Home » Between The Lines » Delhi High Court: Once the CIRP process itself comes to an end, an application for avoidance of transactions cannot be adjudicated

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The Delhi High Court (“DHC”) has in its judgement dated November 26, 2020 (“Judgement”), in the matter of M/S. Venus Recruiters Private Limited v. Union of India [W.P.(C) 8705/2019 & CM APPL. 36026/2019], held that the role of the Resolution Professional (“RP”) cannot continue once the resolution plan (“Plan”) is approved and the
successful resolution applicant takes charge of the corporate debtor (“Corporate Debtor”). It was further held that the National Company Law Tribunal (“NCLT”) has no jurisdiction to entertain and decide avoidance applications in respect of a Corporate Debtor, which is now under a new management, unless provision is made in the final Plan.

Facts
M/s Bhushan Steel Limited, the Corporate Debtor in the instant case, was the subject of Corporate Insolvency Resolution Process (“CIRP”) before the NCLT, New Delhi, initiated by the State Bank of India in 2017. When the CIRP was initiated, Mr. Vijay Kumar Iyer was appointed as an interim resolution professional, who was subsequently confirmed as the RP by the Committee of Creditors (“CoC”) at its first meeting held on August 24, 2017. The CoC
approved the Plan proposed by Tata Steel Limited and the same was filed to seek approval before the NCLT on March 28, 2018. Thereafter, on April 9, 2018, the RP herein also filed an avoidance application, being CA No.284(PB) of 2018, under Section 25(2)(j), Sections 43 to 51 and Section 66 of the Insolvency and Bankruptcy Code, 2016 (“IBC”). In the said avoidance application, various transactions were enumerated as suspect transactions with related parties. The following were the suspect transactions allegedly entered into by the Corporate Debtor in the instant case:

  • Potential excess payment of lease rent to Vistrat Real Estate Private Limited;
  • Preferential credit to various international customers and long outstanding receivables to entities such as Shree Steel Djibouti FZCO and Shree Global Steel FZE;
  • Excess payments to manpower companies/ contractors; and
  • Uncontracted payment of interest on advance to Peak Minerals and Mining Private Ltd. for cancelled sale-and-lease back transactions.

M/s Venus Recruiters Private Limited (“Petitioner”) is one of the manpower contractors, as listed in suspect transactions in (iii) above. The Corporate Debtor and the RP herein, the successful resolution applicant (Tata Steel Limited) and the Union of India are hereinafter  collectively referred to as the “Respondents”. Within five weeks of filing the avoidance application, the NCLT approved the Plan, and the avoidance application in relation to the suspect transactions was neither heard nor decided on merits. On May 18, 2018, the Plan was finally closed and the new management took over. On July 24, 2018, the NCLT passed an order in the avoidance application (C.A. No. 284/2018), which was filed prior to the approval of the Plan.

The NCLT’s order dated May 15, 2018, approving the Plan, was subsequently upheld by the National Company Law Appellate Tribunal (“NCLAT”) by its judgment dated August 10, 2018. However, on October 25, 2018, the NCLT impleaded the Petitioner as a party in CA No. 284(PB)/2018 and issued notice to it. It is the said order impleading and issuing notice to the Petitioner, which was challenged by the Petitioner in the present petition, seeking issuance of a writ declaring the proceedings pending before the NCLT as void and non-est.

Issues

  • Whether an application for avoidance of a preferential transaction, though filed prior to the Plan being approved, can be heard and adjudicated by the NCLT, at the instance of the RP, after the approval of the Plan.
  • Whether a RP can continue to act beyond the approval of the Plan.
  • Who would get the benefit of an adjudication of the avoidance application after the approval of the Plan.

