Whether Committee of Creditors can pass a resolution to reimburse the fees of a law firm which helped the creditor to admit the petition under IBC?

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SHUBHAM BUDHIRAJA[1]

 (Advocate, Delhi High Court)

(shubhambudhiraja02@gmail.com)

Mr. A was appointed as IRP of PQR limited and in the 1st COC meeting, COC approved the agenda of reimbursement of fees of law firm which represented financial creditor before NCLT in admission of CIRP of PQR Limited.  Further, SBI, one of COC member, appointed PWC, EY, etc. firms to assist the CIRP process and same was approved by COC. Mr. A appointed Mr. B to conduct due diligence for purpose of section 29A eligibility of resolution applicants. It was held that Mr. A is guilty of professional misconduct because (i) Appointment of Mr. B was not required as scope of his work was already covered within scope of work of PWS, EY, etc., (ii) It was impressible for a member of COC (SBI) to appoint the PWC, EY to assist the CIRP. It is for IRP to decide whether he needs assistance of professionals and not for the COC to decide. These appointments burden the cost on the corporate debtor that adversely impacts the valuation of the corporate debtor. (iii) It is impressible to reimburse the pre-admission expenses to the law firm[2].

 

(I)                 The provisions of the CIRP Regulations apply only when the CIRP has commenced and not for those matters prior to commencement of CIRP. In view of this, the scope of regulation 31(e) of the CIRP is limited to the cost incurred after the commencement of CIRP and approved by the COC.

 

(II)               It is clear from the conjoint reading of section 5(13) and regulation 31 of the CIRP Regulations that amounts due or expenses incurred are during the CIRP period and not prior to CIRP.

 

(III)             The intent is very clear that expenses incurred by the IRP during the CIRP will be part of IRPC. Thus, regulation 33(3) of the CIRP Regulations does not include any of the expenses that might have been incurred by the applicant before commencement of CIRP. Further, IBBI clarified vide June 2018 circular in Para 8(c) that any fee or other expense incurred before the commencement of CIRP shall not be included in the IRPC.

 

(IV)             Section 208 of the Code provides for the functions and obligations of the IP which provides inter alia that the IP shall abide by the Code of Conduct to take reasonable care and diligence when performing his duties and to perform his functions in such manner and subject to such conditions as may be specified.

 

(V)               As per sections 20(2)(a) and 25(2)(d), it is the authority of the IRP and RP to appoint any professional for the CIRP. it is the duty of the IP to comply with the rules and regulations as established by the Board to achieve the objective of the Code underlined in its various provisions. The rules and regulations are made to bring a clarity, transparency and professionalism in the profession of IPs and the IPs are expected to follow them in that spirit. Thus, he violated section 20(2) (a) and section 25(2) (d) of the Code.

 

(VI)             With regard to the issue of fee payable to PwC, the section 20(1) of the Code provides that the IRP shall make every endeavor to protect and preserve the value of the property of the CD and manage the operations of the CD as a going concern. Section 23(2) reasserts this responsibility.. Therefore, it becomes crucial to monitor the expenses by the RP to ensure that a CD, who is already entangled in a web of unsustainable liabilities, is not further overburdened with exorbitantly high IRPC.

 


[1] (LLB, ACS, BCOM(H))

[2] No. IBBI/DC/85/2022

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