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RP cannot wear the hat of ‘Former RP’ to pursue avoidance application: Delhi HC – By Adv Aniketa Prasad and Adv Aditya Gauri

In a judgment dated 26th November, 2020, a single judge bench of Justice Pratibha M Singh of Delhi High Court while adjudicating the matter between M/s Venus Recruiters Pvt. Ltd. v. Union of India (2020) 41 HC, held that an avoidance application relating to preferential transaction under section 43 of Insolvency and Bankruptcy Code shall not survive beyond the conclusion of the insolvency resolution process.

The court observed that the continuation of the Resolution Professional for the purpose of prosecuting an avoidance application after the completion of insolvency resolution process (CIRP) is beyond the contemplation of the IBC.

The petitioner, M/s Venus Recruiters Pvt. Ltd. was found in a suspected transaction, with Bhushan Steel Ltd. (now known as Tata Steel BSL Ltd.), the Corporate Debtor. Accordingly, an avoidance application was filed by the Resolution Professional (RP) before the National Company Law Tribunal (NCLT

The Corporate Debtor was under CIRP, initiated by the State Bank of India on 26th July 2017.  The COC approved the Resolution Plan in COC and the RP filed the same on 28th March 2018 for approval by the Adjudicating Authority. The RP filed application under Section 43 for avoidance transaction on 9th April 2018. The proposed Resolution Plan was approved by the NCLT vide order dated 15th May 2018 and all the pending applications were disposed off.  The avoidance application was not heard nor dealt with on the merits.

Eventually, the new management took over the Corporate Debtor pursuant to the order and NCLT passed an order in the avoidance application and issued notice to certain parties. By the time the petitioner was impleaded as a party to the avoidance application and issued notice, the resolution plan of the original corporate debtor had already been approved by the NCLT. The petitioner’s objection was that since NCLT had disposed of all the pending application when it approved the resolution plan and the new management had taken over the Corporate Debtor, NCLT could not have proceeded with the avoidance application.

The petitioner made the following submissions:

  • Once the CIRP has reached finality, the RP becomes functus officio and can no longer file or pursue any application on behalf of the company.
  • In terms of section 60 IBC, jurisdiction of NCLT cannot extend beyond the approval of the Resolution Plan.
  • Avoidance application ought to be taken before conclusion of the CIRP and such preferential transactions should form part of the Resolution Plan which is submitted to the CoC.

The opposition team argued that:

  • Intention of the IBC is to delink the CIRP proceedings from the avoidance transactions since adjudication of such transaction takes longer than the timeline stipulated in the adjudicatory process.
  • Power of the Resolution Professional is independent of the CIRP proceedings.
  • In spite of the notice in avoidance proceedings in 2018, the petitioner approached the High Court only in 2019.

The Court made an observation that an avoidance application for any preferential transaction is meant to give some benefit to the creditors of the Corporate Debtor and not the ‘New Corporate Debtor’ post the approval of the Resolution Plan. The Court further held that while IBC itself did not fix any time limits for filing of avoidance applications, CIRP Regulations in Chapter X clearly stipulates the “structure and methodology for dealing with objectionable transactions”.

Relying on sections 43 and 44 of IBC and Regulations 35A of CIRP Regulations which gives a specific timeline for formation of an opinion on objectionable transactions by the Resolution Professional, the Court stated, “A conjoint analysis of Sections 43 and 44 read with the applicable Regulations clearly shows that the assessment by the RP of the objectionable transactions including preferential transactions cannot be an unending process.”

“An RP cannot continue to file applications in an indefinite manner even after the approval of a Resolution Plan under Section 31. The role of an RP is finite in nature. He or she cannot continue to act on behalf of the Corporate Debtor once the Plan is approved and the new management takes over. To continue a resolution process indefinitely even beyond the approval of the Resolution Plan would be contrary to the purpose and intent behind appointment of a RP.” The Resolution Professional (RP), as the name itself suggests has to be a person who would enable the resolution. The role of the RP is not adjudicatory but administrative in nature. Thus, the RP cannot continue beyond an order under Section 31 of the IBC, as the CIRP comes to an end with a successful Resolution Plan having been approved. This is however subject to any clause in the Resolution Plan to the contrary, permitting the RP to function for any specific purpose beyond the approval of the Resolution Plan. In the present case, no such clause has been shown to exist.

The Court said that if an avoidance application for preferential transaction is permitted beyond the period after the Resolution Plan is approved, the NCLT steps into the shoes of the new management to decide the good or bad of the company. 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/agreement or not. Thus, if the CoC or the RP are of the view that there are transactions which are objectionable in nature, the order for the same must be passed prior to the approval of the Resolution Plan.

Concluding the judgment, the court held that the present petition is concerned with a Corporate Debtor in respect of a Resolution Plan approved by the NCLT wherein an application is sought to be filed by the RP as former RP through its counsel. 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 gone into the hands of new management. This is wholly impermissible in law as the mandate of the RP has come to an end.

Clearly the present petition is only in context of Resolution Process and accordingly the court has passed the judgment. However, the same observations of the court shall not applicable in case of liquidation proceedings.  In liquidation process, the situation may be different inasmuch as the liquidator may be able to take over and prosecute applications for avoidance of objectionable transactions.  The benefit of orders passed in respect of such transactions may be passed on to the Corporate Debtor which may assist in liquidating company at the final stage. However, this is not the case in the present petition.

CA Anil Goel, Founder Chairman of AAA Insolvency Professionals (AAAIP) says, “It is an important judgment that will help clear the air around the existing confusions surrounding the avoidance applications. It will also send out a strong message to the NCLTs to mark priority to disposing off of all the avoidance applications.  It is common practice where these seemingly comprehensive and complicated applications often take a backseat as the CIRP progresses. With the passage of this new order, a deadline, although not prescribed by the statute, will be considered for swifter adjudication of such applications.”

The judgment reported at : (2020) 41 HC