NCLT Scrutinizes Ernst & Young’s Success Fee
The National Company Law Tribunal (NCLT) in Chennai has raised concerns about a 1% success fee claimed by Ernst & Young LLP (EY) for securing relief in Goods and Services Tax (GST) proceedings. This was highlighted in the case of EY v. Mobase Electronics, where a Bench comprising Judicial Member Jyoti Kumar Tripathi and Technical Member Ravichandran Ramasamy reviewed an insolvency petition filed by EY against Mobase Electronics India Private Limited.
The tribunal dismissed EY’s petition, which sought ₹3.11 crore from Mobase. It clarified that there was no finding of professional misconduct against EY or any individual professional. However, the NCLT suggested that the Institute of Chartered Accountants of India (ICAI) should examine the engagement’s nature and the outcome-based fee arrangement.
“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,” stated the Tribunal.
EY had filed the petition under Section 9 of the Insolvency and Bankruptcy Code (IBC), seeking insolvency proceedings against Mobase. The firm claimed that Mobase had enlisted its professional services for GST issues for the fiscal years 2019-20, 2020-21, and 2021-22. The agreement included an initial fee of ₹25 lakh and an additional fee of 1% of the relief secured in the GST cases.
EY reported achieving relief amounting to approximately ₹235.66 crore against total GST demands of about ₹459.37 crore, prompting the demand for an outcome-based fee. Consequently, EY claimed a principal amount of ₹2.78 crore and around ₹33.18 lakh as interest, summing up to an operational debt of ₹3.11 crore.
Contention by Mobase Electronics
Mobase contested EY’s claim, asserting that only the ₹25 lakh fee was agreed upon and had been settled. They argued that the additional 1% success fee was neither negotiated nor agreed upon. Mobase questioned the legality of such a success fee, citing professional regulations that typically prohibit outcome-linked fees for chartered accountants and similar professionals. They further argued that the arrangement might violate public policy under Section 23 of the Indian Contract Act.
Additionally, Mobase highlighted that one GST order, which formed the basis for EY’s fee calculation, had been overturned by the Madras High Court and sent back for reconsideration.
NCLT’s Ruling and Observations
The NCLT concluded that the dispute extended beyond the claimed amount, encompassing the legitimacy of the success fee and the definition of “success” in the engagement. The Tribunal noted the ongoing GST proceedings’ impact on the fee entitlement. It emphasized that these complex issues were outside the purview of Section 9 of the IBC.
The tribunal also observed that Mobase had contested EY’s entitlement to the fee before the issuance of a statutory demand notice, supported by contemporaneous correspondence and rejection of invoices.
Therefore, the NCLT dismissed EY’s insolvency petition but allowed EY to pursue other legal avenues for their contractual claims.
EY was represented by Advocates Aparajitha Vishwanath and Dharshan, while Mobase was represented by Advocates R Sankaranarayanan and Sai Prashanth.