Arguments
Contentions raised by the Petitioner:

The Petitioner questioned the jurisdiction of the NCLT and submitted that once the CIRP has reached finality, the RP becomes functus officio, after which it was no longer entitled to file or pursue any application on behalf of the company. Various provisions of the IBC were referred to, to submit that the RP merely conducts and manages the operations of the Corporate Debtor during the CIRP and not beyond that. As per Section 60 of the IBC, jurisdiction of the NCLT cannot extend beyond the approval of the Plan, and as the NCLT had disposed of all the pending applications by its order on May 15, 2018 making way for the new management to acquire control of the erstwhile Corporate Debtor, at a later stage, the order issuing notice in an application filed prior to the acceptance of the Plan is completely void. It was further submitted that there are strict timelines provided under the IBC. Reliance was placed on the preamble of the IBC which emphasizes its purpose of concluding the insolvency proceedings in a time bound manner. As per the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations“), there are specific timelines prescribed for the RP to determine whether any transaction was preferential, undervalued, fraudulent or extortionate and also to file an application before the NCLT, both within the prescribed 180-day period. Accordingly, it was advanced that avoidance of any such transactions ought to be undertaken before conclusion of the CIRP. It was further emphasized that avoidance applications could not be filed by the Corporate Debtor or by the resolution applicant, but only by the CoC or the RP, prior to the Plan being approved. The difference between a statutory remedy under Sections 43 and 44 of the IBC and a civil remedy was highlighted and it was argued that once the new management comes into control of the Corporate Debtor, post the approval of the Plan, the Corporate Debtor was free to avail of its civil law remedies in respect of any new transaction that the new management is overviewing. The Petitioner explained that once the Plan is approved, the CoC itself is wound up, as all the dues of CoC are paid and a “No Dues Certificate” is submitted, after which no further proceedings can be undertaken by the CoC. Since the CoC
assumes the role of the final arbiter of the Plan, if it chooses not to pursue any particular transaction, the RP ought not to be allowed to pursue the same and reopening the resolution process in this manner would have adverse implications.

Contentions raised by the Respondents:
The Respondents protested that despite receiving the notice in the avoidance proceedings in April 2018, the Petitioner approached the DHC only in 2019 and thus it would not be entitled for discretionary jurisdiction to be exercised in its favour. The Respondents highlighted that the intention of the IBC is to delink the CIRP proceedings from avoidance transactions inasmuch as the adjudication of such transactions could take much longer than timelines fixed in the adjudicatory process. It was submitted that after the introduction of Section 26 of the IBC, it is clear that the power of the RP is independent of the CIRP proceedings. The Respondents, with the support of the Discussion Paper on Corporate Liquidation Process along with Draft Regulations published by Insolvency and Bankruptcy Board of India (“IBBI”) on April 27, 2019, contended that applications in respect of vulnerable transactions are long drawn due to continuous litigation and it is for this reason that Section 26 of the IBC clarifies that filing of an avoidance application shall not affect the proceedings of the CIRP. Reliance was placed on the decision in Committee of Creditors of Essar Steel India Ltd. through Authorised Signatory v. Satish Kumar Gupta [Civil Appeal No. 8766-67 of 2019, dated 15th November, 2019 (SC)], wherein the Supreme Court held that, although timelines were important in the CIRP proceedings, the word ‘mandatorily’ was struck down from
Section 12 of the IBC as being violative of Article 19(1)(g) of the Constitution. It was also argued that any order passed by the NCLT under Sections 60 and 61 of the IBC is appealable to the NCLAT, thereby questioning the jurisdiction of the DHC to entertain the instant writ petition on accord of an alternate remedy.

The point raised was that the NCLT could not have disposed of the entire petition, without dealing with the avoidance application and the timelines to adjudicate on the avoidance transactions can in fact be extended. It was contended that a perusal of Regulation 39(4) of the CIRP Regulations along with Form H of the CIRP Regulations clearly shows that the avoidance application could be filed or be pending at the time of submitting the Plan by the RP. It was pointed out that Clause 4.2 of the Report of the Insolvency Law Committee, constituted by the Ministry of Corporate Affairs dated 20th February, 2020 (“ILC Report”), opined that an avoidance application may continue even beyond the closure of the resolution proceedings. The Respondents argued that the RP, after arriving at a conclusion that a particular transaction is a preferential transaction, has to approach the NCLT, which can reverse the effect of the transaction and under Section 26 of the IBC there is no fixed time limit for deciding an avoidance application.

