[IBC] Adjudication of avoidance application is independent of the resolution of the Corporate Debtor and can survive CIRP, propounds HC,

 

The Delhi High Court opined that the corporate insolvency resolution process (hereinafter referred to as “CIRP”) and avoidance applications are different proceedings and hence, adjudication of avoidance application is independent of the resolution of the corporate debtor and can survive CIRP. Further, avoidance applications cannot be rendered infructuous where the resolution plan is silent on the treatment of such applications.  Money borrowed from creditors is public money and hence, the same cannot be appropriated by way of private transactions/arrangements. 

Therefore, the RP will not be functus officio when it comes to avoidance applications. After avoidance of transactions the money cannot go to the kitty of the resolution applicant and the benefit must be given to the creditors. 

Brief Facts:

An application for CIRP of M/s Bhushan Steel Limited was sought by SBI on default on credit facilities. Thereafter, a Committee of Creditors (“CoC”) was constituted, and the resolution plan of Tata Steel Ltd. was approved. The plan was proposed before NCLT for approval. Before the approval, the Forensic Auditor of Bhushan Steel submitted a Forensic Auditor Report to the Resolution Professional (“RP”). The report disclosed several shady transactions entered by the Corporate Debtor. One such transaction was with Venus Recruiters (Respondent No.1) which contained a clause stipulating payment of a 10% service charge to Venus in lieu of manpower supplied under the agreement. 

Thereafter, the RP filed an application (“Avoidance Application”) under Section 25(2)(j), 43 to 51 and 66 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC”) showing several transactions as suspect transactions. Subsequently, NCLT approved the resolution plan and hence, Tata Steel assumed control of Bhushan Steel Limited.

The NCLT noted that the avoidance application was filed by the RP before the approval of the resolution plan. Parallelly, the order was passed by the NCLT to approve the resolution plan. Therefore, Respondent preferred a writ petition before the Learned Single Judge seeking proceedings before the NCLT to be declared void. 

The Learned Single Judge firstly held that continuation of the jurisdiction of NCLT beyond what has been permitted under IBC would be contrary to the Code. It was further held that the RP cannot continue beyond an order under Section 31 of the IBC as CIRP end with a successful resolution plan. Moreover, an avoidance application cannot be filed by the Resolution Applicant especially when the plan is approved. It was opined that allowing adjudication of avoidance application after the resolution of the debtor would be like stepping in the shoes of the new management to decide what is good for it. It was held that the application under Section 43 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC”) cannot survive beyond the conclusion of the corporate insolvency resolution process (hereinafter referred to as “CIRP”). 

Hence, the Appellants (Tata Steel BSL Ltd. (TSBL), Union of India) collectively preferred Letters Patent Appeals against the said order of the Learned Single Judge.

Contentions of the Tata Steel BSL Ltd:

It was argued that the avoidance application has to be filed before the NCLT and therefore, the Learned Single Judge could not have adjudicated on the same. Further, as per Section 26, CIRP cannot be extended to proceedings borne out of avoidance applications. The section itself clarifies that the filing of an avoidance application shall not affect the CIRP proceedings and hence, the proceedings can continue parallelly with CIRP. Also, the avoidance applications may continue beyond CIRP as well.

Contentions of the Union of India:

 

It was argued that if judicial review by High Courts is allowed for the orders of NCLT, the same would defeat the purpose of the IBC. After the CIRP comes to an end, the RP does not become functus officio and the avoidance proceedings cannot be said to be terminated. It was submitted that Regulation 35A is only a directory regulation when it comes to timelines provided under it. 

Contentions of the RP:

It was contended that there exists no requirement for RP to pursue the avoidance application and the same can be done by the Corporate Debtor upon the successful resolution of the CIRP. 

Contentions of the Venus Recruiters Pvt. Ltd:

It was argued that the avoidance application cannot be continued after the approval of the resolution plan. NCLT has no jurisdiction if there is neither CIRP nor a liquidation process. It was argued that the mandate of RP cannot run beyond the CIRP proceedings. 

It was also argued that as per Section 43(1) of the IBC, an application for the avoidance of preferential transactions can only be filed by RP or a liquidator.

 

Observations of the Court: 

The Court analyzed the scheme of IBC vis-à-vis avoidable transactions and noted that the inclusion of Sections 43-51 and 66 and 67 in IBC were done to ensure that RP can avoid these to protect the interest of the creditors. These Sections seek to enhance the pool of assets of the Corporate Debtor for either making it a lucrative prospect for a Resolution Applicant or in case of liquidation, for distributing amongst creditors. 

