2025 (6) TMI 124 - AT - IBC

Ex-liquidator's fee claim rejected under Regulation 4(3) as sales realizations fell short of liquidation costs

Bhupesh Gupta, Ex-Liquidator, Supreme Tex Mart Limited Versus Mr. Ravinder Kumar Goel, Liquidator

Bhupesh Gupta, Ex-Liquidator, Supreme Tex Mart Limited Versus Mr. Ravinder Kumar Goel, Liquidator - TMI The core legal questions considered in this judgment revolve around the entitlement of the ex-Liquidator to remuneration for his tenure, specifically:1. Whether the ex-Liquidator is entitled to fees under Regulation 4(3) of the IBBI (Liquidation Process) Regulations, 2016, based on the amount realized during the liquidation period, including sales revenue generated from running the Corporate Debtor as a going concern.2. The interpretation of the term 'amount realised' under Regulation 4(3) and the scope of 'liquidation cost' under Regulation 2(1)(ea), particularly in light of amendments and IBBI circulars.3. Whether the IBBI circular dated 28.09.2023, which clarifies the components of liquidation cost and amount realised, can be applied retrospectively to affect the ex-Liquidator's claim.4. The legal effect of the remand order passed by the Appellate Tribunal directing the Adjudicating Authority (AA) to consider the breakup of sales during the liquidation period and apply the circular dated 28.09.2023.5. Whether the AA exceeded its jurisdiction by introducing a new ground-that operational costs exceeded revenues-to reject the fee claim post-remand.6. The applicability of the principle of quantum meruit under Section 70 of the Indian Contract Act, 1872, for remuneration in the absence of explicit contractual entitlement.7. The impact of prior regulatory and judicial findings, including the IBBI order directing the ex-Liquidator to deposit fees drawn without COC approval.Issue-wise Detailed Analysis:1. Entitlement to Liquidator's Fees under Regulation 4(3) based on Realisation:The legal framework under Section 34(8) and (9) of the Insolvency and Bankruptcy Code (IBC), 2016, and Regulation 4 of the IBBI (Liquidation Process) Regulations, 2016, governs the payment of liquidator's fees. Regulation 4(3) provides that in absence of Committee of Creditors (COC) approval, the liquidator is entitled to fees as a percentage of the amount realised net of other liquidation costs and of the amount distributed.The ex-Liquidator contended that the sales revenue of approximately Rs. 78.47 crores generated during the period when the Corporate Debtor was run as a going concern must be treated as 'amount realised' for fee calculation. This interpretation was supported by the IBBI circular dated 28.09.2023, which defined 'amount realised' as proceeds from the sale of assets where the asset changes form, including sales generated from going concern operations.The AA and Respondent, however, restricted 'amount realised' to proceeds from sale of fixed assets and excluded operational sales revenue and current assets. They argued no legal provision supports payment of fees on sales made during the going concern period, and only one asset (a Toyota car) was sold during the ex-Liquidator's tenure, realizing Rs. 2.6 lakhs.The Appellate Tribunal had earlier remanded the matter directing the AA to consider the breakup of sales and apply the IBBI circular's clarification, but the AA dismissed the claim on the new ground that operational costs exceeded revenues, leaving no net realisation for fee calculation.The Court analyzed the interplay between Regulation 4(3) and Regulation 2(1)(ea) (defining liquidation costs), the amendments thereto, and the clarifications issued by IBBI. It noted that the amended Regulation 2(1)(ea) expanded liquidation costs to include costs of running the Corporate Debtor as a going concern and preserving assets, which are to be deducted from the realisation amount for fee calculation.However, the Court observed that the sales revenue was significantly less than the liquidation costs incurred, resulting in no net amount on which fees could be paid under Regulation 4(3). This factual finding was supported by audit reports and liquidation cost data presented before the AA.2. Retrospective Application of IBBI Circular and Amendments:The ex-Liquidator argued that the circular dated 28.09.2023 and amendments to Regulation 2(1)(ea) cannot be applied retrospectively to his tenure, as the Corporate Debtor ceased going concern operations before the amendments came into effect. He relied on the principle that subordinate legislation cannot alter vested rights retrospectively unless expressly permitted.The Court, however, found that the expanded definition of liquidation cost under the 2019 amendment and the IBBI circular clarifications were always part of the liquidation cost, irrespective of the liquidation commencement date. It reasoned that these costs are paid in priority under Section 53 of the IBC and thus must be considered in fee calculations. The Court rejected the ex-Liquidator's contention on retrospective application, holding that the amended definition clarifies and confirms the components of liquidation cost rather than creating new liabilities.3. Scope and Effect of the Remand Order:The Appellate Tribunal's remand order dated 11.03.2024 directed the AA to consider the breakup of sales during the liquidation period and apply the IBBI circular dated 28.09.2023. The ex-Liquidator contended that the AA failed to comply with this direction by ignoring the sales revenue and introducing a new ground-operational costs exceeding revenues-to dismiss the fee claim.The Court acknowledged the settled principle that a tribunal post-remand cannot go beyond the scope of the remand order and cannot introduce fresh grounds not previously considered or permitted. However, it noted that the IBBI circular's Clause 2.1, heavily