Insolvency Resolution Process Costs & Essential supplies under Insolvency and Bankruptcy Code 2016 (IBC)

CIRP
RP to conduct the CIRP and manage the operations

Insolvency Resolution Process Costs & Essential supplies

I. CIRP Cost

1. Meaning of Insolvency Resolution Process costs

As per section 5(13) of the Code read with CIRP Regulations 31, “Insolvency resolution process costs” means:

(a) the amount of any interim finance and the costs incurred in raising such finance;

(b) the fees payable to any person acting as a resolution professional;

(c) any costs incurred by the resolution professional in running the business of the corporate debtor as a going concern;

There is no illegality if the Resolution Professional uses the money available from the sale of pledged stock for the purpose CIRP- NCLAT in the matter of Punjab National Bank Vs. State Bank of India 160(IBC)125/2020 held that the stock already having been sold, there is no illegality if the Resolution Professional uses the money available from the sale of the stock for the purpose CIRP. The rights and benefits in law claimed by the Appellant of having security by way of pledge and the value of the stock which was pledged are kept open for consideration of the CoC when the Resolution Plan is available before it, and/or in case situation of liquidation arises. The claim  as  above  of  Appellant  shall  be  kept  in  consideration  by RP/CoC/Adjudicating Authority while dealing with the Resolution Plan, if any, and/or in case of liquidation.

(d) any costs incurred at the expense of the Government to facilitate the insolvency resolution process; and

(e) any other costs as may be specified by the Board;

The Board specified the following:

  • amounts due to suppliers of essential goods and services under Regulation 32;
  • fee payable to authorised representative under sub-regulation (8) of regulation 16A;
  • out of pocket expenses of authorised representative for discharge of his functions under 3 section 25A;
  • amounts due to a person whose rights are prejudicially affected on account of the moratorium imposed under section 14(1)(d);
  • expenses incurred on or by the interim resolution professional to the extent ratified under Regulation 33;
  • expenses incurred on or by the resolution professional fixed under Regulation 34; and
  • other costs directly relating to the corporate insolvency resolution process and approved by the committee.

2. Costs of the interim resolution professional[Reg.-33]

The applicant shall fix the expenses to be incurred on or by the interim resolution professional. The Adjudicating Authority shall fix expenses where the applicant has not fixed expenses. The applicant shall bear the expenses which shall be reimbursed by the committee to the extent it ratifies. The amount of expenses ratified by the committee shall be treated as insolvency resolution process costs.

Herein “expenses” include the fee to be paid to the interim resolution professional, fee to be paid to insolvency professional entity, if any, and fee to be paid to professionals, if any, and other expenses to be incurred by the interim resolution professional.

If no Committee of Creditors was ever appointed, whatever the Adjudicating Authority fixes as expenses will be borne by the creditor who moved the application- Hon’ble Supreme Court in the matter of S3 Electricals And Electronics Private Limited Vs. Brian Lau & Anr. 78(IBC)09/2019 held that a bare reading of Regulation 33(3) indicates that the applicant is to bear expenses incurred by the RP, which shall then be reimbursed by the Committee of Creditors to the extent such expenses are ratified. We are informed that, in this case, no Committee of Creditors was ever appointed as the interim resolution process did not reach that stage. In these circumstances, it is clear that whatever the Adjudicating Authority fixes as expenses will be borne by the creditor who moved the application.

NCLAT in the matter of  CoC M/s. Smartec Build Systems Pvt. Ltd. Vs. B. Santosh Babu & Ors. 10(IBC)10/2020 held that CoC is to pay the fees and cost incurred by IRP, who also acted during the resolution process beyond 30 days till the date of liquidation having not allowed to continue as Liquidator. If IRP who continued till the order of impugned order of liquidation was passed, would have been allowed to continue as Liquidator and only in such case, the payment could have been made to him as Liquidator in terms of Section 34(8) of the Code.

3. Resolution professional costs[Reg-34]

The committee shall fix the expenses to be incurred on or by the resolution professional and the expenses shall constitute insolvency resolution process costs.

Herein “expenses” include the fee to be paid to the resolution professional, fee to be paid to insolvency professional entity, if any, and fee to be paid to professionals, if any, and other expenses to be incurred by the resolution professional.

4. Disclosure of Costs[Reg-34A]

The interim resolution professional or the resolution professional, as the case may be, shall disclose item wise insolvency resolution process costs in such manner as may be required by the Board.

II. Essential supplies[Reg-32]

The essential goods and services referred to in section 14(2) shall mean-

(1) electricity;

(2) water;

(3) telecommunication services; and

(4) information technology services,

to the extent these are not a direct input to the output produced or supplied by the corporate debtor.

Illustration- Water supplied to a corporate debtor will be essential supplies for drinking and sanitation purposes, and not for generation of hydro-electricity.

Read more about essential service under moratorium.

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