Observations of the Delhi High Court

Role of the RP:
While making note of the structure of the CIRP prescribed under the IBC, the DHC held that under Section 31 of the IBC, if the NCLT is satisfied with a Plan, it shall approve the same, making it binding on the Corporate Debtor and its stakeholders and guarantors. After ensuring that the Plan has sufficient provisions for its implementation, the NCLT approves the Plan, pursuant to which the moratorium order under Section 14 of the IBC ceases. The RP forwards all the records relating to the CIRP and the Plan to the IBBI to be recorded on its database, after which the role of the RP comes to an end.

Application for avoidance transactions:
The IBC contemplates various transactions which could be considered as objectionable or unacceptable and may require to be either reversed or compensated for, in order to maintain the fairness of insolvency or liquidation process to the creditors. As per Section 43 of the IBC, if the RP is of the opinion that any preferential transaction has taken place, by which the Corporate Debtor has given any benefit to a related party two years prior to the insolvency commencement date, or a preference to an unrelated party one year prior to the said date, he can move an application with the NCLT for avoidance of the same. If the NCLT is of the view that the transaction was a preferential transaction, it can pass various types of orders as set out in Section 44 of the IBC, in effect neutralizing the transaction including the reversal of the transaction, sale of any property given under the transaction, and amounts being paid in respect of benefits received. The DHC noted that a related party transaction would be preferential if it has taken place two years before the insolvency commencement date and puts such party in a beneficial position as against other creditors, sureties or guarantors. In case of an unrelated party, the period is one year.

The avoidance application in the instant case was filed after the CoC had approved the Plan and almost at the very end of the submissions on the Plan being heard by the NCLT, which it did not deal with at the time of approving the Plan. The DHC opined that after the approval of the Plan and the new management taking over the Corporate Debtor, no proceedings remain pending before the NCLT, except issues relating to the Plan itself, as permitted
under Section 60 of the IBC. Emphasizing that certainty and timeliness is the hallmark of the IBC, the DHC reiterated the views upheld in Innoventive Industries Ltd. v. ICICI Bank & Anr. [(2018) 1 SCC 407], that one of the important objectives of the IBC is to bring the insolvency law in India under a single unified umbrella with the object of speeding up of the insolvency process. Continuation of the jurisdiction of the NCLT beyond what is
permitted under the IBC would be contrary to its very ethos. The DHC observed that after the approval of the Plan, the NCLT cannot exercise jurisdiction in respect of the avoidance application. It reasoned that an avoidance application for any preferential transaction is meant to give some benefit to the creditors of the Corporate Debtor and not to the Corporate Debtor in its new avatar, after the approval of the Plan, as is clear from Section 44 of the IBC.

The DHC noted that while the IBC is bereft of any provision prescribing a time limit to dispose of avoidance applications, the CIRP Regulations clearly stipulate the structure and methodology for dealing with objectionable transactions. Analyzing Sections 43 and 44 of the IBC, it observed that the assessment by the RP of the objectionable transactions including preferential transactions cannot be an unending process. As prescribed by the CIRP Regulations, if the RP concludes that the Corporate Debtor has been subject to preferential transactions, the determination has to be made by the 115th day and application to the NCLT for appropriate relief on or before the 135th day. The DHC observed that the said timelines are prescribed so that the RP includes these details in the resolution plan submitted under Section 30 of the IBC. These details ought to be available before the NCLT at the time of approval of the resolution plan under Section 31 of the IBC. The DHC observed that there is a start line and finish line for the CIRP. Section 23 of the IBC clearly stipulates that the role of the RP is to `manage’ the affairs of the Corporate Debtor `during’ the resolution process and not thereafter. Prior to the proviso to Section 23 of IBC, the RP’s mandate ended with the CIRP, but the proviso merely extended the functions of the RP till the approval of the Plan under Section 31 of the IBC, or appointment of liquidator, and not beyond that. Thus, the continuation of the RP or filing of an application for the purpose of prosecuting an avoidance application as a `Former RP’ is beyond the contemplation of the IBC. The RP ceases to be one after an order under Section 31 of the IBC is passed. The RP does not have any connection whatsoever with the new management which takes over the erstwhile Corporate Debtor, after the approval of the Plan. Any other interpretation could lead to a situation where an RP could be a ‘Former RP’ for years together without any definite end date.

