NCLAT Chennai upholds IRP fee payment after finding Committee of Creditors ratified expenses through meeting minutes approval

The NCLAT Chennai dismissed an appeal challenging payment of IRP fees and expenses totaling Rs. 9,05,058/-. The appellant argued non-ratification of IRP expenses by the Committee of Creditors (CoC) under Regulation 33(3) of IBBI Regulations, 2016. The tribunal held that ratification occurred when the 2nd CoC meeting approved minutes from the 1st CoC meeting, satisfying regulatory requirements. The court emphasized that ratification, as defined under Section 196 of the Indian Contract Act, 1872, provides procedural confirmation of prior decisions and can be expressed through conduct or acts. The tribunal found no anomaly in directing payment to the IRP, upholding the lower authority's decision.

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The core legal questions considered in this judgment revolve around the entitlement of the Interim Resolution Professional (IRP) to receive professional fees and expenses during the Corporate Insolvency Resolution Process (CIRP), specifically:

1. Whether the IRP is entitled to receive fees and expenses as claimed, in light of the provisions of the Insolvency and Bankruptcy Code (IBC) and the associated regulations.

2. The legal effect and necessity of ratification by the Committee of Creditors (CoC) of the fee and expenses payable to the IRP under Regulation 33 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

3. Whether the determination of fees and expenses without formal ratification by the CoC is valid and enforceable.

4. The applicability and interpretation of Regulation 33 and Regulation 34 of the IBBI Regulations concerning the fixation and ratification of IRP and Resolution Professional (RP) costs.

Issue-wise Detailed Analysis:

Issue 1: Entitlement of the IRP to Fees and Expenses under the IBC and Regulations

The legal framework governing the payment of fees and expenses to the IRP is primarily found in the Insolvency and Bankruptcy Code, 2016, and the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. Section 60(5) of the IBC empowers the Adjudicating Authority to pass necessary orders, while Regulations 33 and 34 specifically address the costs of the IRP and RP.

Regulation 33(1) mandates that the applicant fixes the expenses to be incurred on or by the IRP, and Regulation 33(3) requires that these expenses be reimbursed by the CoC to the extent it ratifies. Regulation 33(4) clarifies that ratified expenses are treated as insolvency resolution process costs. Regulation 34 similarly governs the costs of the RP.

The Appellant contended that the fee claimed by the IRP was not determined in accordance with these regulations and that the Adjudicating Authority erred in directing payment without proper compliance. The Court examined the statutory provisions and the process followed in the instant case, noting that the IRP had been appointed by the Adjudicating Authority and had performed his duties during the CIRP period.

The Court found that the IRP's claim for Rs.9,05,058/- towards fees and expenses was supported by the activities undertaken and was consistent with the process envisaged under the IBC and Regulations. The Adjudicating Authority had rightly recognized the entitlement of the IRP to receive fees for services rendered during his tenure.

Issue 2: Necessity and Effect of Ratification by the Committee of Creditors

The pivotal legal question was the interpretation of the term "ratify" under Regulation 33(3) and (4) and its impact on the IRP's entitlement to fees and expenses. The Appellant argued that ratification by the CoC was a mandatory precondition and that without explicit ratification, the IRP's claim could not be sustained.

The Court analyzed the concept of ratification, drawing on the Indian Contract Act, 1872, Section 196, which explains ratification as a confirmation or adoption of a prior decision, thereby validating it retrospectively. The Court observed that ratification is procedural and serves to affirm a decision already taken, providing it enforceability and sanctity.

In the instant case, the IRP had consented to perform his duties at a fee of Rs.3,00,000/- per month plus reimbursement of actual expenses, as recorded in the 1st CoC meeting dated 09.06.2022. The 2nd CoC meeting dated 13.07.2022 expressly approved and ratified the minutes of the 1st CoC meeting, including the fee determination.

The Court held that such ratification by the CoC was sufficient and in accordance with the Regulations. The contention that the fee was fixed unilaterally without CoC approval was contradicted by the meeting records, which showed that the CoC, with 100% voting rights held by the Appellant, had approved the fee structure and expenses.

Issue 3: Validity of Fee Determination without Formal Ratification

The Appellant's argument that the absence of ratification invalidated the fee determination was addressed by the Court through a detailed examination of the CoC meeting minutes and the timeline of events. The Court noted that the fee and expenses were initially fixed at the 1st CoC meeting and subsequently ratified at the 2nd CoC meeting.

Therefore, the Adjudicating Authority's order directing payment was justified and consistent with the regulatory framework. The Court emphasized that ratification is a confirmation of a prior decision and that the CoC's subsequent approval remedied any initial lack of formal ratification.

The Court rejected the Appellant's contention that the fee determination violated Regulation 33 and Regulation 34, holding that the process followed was compliant with the statutory requirements.

Issue 4: Interpretation and Application of Regulations 33 and 34

The Court closely examined Regulations 33 and 34 to interpret the scope and procedural requirements for fixing and ratifying IRP and RP costs. It highlighted that the Regulations envisage a two-step process: first, the fixation of expenses by the applicant or the Adjudicating Authority, and second, ratification by the CoC.

The Court underscored that ratification is essential to treat the expenses as insolvency resolution process costs, but it must follow a prior decision or fixation of fees. The Court explained that ratification confers enforceability but does not itself constitute the initial decision to pay fees.

Applying this interpretation to the facts, the Court found that the IRP's fees and expenses were fixed during the 1st CoC meeting, and the 2nd CoC meeting ratified these decisions, thereby fulfilling the requirements of the Regulations.

Competing Arguments and Their Treatment

The Appellant argued that the IRP's fees were unilaterally fixed and lacked proper ratification, rendering the payment direction unlawful. The Court countered this by relying on the CoC meeting records, which demonstrated that the Appellant itself, holding 100% voting rights, had approved the fees and expenses.

The Court also addressed the procedural aspect of ratification, clarifying that it is a confirmatory act that must follow an initial decision. Since the initial fixation of fees was done during the 1st CoC meeting and ratified in the 2nd, the Appellant's objection was unfounded.

The Court found no merit in the contention that the Adjudicating Authority's order was contrary to the Regulations or the IBC provisions.

Conclusions

The Court concluded that the IRP was entitled to receive the fees and expenses claimed, as the fixation and ratification process complied with the IBC and IBBI Regulations. The ratification by the CoC was valid and sufficient to confer enforceability on the fee determination.

The Adjudicating Authority's order directing payment of Rs.9,05,058/- to the IRP was upheld, and the Appeal was dismissed for lack of merit.

Significant Holdings

"The word 'ratifies', it simpliciter means, a formal approval to be granted to a decision already taken, in order to provide the decision with a strength of enforceability."

"Ratification once it is even orally accepted by a conduct or even by an act, it will have the same implication as to be an original authority so as to bind the principal."

"The minutes of the 1st CoC meeting was placed for ratification in the 2nd CoC meeting, and it was ratified, and that is what has been observed in the conclusion which has been arrived at by the Tribunal."

"Under the given set of circumstances, the issue of ratification do not come into the picture, in order to deprive Respondent No.1 i.e., the IRP of the fees, and other expenses payable to him as it has been determined to be paid."

"The professional fee as claimed by the Respondent No.1, also stood approved by the Appellant itself holding 100% voting rights of the CoC, and the claim made that it was unilaterally fixed, is contrary to the facts as borne out by the minutes of the 1st CoC meeting."

"The Appeal lacks merit, and the same is dismissed."

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