EY’s 1% Success Fee: NCLT Flags ICAI Ethics Issue

Summary: The Chennai Bench of the National Company Law Tribunal dismissed Ernst & Young LLP’s insolvency petition against Mobase Electronics India Private Limited concerning an alleged one per cent outcome-linked fee for services relating to GST proceedings. EY had been engaged under an Engagement Letter dated 16 December 2023 for GST-related professional assistance concerning Financial Years 2019-20, 2020-21 and 2021-22. According to EY, the remuneration comprised an initial fee of ₹25 lakh and an additional fee equivalent to one per cent of the relief obtained upon a favourable outcome, with proportionate payment in the event of partial success. EY claimed that relief of approximately ₹235.66 crore had been obtained against aggregate GST demands of about ₹459.37 crore and asserted an operational debt of ₹3.11 crore, comprising principal of approximately ₹2.78 crore and interest of about ₹33.19 lakh. Mobase disputed EY’s entitlement to the outcome-based fee, the applicability of the relevant contractual clause, the meaning of “success,” the crystallisation of the alleged debt and the effect of subsequent proceedings in which the GST order for Financial Year 2020-21 was set aside. The NCLT held that a genuine and bona fide pre-existing dispute existed and that the questions concerning crystallisation, enforceability and legal permissibility of the alleged fee arrangement required examination beyond the limited jurisdiction under Section 9 of the Insolvency and Bankruptcy Code, 2016. While expressly clarifying that it had not recorded any finding of professional misconduct against EY or any individual professional, the Tribunal observed that the professional nature of the engagement and the permissibility of the outcome-based fee could appropriately be examined by ICAI if the services were rendered through persons governed by its regulatory framework.

The Controversy Over EY’s 1% Outcome-Based Fee

The Chennai Bench of the National Company Law Tribunal dismissed the insolvency petition filed by Ernst & Young LLP against Mobase Electronics India Private Limited concerning an alleged outcome-based fee for services rendered in connection with GST proceedings. The Tribunal also observed that the professional nature of the engagement and the permissibility of the outcome-based fee arrangement could appropriately be examined by the Institute of Chartered Accountants of India.

The controversy arose from an Engagement Letter dated 16 December 2023 executed between EY and Mobase Electronics India Private Limited. EY was engaged to provide professional assistance in connection with notices and orders issued in GST proceedings initiated by the Tamil Nadu State Goods and Services Tax authorities concerning Financial Years 2019-20, 2020-21 and 2021-22.

The scope of work described in the Engagement Letter included preparation of replies, representation before the GST authorities, attendance at personal hearings and assistance in appellate proceedings.

According to EY, Clause 7 of the Statement of Work required Mobase to pay ₹25 lakh upon execution of the agreement and an additional fee equivalent to one per cent of the total relief granted upon a favourable outcome. Proportionate payment was allegedly payable in the event of partial success. Mobase paid the initial fee of ₹25 lakh but disputed its liability to pay the outcome-based component.

EY claimed that aggregate GST demands of ₹459,37,39,869 had been raised against Mobase and that relief aggregating to ₹235,65,67,028 had been obtained. The year-wise amounts claimed by EY were as follows:

On this basis, EY raised its claim for an outcome-based professional fee calculated at one per cent of the proportionate relief obtained. EY claimed principal dues of ₹2,78,07,136.60 and interest of ₹33,18,648.43 for the period from 11 March 2025 to 20 November 2025, aggregating to an alleged operational debt of ₹3,11,25,785.03.

Mobase, however, maintained that the agreed professional fee was limited to ₹25 lakh, which had been paid in full on 19 January 2024. It disputed the alleged additional success fee and contended that the relevant provision in Clause 7 of Appendix-A to the Engagement Agreement was obscure, concealed through an asterisk and footnote, and had neither been negotiated nor agreed to by it. These were the submissions of Mobase and were not finally adjudicated by the NCLT on their merits.

Mobase had also disputed the outcome-based fee through contemporaneous correspondence. The order records that Mobase expressly denied its liability by email dated 20 June 2024. EY thereafter issued a demand notice dated 30 September 2024 and a recovery notice dated 5 December 2024. A statutory demand notice in Form 3 under the IBC was subsequently issued on 6 June 2025 and received by Mobase on 9 June 2025.

