IBBI Clarifies Interpretation Regarding Liquidator’s Fee Under Regulation 4(2)(B) Of Liquidation Process Regulations

Brief background

Regulation 4 of Liquidation Regulations provides for Liquidator’s fee. Regulation 4(1) and 4(1A) provide that the fee payable to the liquidator be decided by the Committee of Creditors (CoC) or Stakeholders’ Consultation Committee (SCC), as the case may be. If liquidators’ fee is not fixed under Regulation 4(1) and 4(1A), then Regulation 4(2)(b) provides that the liquidator shall be entitled to a fee as a percentage of the amount realised net of other liquidation costs, and of the amount distributed, for the balance period of liquidation.

Clarification with respect to interpretations

Upon perusal of records during the inspections and investigations, the IBBI found that certain terms in the Regulation 4(2)(b) of Liquidation Regulations are being interpreted differently. Thus, the following clarification has been given for such terms by the IBBI:

• Regulation 4(2)(b) provides that the fee shall be “as a percentage of the amount realised net of other liquidation costs, and of the amount distributed, for the balance period of liquidation….”

Clarification: “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

• The term “Amount of Realisation (exclusive of liquidation costs)” given in the table in Regulation 4(2)(b) mandates that all liquidation costs are to be deducted from the realisation amount. However, as per regulation 4(2)(b), “other liquidation cost” is to be deducted from realisation. There is a gap in understanding in the market about what components of the liquidation cost are to be excluded from the liquidation cost to derive “other liquidation cost”.

Clarification: The “other liquidation cost” in regulation 4(2)(b) shall mean liquidation cost paid in priority under section 53(1)(a), after excluding the liquidator’s fee.

• Section 53 of IBC provides for order of priority for making distribution out of proceeds from sale of assets. Furthermore, the table in Regulation 4(2)(b) provides for liquidator’s fees to be calculated as a percentage of the ‘Amount Distributed to Stakeholders’.

Clarification: “Amount distributed to stakeholders” shall mean distributions made to the stakeholders, after deducting CIRP and liquidation cost.

• Different interpretations are being made for the words “Amount of Realisation /Distribution” used in table in the Regulation 4(2)(b). Though, most of them are interpreting it correctly to mean the cumulative value of assets realised till date, few are interpreting it to mean the value of assets realised during the first six months and then next six months and so on.

Clarification: “Amount of Realisation /Distribution” shall mean cumulative value of amount realised/ distributed which is to be bifurcated in various slabs as per column 1 and thereafter the same is to be bifurcated into realisation/ distribution in various periods of time and then corresponding fee rate from the table is to be taken.

• Period for calculation of fee - liquidators are suo-moto excluding various time periods such as stay by court on sale of a particular asset, delay in relinquishment by secured creditor, for the purpose of calculating the fee. However, since the liquidator works under the overall guidance of the Adjudicating Authority, any such exclusion should have stamp of judicial authority and should be only for the asset for which such exclusion has been granted.

Clarification: Exclusion for purpose of fee calculation is to be allowed only when the same has been explicitly provided by the Hon’ble NCLT/NCLAT or any other court of law and will operate only for the asset which could not have been realised during the excluded period.

The IBBI has also intimated that the Insolvency Professionals who are currently handling or have handled in the past any liquidation assignment shall ensure that the fee charged by them under Regulation 4(2)(b) is in accordance with above clarifications and inform the same to the Board electronically on the website of IBBI. In cases, where excess liquidator’s fee is returned and distributed on or before 31st October 2023 no disciplinary proceedings will be initiated on the ground that the excess fee was charged and has now been returned

Ref. No. IBBI/LIQ/61/2023

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