relied upon by the ex-Liquidator, was struck down by the Bombay High Court as ultra vires, and subsequently withdrawn by IBBI's circular dated 18.04.2024. This development altered the legal landscape and justified the AA's fresh consideration of liquidation costs versus realisations.Accordingly, the Court found no jurisdictional error or procedural illegality in the AA's approach post-remand, given the changed circumstances and binding judicial pronouncements.4. Interpretation of 'Amount Realised' and 'Liquidation Cost': The Court examined the definition of 'amount realised' and 'liquidation cost' under the Code, Regulations, and circulars. It observed that 'amount realised' means proceeds from sale or realisation of assets, and 'liquidation cost' includes fees, remuneration, costs for preserving assets, and costs of running the CD as a going concern.The Court rejected the ex-Liquidator's argument that operational expenses should be offset by sales revenue to arrive at net operational loss for liquidation cost calculation. It held that the entire operational expenses incurred during liquidation are part of liquidation cost, as per the amended Regulation 2(1)(ea) and IBBI circular clarifications, irrespective of the date of liquidation commencement.The Court also noted that the distinction drawn by the Respondent between current and fixed assets for fee calculation is not recognized under the IBC or Regulations. All assets forming part of the liquidation estate are relevant for realisation and liquidation cost calculation.5. Principle of Quantum Meruit and Entitlement to Remuneration:The ex-Liquidator invoked the principle of quantum meruit under Section 70 of the Indian Contract Act, 1872, arguing entitlement to reasonable remuneration for services rendered, despite no explicit contractual fee determination. He emphasized his bona fide efforts in running the CD as a going concern, managing operations, and maximizing value, and contended that denial of fees solely due to operational losses is unjust and contrary to natural justice.The Court acknowledged the principle but found that the statutory scheme under the IBC and Regulations provides a clear mechanism for fee determination based on realisations net of liquidation costs. Since the liquidation costs exceeded realisations, no net amount remained for fee payment under the statutory framework. The Court did not find sufficient legal basis to override the statutory scheme by applying quantum meruit in this context.6. Compliance with Prior Regulatory and Judicial Orders:The ex-Liquidator had drawn remuneration during liquidation without COC approval, leading to an IBBI show cause notice and an order directing him to deposit Rs. 31.09 lakhs into the liquidation estate. This order has not been set aside and remains binding.The Court noted this fact and observed that the ex-Liquidator's entitlement to fees must be consistent with regulatory compliance and the statutory framework. The prior order and non-approval by COC weigh against the ex-Liquidator's claims for additional fees beyond what was drawn.7. Treatment of Competing Arguments and Final Conclusions:The Court carefully considered the ex-Liquidator's submissions on the scope of 'amount realised,' retrospective application of amendments, compliance with remand directions, and quantum meruit. It also evaluated the Respondent's reliance on statutory provisions, regulatory amendments, IBBI circulars, and prior regulatory orders.Ultimately, the Court concurred with the AA's conclusion that the liquidation costs incurred exceeded the sales realisations during the ex-Liquidator's tenure, resulting in no net amount for fee calculation under Regulation 4(3). The Court found no infirmity in the AA's reasoning and dismissed the appeal, holding that no remuneration is payable to the ex-Liquidator for the period in question.Significant Holdings:'Since the Sales realization as per the submission of both the Applicant and Respondent are significantly less than the liquidation cost, nothing remains as realization for which any fees can be paid in terms of Regulations 4 of the Liquidation Regulations.''The cost of purchase, direct, indirect and other costs need to be considered in working out the liquidation cost in the present matter.''These newly added components [to liquidation cost] were always part of the liquidation cost irrespective of the date of commencement of liquidation process.''The term '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.' (Noting that this clarification was struck down and withdrawn, affecting the legal position.)'A court or tribunal, while exercising powers post-remand, cannot travel beyond the confines of the remand order.''Where liquidation fees were not decided by the Committee of Creditors, the Liquidator is entitled to fees as a percentage of amount realised net of liquidation costs as per Regulation 4(3).''No fees are payable where liquidation costs exceed amount realised.''Quantum meruit cannot override the statutory scheme of remuneration under the IBC and Regulations where no net realisation remains.'The judgment establishes the principle that liquidation fees must be computed strictly in accordance with the statutory and regulatory framework, considering all liquidation costs including operational expenses during going concern operations, and that fees are payable only on net realisation. It also clarifies that subordinate legislation such as IBBI circulars cannot be applied retrospectively to alter vested rights unless expressly permitted, but amendments clarifying liquidation costs apply to all liquidation proceedings irrespective of commencement date. The judgment underscores the binding nature of remand orders and the limits on tribunals to introduce new grounds post-remand, subject to changed legal circumstances.