GST Order Set Aside and Question of Crystallisation

The status of the underlying GST proceedings became material because they had not attained finality. The GST order dated 4 April 2024 relating to Financial Year 2020-21 was set aside by the Madras High Court on 9 July 2024 in W.P. No. 16981 of 2024, and the matter was remanded for fresh consideration. Proceedings concerning the other assessment years were also stated to be pending.

The relief claimed by EY for Financial Year 2020-21 amounted to approximately ₹220.69 crore. At the contractual rate claimed by EY, the outcome-linked fee attributable to that relief would be approximately ₹2.21 crore.

The NCLT observed that EY’s contention that the mere reduction of the GST demand constituted a final “success,” giving rise to an unconditional entitlement to the fee, could not be accepted without further adjudication. The subsequent setting aside of the underlying GST order and the pendency of proceedings for other years created a substantial dispute concerning whether the alleged fee had crystallised.

Mobase’s Objections to Legal and Professional Permissibility

Mobase further contended that the success-fee clause was void and opposed to public policy. It submitted that the Engagement Agreement contemplated professional services and representation before GST authorities, which could be undertaken only by recognised persons under Section 116 of the Central Goods and Services Tax Act, 2017. According to Mobase, professionals governed by their respective regulatory enactments were prohibited from charging result-based fees.

Mobase also relied on Section 23 of the Indian Contract Act, 1872 to contend that the arrangement was opposed to law or public policy. These contentions formed part of Mobase’s defence; the NCLT did not finally decide that the outcome-based fee was void under Section 23 or that it violated any identified provision of the Chartered Accountants Act, 1949.

EY disputed these objections. It contended that the outcome-linked fee had been agreed to by a commercially sophisticated entity and that, in the absence of any competent forum declaring the clause illegal, Mobase could not rely upon such objections to avoid payment. EY also maintained that the Engagement Letter did not make payment conditional upon the GST orders attaining finality and that its entitlement arose once the GST demand was reduced and the invoice was raised.

The order records that EY took the stand that it was not itself a firm of chartered accountants. The NCLT, however, found that sufficient material had not been placed before it to establish clearly the legal capacity in which the persons representing Mobase before the GST authorities had acted.

NCLT Finds Genuine Pre-Existing Dispute

After examining the Engagement Letter, correspondence and other documents, the NCLT found that the controversy was not confined to the mathematical computation of the amount claimed.

The dispute concerned:

• EY’s entitlement to the outcome-based fee;
• the applicability and enforceability of the success-fee clause;
• the meaning and occurrence of contractual “success”;
• the stage at which the alleged fee crystallised;
• the legal effect of pending and subsequent GST proceedings;
• the nature and capacity in which the professional services were rendered; and
• the permissibility of a fee calculated with reference to relief obtained in statutory proceedings.

The NCLT found that Mobase had disputed EY’s entitlement to the alleged fee much before issuance of the statutory demand notice. The dispute was supported by contemporaneous correspondence, rejection of the invoices and subsequent developments in the GST proceedings. It could not, therefore, be characterised as a dispute raised for the first time after commencement of the insolvency proceedings.

Relying on the Supreme Court’s decision in Mobilox Innovations Private Limited v. Kirusa Software Private Limited, (2018) 1 SCC 353, the Tribunal reiterated that a Section 9 application must be rejected where the corporate debtor demonstrates a plausible contention requiring further investigation and the defence is not patently feeble or a mere assertion unsupported by evidence.

The NCLT consequently held that Mobase had established a genuine and bona fide pre-existing dispute concerning the alleged operational debt. The dispute involved questions relating not only to computation but also to the crystallisation, enforceability and legal permissibility of the alleged outcome-based fee arrangement.

Since the requirements for admission under Section 9 of the Insolvency and Bankruptcy Code, 2016 were not satisfied, the company petition was dismissed.

The NCLT did not conclusively adjudicate EY’s contractual entitlement or declare the outcome-based fee lawful or unlawful. Its decision was confined to determining whether the alleged operational debt could support admission of a Section 9 insolvency petition in the presence of a genuine pre-existing dispute.

Pre-Existing Dispute Before the Statutory Demand Notice

The chronology of the dispute was particularly important. Mobase expressly disputed its liability through an email dated 20 June 2024, whereas the statutory demand notice in Form 3 was issued only on 6 June 2025.

