NCLT flags Ernst & Young's 1% success fee for securing relief in GST cases; asks ICAI to examine

The National Company Law Tribunal (NCLT) at Chennai has questioned a 1% success fee claimed by Ernst & Young LLP for securing relief in GST proceedings. [EY v. Mobase Electronics]

A Bench of Judicial Member Jyoti Kumar Tripathi and Technical Member Ravichandran Ramasamy made the observation while dismissing EY’s insolvency petition seeking about ₹3.11 crore from Mobase Electronics India Private Limited.

The NCLT clarified that it was not recording any finding of professional misconduct against EY or any individual professional. However, it said that the nature of the engagement and the outcome-based fee arrangement could appropriately be examined by Institute of Chartered Accountants of India (ICAI).

“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,” the Tribunal said.

EY had approached the NCLT under Section 9 of the Insolvency and Bankruptcy Code (IBC) seeking initiation of insolvency proceedings against Mobase. According to EY, Mobase had engaged it for professional assistance in GST proceedings for financial years 2019-20, 2020-21 and 2021-22. The engagement provided for an initial fee of ₹25 lakh and a further fee equivalent to 1% of the relief obtained in the GST proceedings.

EY claimed that against aggregate GST demands of about ₹459.37 crore, it had secured relief of around ₹235.66 crore. It accordingly raised an outcome-linked fee. It ultimately claimed ₹2.78 crore as principal and about ₹33.18 lakh as interest, taking the total alleged operational debt to about ₹3.11 crore.

Mobase disputed the claim. It argued that the agreed fee was only ₹25 lakh and that this amount had already been paid. It also said the additional 1% success-fee provision had never been negotiated or agreed to.

The company further questioned whether such an outcome-linked fee was legally permissible. It argued that professional rules governing chartered accountants and other regulated professionals prohibited such fees. It also contended that the arrangement could be opposed to public policy under Section 23 of the Indian Contract Act.

Mobase also pointed to subsequent developments in the GST proceedings. One of the GST orders on which EY had based its fee computation was set aside by the Madras High Court. The matter was remanded for fresh consideration.

The NCLT found that the dispute was not merely about the amount claimed. There was also a dispute over whether EY was entitled to the success fee at all. Questions also arose over what amounted to “success” under the engagement and the effect of the pending GST proceedings.

The Tribunal said that the nature of the services rendered and the enforceability of the fee arrangement were also in dispute.

“These are matters which require examination beyond the limited jurisdiction contemplated under Section 9 of the Code."

The NCLT also noted that Mobase had disputed EY’s entitlement before the statutory demand notice was issued. The objections were backed by contemporaneous correspondence and rejection of invoices.

It, therefore, dismissed EY’s insolvency petition. The Tribunal, however, left EY free to pursue other remedies available in law for its contractual claim.

EY was represented by Advocates Aparajitha Vishwanath and Dharshan.

Mobase was represented by Advocates R Sankaranarayanan and Sai Prashanth.

[Read Judgment]