NCLT Chennai Dismisses EY's Plea Seeking 1% Success Fee For Relief In GST Proceedings, Asks ICAI To Examine

The National Company Law Tribunal (NCLT) at Chennai has recently dismissed EY's insolvency plea against a company. EY was seeking a 1% success fee for relief obtained in GST proceedings.

The tribunal found a genuine dispute over EY's entitlement to the outcome-based fee.

It also observed that the nature of EY's professional engagement and the permissibility of the outcome-based fee arrangement may be examined by the Institute of Chartered Accountants of India if the services were rendered through persons governed by its regulatory framework.

EY had been engaged to assist Mobase in GST proceedings relating to the financial years 2019-20, 2020-21, and 2021-22. Under an Engagement Letter dated December 16, 2023, EY was to receive an initial fee of ₹25 lakh and an additional fee equal to 1% of the relief obtained on a favourable outcome, with proportionate payment in case of partial success.

Claiming that it had secured substantial reductions in the GST demands, EY raised a claim of about ₹3.11 crore, including interest, towards the outcome-based fee. Mobase disputed its liability, questioning whether EY was entitled to the fee at all and whether the GST proceedings had produced the “success” contemplated under the agreement.

A bench of Judicial Member Jyoti Kumar Tripathi and Technical Member Ravichandran Ramasamy noted that the dispute was not confined to the amount claimed. It concerned EY's entitlement to the success fee, what amounted to “success” under the Engagement Letter, the effect of the pending GST proceedings, the nature and capacity in which the services were rendered, and whether a fee calculated with reference to the relief obtained was enforceable.

The GST proceedings forming the basis of EY's claim had not attained finality. In particular, the GST order for the financial year 2020-21 relied on by EY was subsequently set aside by the Madras High Court on July 9, 2024. The tribunal also noted that proceedings concerning the other assessment years remained pending.

"Thus, the Applicant's contention that the mere reduction of the GST demand constituted a final "success" giving rise to an unconditional entitlement to the alleged fee cannot be accepted without further adjudication," the tribunal observed.

The tribunal thus observed that a reduction in the GST demand, by itself, could not be treated as a final “success” giving EY an unconditional entitlement to the 1% fee without further adjudication. Whether the outcome-based fee had become payable required further examination.

Mobase had also raised objections to the permissibility of the fee arrangement, arguing that an outcome-based fee for services involving regulated professionals could be contrary to applicable professional restrictions. EY maintained that it was not itself a firm of Chartered Accountants and that the fee was a valid commercial outcome-linked arrangement.

The tribunal noted, however, that the Engagement Letter and scope of work involved professional services relating to GST proceedings, including representation before statutory authorities. It observed that the capacity in which those services were rendered, and whether the arrangement complied with applicable professional standards and regulations, could be examined by ICAI if the services were rendered through persons governed by its regulatory framework.

"The question as to the capacity in which such services were rendered, and whether the arrangement complied with the applicable professional standards and regulations, is therefore a matter which may appropriately be examined by the Institute of Chartered Accountants of India (ICAI), in accordance with law, if the services were rendered through persons governed by its regulatory framework," the tribunal observed.

It clarified that this observation was not a finding of professional misconduct against EY or any individual professional. The competent regulatory authority could independently examine the matter and take action if warranted under the applicable legal and professional framework.

The tribunal also found that Mobase had disputed EY's entitlement to the success fee before the statutory demand notice was issued. Contemporaneous correspondence showed that Mobase had questioned the fee, the meaning of "success," and the effect of the pending GST proceedings. The dispute could not, therefore, be treated as an objection raised for the first time after EY initiated insolvency proceedings.

Finding that Mobase had established a genuine and bona fide pre-existing dispute concerning EY's claimed fee, the tribunal dismissed the insolvency petition.

It also observed that a copy of the order may be forwarded to ICAI for examination, if considered appropriate, particularly regarding the nature of the professional services and the permissibility of the outcome-based fee arrangement.

EY remains free to pursue any other remedy available under law to seek adjudication of its contractual claim.

For Applicant: Advocates Aparajitha Vishwanath & Dharshan

For Respondent: Advocates R. Sankaranarayanan & Sai Prashanth