Fee regulations for insolvency professionals soon

The Insolvency and Bankruptcy Board of India (IBBI) may shortly go for some “light touch” regulations on the increasingly controversial aspect of fees quoted by insolvency professionals (IPs) handling corporate insolvency resolution processes (CIRP).

The regulations will seek to improve transparency (disclosures) and promote best practices in the area of compensation for IPs services commensurate with their qualification, experience and responsibilities, official sources said.

This is significant as concerns have been expressed in some CIRP cases that IPs in India are charging “high fees” that may not be reasonable and commensurate with the work being handled by them.

There have also been instances of abnormally low fees charged by an IP, such as ₹1, to act as an insolvency resolution professional.

Simply put, a “light touch” approach involves the introduction of exercise of judgment when making decisions about supervision and regulation of activities. It is a sort of regulatory philosophy avoiding the ‘box ticking’ approach.

Discussion paper

IPs constitute one of the four key pillars of the insolvency regime, the other three being the Adjudicating Authority, the IBBI and the Information Utilities.

Currently, the Insolvency and Bankruptcy Code (IBC) does not specify the amount of fee to be paid to an IP for services in a particular process.

The contours of the proposed “light touch” regulations are not yet known, but the IBBI had recently come out with a “discussion paper” on the regulation of fee payable to IPs for CIRP. The discussion paper had noted that ‘fee’ is an important component of the insolvency resolution process. It gets priority in payment over any other dues of the corporate debtor. The fee is paid for services of IPs and other professionals. These services are not standardised.

The amount of effort required in one CIRP is quite different from that in another CIRP. It is difficult to prescribe a standard fee for the services of a professional, the discussion paper said.

It is expected that the market will determine the fee for a particular IP. The market outcome in certain circumstances, however, has not been efficient (as high as ₹5 crore to as low as ₹1 for the services of an IP). Neither very high fees nor very low fees are in the interest of corporate debtors, the professional services industry and the insolvency regime, the discussion paper said.

It has been highlighted in the discussion paper that theoretically, a market is most efficient when there is no or negligible transaction, and the stakeholder has complete information.

Way forward

The first step to minimise the cost is identification of the elements of the cost associated with CIRP. Through the discussion paper, an attempt has been made to identify these elements.

The next step is to make the data about cost and fee available in public domain for the market forces to determine the fees. The next step could be promotion of best practices. Thereafter specific regulatory intervention may be required to regulate the costs and fee to the extent required to address market failure, if any, according to the discussion paper.

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