.3 Amount distributed to stakeholders:
Clarification: “Amount distributed to stakeholders” shall mean distributions made to the stakeholders, after deducting CIRP and liquidation cost.
2.4 Amount of Realisation /Distribution:
Clarification: “Amount of Realisation /Distribution” shall mean cumulative value of amount realised/ distributed which is to be bifurcated in various slabs as per column 1 and thereafter the same is to be bifurcated into realisation/ distribution in various periods of time and then corresponding fee rate from the table is to be taken.
2.5 Period for calculation of fee
It has been observed that the liquidators are suo-moto excluding various time periods such as stay by court on sale of a particular asset, delay in relinquishment by secured creditor, for the purpose of calculating the fee. However, since the liquidator works under the overall guidance of the Adjudicating Authority, any such exclusion should have stamp of judicial authority and should be only for the asset for which such exclusion has been granted.
Clarification: Exclusion for purpose of fee calculation is to be allowed only when the same has been explicitly provided by the Hon’ble NCLT/ NCLAT or any other court of law and will operate only for the asset which could not have been realised during the excluded period.
The Hon’ble High Court held that Paragraph 2.1 and Paragraph 2.5 of the Impugned Circular are hereby struck down as being ultra vires the LP Regulations and the IBC. They introduce substantive amendments to statutory legislation even while purporting to be mere clarifications. The changes they seek to bring in are not even covered by the IBC and the LP Regulations. Due process by way of compliance with the statutory requirements of the Law Making Regulations is missing. Therefore, in the course of conducting the quasi-judicial proceedings, the IBBI is prohibited from placing any reliance on Paragraph 2.1 and Paragraph 2.5 of the Impugned Circular in determining if any fee charged by the Petitioner in the liquidation assignments in question, was in excess of permissible thresholds;
Paragraph 2.2 is upheld in its terms since it does not stipulate any new standard and rightly clarifies the legal position under Section 5(16) of the IBC read with Regulation 2(1)(ea) of the LP Regulations in discerning the meaning of the term “liquidation cost”. The definitional content of Regulation 2(1) (ea) of the LP Regulations is only illustrative of the types of “liquidation cost” that are covered by the term “any cost incurred” under Section 5(16) of the IBC;
Paragraph 2.3 and Paragraph 2.4 are upheld. Payments to those doing business with the Corporate Debtor in the course of keeping the business running as a going concern pending liquidation, would not constitute a “distribution” to “stakeholders” from the proceeds of realisation, if they are paid in priority as “liquidation costs”. If any business counterparty is willing to wait in queue to be paid as part of the eventual waterfall mechanism (potentially, in itself, a theoretical and impractical proposition), then such counterparty may be an operational creditor who is a stakeholder to whom proceeds from realisation have to be distributed. But a counter-party who is paid for the purpose and while the business of the Corporate Debtors is running as a going concern during liquidation, and that too ahead of all others (only possible because such payment is a “liquidation cost”) would not be a “stakeholder” waiting for “distribution” of the liquidation proceeds realised. Any reliance on Paragraph 2.3 and Paragraph 2.4 of the Impugned Circular in the proceedings, must be in accordance with the declaration of the law on the respective subjects as articulated above;
Thereafter, the IBBI issued a Circular on 18th April, 2024 by modifying the earlier circular dated 28th September, 2023 partially to the extent of para 2.1 and para 2.5 of the said circular of 28th September 2023 are being withdrawn.
