Defective Or Withdrawn Liquidation Application Cannot End RP's Entitlement To Fees: NCLT Ahmedabad

The Ahmedabad bench of the National Company Law Tribunal (NCLT) has recently held that a liquidation application that is subsequently withdrawn cannot by itself end a Resolution Professional's entitlement to remuneration if the RP continues to discharge statutory duties.

The bench said a defective or withdrawn liquidation application that does not culminate in an order of liquidation cannot terminate the RP's entitlement to remuneration when he continues to function under the Insolvency and Bankruptcy Code, 2016.

The bench of Judicial Member Shammi Khan and Technical Member Sanjeev Sharma observed,

“The expression "filing of liquidation application" occurring in Regulation 34B of the CIRP Regulations cannot be construed in isolation where such application itself is subsequently withdrawn and the CIRP continues. A defective or withdrawn liquidation application, which does not culminate in an order of liquidation, cannot by itself terminate the entitlement of the Resolution Professional to remuneration when he continues to discharge statutory duties under the Code until commencement of liquidation. Any other interpretation would be inconsistent with the scheme and object of the Insolvency and Bankruptcy Code, 2016."

The ruling came on an application filed by Sachin Naveen Sinha, erstwhile RP of Spel Granito Pvt. Ltd., seeking unpaid professional remuneration.

Spel Granito was admitted into the Corporate Insolvency Resolution Process (CIRP) on May 19, 2023. Sinha was appointed as the RP by an order dated October 10, 2023. He took charge on October 20, 2023.

The Committee of Creditors later decided to liquidate the Corporate Debtor. An application for the same was filed on June 14, 2024, but it was later withdrawn with liberty to file a fresh application.

Even after the withdrawal, Sinha continued to function as the RP until September 12, 2024. A fresh liquidation application was subsequently filed, pursuant to which the Tribunal passed the liquidation order on September 12, 2024, appointing Arvind D. Gaudana as the liquidator.

Sinha claimed professional remuneration for the periods from October 10 to December 31, 2023, and June 1 to September 12, 2024. He argued that he remained under a statutory obligation to manage the affairs of the Corporate Debtor until liquidation commenced.

The liquidator opposed the claim, relying on Regulation 34B of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. The liquidator contended that Sinha's entitlement to professional remuneration ended when the liquidation application was filed.

The Tribunal rejected this contention. It noted that the first liquidation application was withdrawn with liberty to file afresh and did not culminate in the commencement of liquidation.

The bench held that the CIRP therefore continued uninterrupted during the intervening period. Sinha continued to function as RP and discharge statutory obligations until the liquidation order.

The tribunal noted that Sinha continued to preserve and protect the Corporate Debtor's assets, maintain security, coordinate with stakeholders, pursue removal of the debit freeze on the CIRP account, and file the fresh liquidation application.

It held that these functions were part of his statutory obligations under Sections 25 and 208 of the IBC.

The bench further held that professional remuneration lawfully incurred during CIRP constitutes Insolvency Resolution Process Cost under Section 5(13) of the IBC. Such costs enjoy priority under Section 53(1)(a) of the Code.

The tribunal also rejected the argument that the remuneration claim could be defeated merely because the Stakeholders' Consultation Committee had not recommended it. It noted that the SCC is constituted only after commencement of liquidation and has a consultative role under Regulation 31A of the IBBI (Liquidation Process) Regulations, 2016.

“Therefore, the Applicant's entitlement is founded upon the continued discharge of statutory duties under the Code and not merely upon the filing of the first liquidation application.”, it ruled.

The Tribunal directed Axis Bank to verify and reconcile Sinha's professional remuneration for the period from October 10 to December 31, 2023, within 15 days. If any amount was found unpaid, the bank was directed to release it to the liquidation account for disbursement in accordance with law.

It also directed the liquidator to quantify the balance of professional remuneration payable for the period from June 1 to September 12, 2024.

The quantified amount is to be treated as an insolvency resolution process cost under Section 5(13) of the IBC and paid in accordance with Section 53(1)(a), after adjusting payments already made.

The tribunal clarified that Sinha would be entitled only to the balance of remuneration remaining unpaid after adjustment of amounts already received. No duplicate payment could be made.

The remaining prayers in the application were rejected, and the application was partly allowed.