The NCLT therefore found that the dispute existed before issuance of the statutory demand notice. It was not a defence subsequently created to avoid insolvency proceedings.

This finding is consistent with the principle that the adjudicating authority must reject a Section 9 application where a genuine pre-existing dispute concerning the operational debt is shown to have existed before receipt of the demand notice.

NCLT Leaves Professional-Regulatory Question for ICAI

The NCLT considered the professional nature of the engagement and the charging of an outcome-based fee to be matters deserving examination by the competent professional or regulatory authority.

The Tribunal noted that the Engagement Letter and scope of work involved services relating to GST proceedings and representation before statutory authorities. It observed that the capacity in which those services were rendered and whether the arrangement complied with the applicable professional standards and regulations could appropriately be examined by ICAI, if the services were rendered through persons governed by its regulatory framework.

The NCLT expressly clarified that this observation did not constitute a finding of professional misconduct against EY or any individual professional. It merely considered it appropriate that the competent regulatory authority could independently examine the nature of the engagement and the outcome-based fee arrangement and take such action, if any, as might be warranted under the applicable statutory and professional framework.

The order further stated that a copy could be forwarded to ICAI for such examination, if considered appropriate, particularly concerning the nature of the professional services rendered and the permissibility of the outcome-based fee arrangement.

Accordingly, the order neither declares the arrangement professionally permissible nor records professional misconduct. It leaves the matter open for independent examination by the competent professional regulator.

Clause 10 and Regulation 192: Separate Professional Analysis

The NCLT order does not specifically refer to Clause 10 of Part I of the First Schedule to the Chartered Accountants Act, 1949 or Regulation 192 of the Chartered Accountants Regulations, 1988. Their possible application is therefore a matter of separate professional analysis and should not be presented as a finding of the Tribunal.

Clause 10 of Part I of the First Schedule generally addresses the charging or acceptance by a chartered accountant in practice of fees based on a percentage of profits or contingent upon the findings or results of professional employment, except where such remuneration is permitted under the applicable regulations.

Whether that restriction applies in the present case would require examination of matters including:

• the identity and regulatory status of the contracting entity;
• the professional status of the persons who actually rendered the services;
• the capacity in which they acted before the GST authorities;
• the precise nature and scope of the engagement;
• whether the services constituted regulated professional services;
• whether the client was also an audit or assurance client; and
• whether the fee arrangement fell within any exception permitted by the applicable regulations.

These matters were not determined by the NCLT. They would require independent examination by ICAI or another competent forum after considering the Engagement Letter, the persons involved in rendering the services and the applicable professional framework.

Section 23 of the Indian Contract Act and Public Policy

Mobase’s reliance on Section 23 of the Indian Contract Act, 1872 was recorded as part of its defence. The company argued that the alleged outcome-based fee was contrary to statutory and professional restrictions and was consequently opposed to public policy.

The NCLT regarded this objection as one of several matters demonstrating that a substantial dispute existed. It did not, however, finally hold that the Engagement Letter or the outcome-based fee clause was void under Section 23.

Any definitive conclusion concerning contractual invalidity would therefore require adjudication by a competent forum and cannot be attributed to the NCLT’s order dismissing the Section 9 petition.

Need for Regulatory Clarity on Outcome-Based Fees

The order highlights the need for clarity concerning outcome-based remuneration in professional assignments involving tax and statutory proceedings. The permissibility of such an arrangement cannot be determined merely from the terminology used by the contracting parties.

A proper examination would need to consider the substance of the engagement, the identity and professional status of the service providers, the capacity in which the services were rendered, the relationship between the fee and the result obtained, and the scope of any exception available under the applicable professional regulations.

The NCLT did not possess or exercise disciplinary jurisdiction under the Chartered Accountants Act in the Section 9 proceeding. It therefore correctly refrained from recording any finding of professional misconduct and left the matter for possible examination by the competent regulator.

If ICAI examines the matter, its determination should clearly identify whether the persons rendering the services were governed by its regulatory framework and, if so, whether the outcome-based fee was covered by a permissible exception or attracted the restriction applicable to contingent professional fees.

Such a reasoned determination would provide useful guidance to chartered accountants and professional organisations undertaking tax, consultancy and regulatory assignments involving variable or outcome-linked remuneration.