IBBI: India Regulation 34-B RP Success Fee Now a Process Cost

• Regulation 34-B of the CIRP Regulations, 2016, introduced a performance-linked incentive fee for resolution professionals, capped at five crore rupees.
• This incentive is classified as an insolvency resolution process cost, giving it priority in the distribution waterfall under the Insolvency and Bankruptcy Code.
• The new regulation reverses a prior NCLAT ruling in *Jayesh N. Sanghrajka v. Ariisto Developers*, which held that RPs were not entitled to success fees.
• The incentive fee has two components: rewarding timely resolution (0.5-1% of realisable value) and value maximization (1% of value exceeding liquidation value).
• The inclusion of this discretionary bonus at the top of the payment hierarchy raises concerns about its impact on creditor recoveries and the impartiality of the resolution process.

Lawyers advising on India's insolvency proceedings must critically assess these implications, especially regarding potential disputes over the inclusion of such fees and their effect on the overall distribution to creditors.

The Insolvency and Bankruptcy Board of India (IBBI) introduced a significant amendment in 2022 through Regulation 34-B of the CIRP Regulations, 2016, allowing for a performance-linked incentive fee for resolution professionals (RPs). This provision permits the Committee of Creditors (CoC) to grant a discretionary bonus, capped at five crore rupees, to the RP. Crucially, sub-regulation (5) mandates that this "India Regulation 34-B RP success fee" be categorized as an insolvency resolution process cost, meaning it is paid from the corporate debtor's estate before any distributions to creditors.

This regulatory change directly contradicts a prior stance taken by the National Company Law Appellate Tribunal (NCLAT). Barely a year before Regulation 34-B's introduction, in the case of *Jayesh N. Sanghrajka v. Ariisto Developers (P) Ltd. (CoC)*, the NCLAT explicitly ruled that a resolution professional was not entitled to a success fee. The tribunal characterized such a fee as speculative and not envisioned by the Insolvency and Bankruptcy Code or its accompanying regulations, even when approved by the CoC. Regulation 34-B(4) effectively reverses this judicial precedent through subordinate legislation, raising questions about its alignment with the foundational objectives of the Code.

Regulation 34-B is structured into several key components that delineate the professional fees for resolution professionals. Sub-regulation (2) establishes a baseline fee, referencing Schedule I, and includes a proviso allowing for an increased ordinary fee. This enhancement is permissible if supported by recorded reasons, taking into account factors such as the corporate debtor's size, operational scale, industry sector, economic activity level, and the overall complexity of the insolvency resolution process. This particular aspect, which ties remuneration to the actual demands of managing a business, is generally considered sound.

In contrast, the contentious element lies within sub-regulation (4), which introduces the performance-linked incentive fee. This incentive, capped at Rs 5 crores, is derived from two primary mechanisms outlined in Clauses 3 and 4 of Schedule I. The first mechanism rewards timely resolution, offering a percentage ranging from 0.5% to 1% of the realisable value of assets. The second component incentivizes value maximization, providing 1% of the amount by which the value achieved under the resolution plan surpasses the liquidation value. Furthermore, the CoC retains broad discretion to implement "any other performance-linked incentive structure" it deems necessary, extending beyond the specific parameters detailed in the Schedule.

The most significant aspect of this regulatory framework, particularly for stakeholders and legal advisors, is found in sub-regulation (5). This provision dictates that the performance-linked incentive fee is not disbursed from the financial creditors' individual recoveries but is instead classified as an insolvency resolution process cost. This classification places the "resolution professional incentive fee legality" directly at the forefront of the distribution waterfall.

Under Section 53(1)(a) of the Insolvency and Bankruptcy Code, 2016, insolvency resolution process costs hold the highest priority. This means the performance incentive, potentially up to Rs 5 crores, is paid ahead of secured financial creditors, workmen's dues, and all other claimants. While the stated objective of the IBC is the maximisation of value for all stakeholders, the inclusion of a discretionary performance incentive at the very top of the payment hierarchy raises concerns about its impact on actual creditor recoveries and the impartiality of the resolution process. Lawyers advising on India's insolvency proceedings must critically assess these implications, especially regarding potential disputes over the inclusion of such fees and their effect on the overall distribution to creditors.

Lawyers advising creditors or resolution professionals in India's insolvency proceedings must critically assess the application and implications of Regulation 34-B's performance-linked incentive fee, particularly its impact on the distribution waterfall and potential for disputes regarding its inclusion as an insolvency resolution process cost, which could affect creditor recoveries.

Source: Original reporting based on legal analysis of Indian insolvency regulations.