The DHC pointed out that the mandate for the RP, under Section 23 of the IBC, cannot be extended beyond the contemplation in the statute. After the approval of the Plan, the new management takes over, and the manner in which the affairs of the company are to be run is the sole prerogative of the new management. In the statutory scheme, the RP cannot continue to act on behalf of the erstwhile Corporate Debtor under the title of `Former RP’, in violation of the legislative intention and the statutory prescription. A perusal of Section 30(4) of the IBC also makes it adequately clear that the CIRP period has to be completed within the time period specified under Section 12(3) of the IBC. Thus, the IBC does not contemplate the continuation of the RP beyond the CIRP period. The DHC clarified that the Judgement passed was strictly applicable to resolution processes and not liquidation. It was also observed that once the CIRP comes to an end, Form H of the CIRP Regulations cannot come to the aid of avoidance applications to remain pending beyond the CIRP process. The DHC, upon closely looking at the ILC Report, observed that the successful resolution applicant cannot be permitted to file such avoidance applications, as the same was not factored into the bid. If an avoidance application for preferential transactions is permitted to be adjudicated beyond the period after the Plan is approved, the NCLT would effectively be stepping into the shoes of
the new management to decide what is good or bad for the erstwhile Corporate Debtor. Once the Plan is approved and the new management takes over, it is completely up to the new management to decide whether to continue a transaction or agreement or not. Thus, if the CoC or the RP are of the view that there are any transactions which are objectionable in nature, the order in respect thereof would have to be passed prior to the approval of the Plan.

Decision of the Delhi High Court
Allowing the petition, the DHC held that once the CIRP process itself comes to an end, an application for avoidance of transactions cannot be adjudicated. It was held that after the approval of the Plan and the new management taking over the Corporate Debtor, no proceedings remain pending before the NCLT, except issues relating to the Plan itself, as permitted under Section 60 of the IBC. Emphasizing on the lack of jurisdiction of the NCLT, the DHC upheld the maintainability of the instant writ petition and held the argument that avoidance applications relating to preferential and other transactions can survive beyond the conclusion of the CIRP, to be contrary to the scheme of the IBC. It was also held that the RP cannot continue beyond an order under Section 31 of the IBC, as the CIRP comes to an end with a successful Plan having been approved, subject to the Plan stating otherwise. The DHC further held that the RP’s role cannot continue once the Plan is approved and the successful resolution applicant takes charge of the Corporate Debtor.

It was decided that Section 26 of the IBC cannot be read in a manner so as to allow an application for avoidance of transactions under Section 25(2)(j) of the IBC to survive after the CIRP process. It was categorically held that the NCLT has no jurisdiction to entertain and decide avoidance applications, in respect of a Corporate Debtor, now under a new management unless provision is made in the final Plan and the parties would have to resort to civil and other remedies in terms of the contract between them. The DHC stated that the RP cannot wear the hat of the ‘Former RP’ and pursue an avoidance application in respect of preferential transactions after the hat of the Corporate Debtor has changed and it no longer remains a Corporate Debtor as this would be wholly impermissible in law as the mandate of the RP has come to an end.

Vaish Associates Advocates View:

Avoidance transactions under the IBC include transactions such as preferential transactions, undervalued transactions, extortionate credit transactions and transactions involving fraudulent and wrongful trading. When the RP or the Liquidator comes across any transaction that can be classified as avoidance transaction, the IBC mandates them to file an avoidance application with the NCLT, seeking appropriate reliefs and directions permissible under the IBC. In the instant case, the question that arose before the DHC pertains to the timeline for disposal of an avoidance application. The DHC has through this Judgement furnished much needed clarity on the fate of pending avoidance applications under Section 43 of the IBC, pursuant to the conclusion of the CIRP.

This Judgement has successfully prescribed a deadline, which has not been expressly stipulated in the IBC or its corresponding regulations, for the speedy disposal of avoidance applications. This case now acts as a precedent for NCLTs throughout the country, highlighting the need to deal with avoidance applications on a priority basis prior to the approval of the Plan. Through the Judgement, the DHC has upheld the integrity of one of the basic tenets of the IBC, that is, insolvency resolution in a time-bound manner.

For more information please write to Mr. Bomi Daruwala at [email protected]

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