It was noted that adjudication of avoidance applications may take more time in adjudication especially when multiple parties enter transactions with the Corporate Debtor and there is an allegation of involvement of related parties.

The bench opined that the nature of avoidance application is such that it can survive after CIRP. This was strengthened by examining IBBI’s ‘Discussion Paper on Corporate Liquidation Process’, which even though is not binding but provides constructive guidance on the treatment of avoidance applications after CIRP ends. 

It was enunciated that the amended Regulation 35A of the CIRP Regulations, 2016 makes it clear that an avoidance application can be pending even beyond the submission of the resolution plan. Such proceedings of avoidance application may be contested and require proper scrutiny of facts and law and therefore, there is a possibility that these last beyond the conclusion of CIRP. 

The High Court propounded that an avoidance application will survive the CIRP if all suspect transactions filed have been accounted for in the resolution plan. It was also noted that the judgment of the Learned Single Judge implies the same as it acknowledges that a resolution plan can permit the RP to function even after CIRP. 

Concerning the maintainability of the writ petition filed before the Learned Single Judge, it was held that the writ petition was not maintainable as the correct remedy was to prefer an appeal before the NCLAT as IBC is a special statute that seeks to be a single source of guidance for all issues relating to insolvency. 

Further, during the pendency of the present appeals, Regulation 38(2)(d) was added to the CIRP Regulations, 2016. The implication of the same is that it becomes mandatory now that the resolution plan considers the fraudulent transactions which if set aside gives CoC an extra amount that otherwise would have been lost as the resolution process comes to an end. 

It was opined that the resolution process is for the corporate debtors and to ensure CoC is not put at a loss because the amount lost is principally public money and the public cannot be made to suffer due to the fraudulent acts of the company. Further, it was enunciated that all resolution plans submitted before the NCLT on or after 14.06.2022 must mandatorily provide for how they propose to deal with a sub-judice avoidance application. Concerning resolution plans submitted for approval before 14.06.2022, it was held that they do not have such an obligation. 

The division bench enunciated that Regulation 35A is only a directory provision which implied that there is no strict timeline for CIRP proceedings. Also, there is no such timeline in the law for NCLT to adjudicate on the avoidance applications. Therefore, in absence of any such law, the Learned Single Judge could not have imposed any condition. 

It was ruled that the avoidance transactions provisions are primarily to benefit the creditors, therefore, even if the resolution plan is silent on the treatment of any pending applications, the creditors can still be beneficiaries of the sum or properties recovered from the adjudication of the avoidance application.  

The High Court observed that Sections 43-51, 66, and 67 of the IBC aim at swilling the asset pool. It was observed that the suspect transactions have to be thoroughly examined and therefore, to conclude these proceedings within the time frame laid down in the process is impossible. Noting that the money belongs to the public, it was opined that if any amount is received, the same shall be distributed to the Committee of Creditors in a manner prescribed by the NCLT. 

The decision of the Court:

It was opined that the CIRP and avoidance applications are different proceedings and hence, adjudication of avoidance application is independent of the resolution of the corporate debtor and can survive CIRP. Further, avoidance applications cannot be rendered infructuous where the resolution plan is silent on the treatment of such applications.  Money borrowed from creditors is public money and hence, the same cannot be appropriated by way of private transactions/arrangements. 

Therefore, the RP will not be functus officio when it comes to avoidance applications. After avoidance of transactions the money cannot go to the kitty of the resolution applicant and the benefit must be given to the creditors. 

Based on the aforementioned reasons, the judgment of the Learned Single Judge was set aside and NCLT was directed to continue with the adjudication of the avoidance applications. Accordingly, the appeals were disposed of. 

Case Title: Tata Steel BSL Limited v. Venus Recruiter Private Limited & Ors. and other connected matters

Coram: Hon’ble the Chief Justice, Hon’ble Mr. Justice Subramonium Prasad

Case No: LPA 37/2021 and other connected matters 

Advocates for Appellant: Advs. Mr.V.P.Singh, Ms. Anindita Roy Chawdhury, Ms. Vatsal Rai, and Ms. Simran Bhat

Advocates for Respondents: Advs. Mr. Kapil Sibal, Ms. Ranjana Roy Gawai, Ms. Vasudha, Ms. Arushi Tiku, Mr. Chetan Sharma, Mr. Anurag Ahluwalia, Mr. Amit Gupta, Mr. Rishav Dubey, Mr. Danish Faraz Khan, Mr. Saurabh Tripathi, Mr. Sahag Garg, Mr. Akarsh Srivastava, Mr. Manmeet Singh, Ms. Nishtha Chaturvedi, Mr. Shatakshi Tripathi

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