In a recent 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, conclusively held that an avoidance application relating to preferential transaction under section 43 of Insolvency and Bankruptcy Code pending as on date of approval of Resolution Plan shall not survive beyond the conclusion of the insolvency resolution process.
The Insolvency and Bankruptcy Code, 2016 enumerates four types of unguarded and risk covered transactions namely-
- preferential transactions,
- undervalued transactions,
- transactions defrauding creditors, and
- extortionate credit transactions.
Such transactions are objectionable and unacceptable and are required to be either reversed or compensated for, in some manner in order to ensure that the insolvency and/or liquidation process is fair to creditors. The legislation provides for the process for avoidance of the same. The Resolution Professional, while facilitating the resolution process of a Corporate Debtor, is duty-bound to observe and identify any such transaction and report the same to the Adjudicating Authority. Thereafter, the application is adjudicated upon and appropriate orders are passed to reverse the effect of such transaction in favor of the creditors.
In this matter, the Court passed an order quashing avoidance proceedings initiated by the National Company Law Tribunal (NCLT) post approval of the Resolution Plan. It further 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. On the same date, the NCLT appointed an Interim Resolution Professional (IRP) for the Corporate Debtor. Thereafter, a public announcement was also made in accordance with Section 15 of the IBC inviting submissions of claims against the Corporate Debtor. Later, a Committee of Creditors was constituted and a first meeting was held wherein IRP was confirmed as the Resolution Professional (RP) for the Corporate Debtor.
The COC approved the Resolution Plan and the RP filed the same on 28th March 2018 for approval by the Adjudicating Authority. The RP filed an avoidance application under Section 25(2)(j), Section 43 to 51 and 66 of the IBC on 9th April 2018. This avoidance application was a result of a Forensic Audit Report submitted by a Forensic consultant wherein he enumerated various transactions as a ‘suspected transaction’.
Nearly five weeks later after the avoidance application was submitted, the proposed Resolution Plan was found in favor of the CoC and accordingly it was approved by the NCLT vide order dated 15th May 2018. The order further said that ‘all other applications are also disposed off’. As a result, the avoidance application filed by the RP in relation to the abovementioned suspected transaction was not heard nor dealt with on the merits.
Eventually, on 18th May, 2018, after the Resolution Plan was finally closed, the new management took over the Corporate Debtor pursuant to the order. Few days later, on 24th July, the NCLT passed an order in the avoidance application that was filed prior to the approval of the Resolution Plan. On 25th October, 2018, the NCLT impleaded the petitioner and issued notice to it through a fresh memo of parties. By the time the petitioner was impleaded as a party to the avoidance application and issued the notice, the Resolution Plan of the original corporate debtor had already been approved by the NCLT. It was this order wherein the petitioner was impleaded and issued the notice which was challenged in the petition before the High Court.
Submissions of the Parties
The petitioner’s objection was that since NCLT had disposed of all the pending applications 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 applications ought to be taken before the 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 transactions 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 stipulated 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.”
A Resolution Professional (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 an RP indefinitely even beyond the approval of the Resolution Plan would be contrary to the purpose and intent behind his/her appointment. 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.
While delivering the judgment, Justice Singh quoted, “In the matter of M/S Innoventive Industries Ltd. v. ICICI Bank & Anr., the Apex Court observed that one of the most important objectives of the Code is to bring the insolvency law in India under a single unified umbrella with the object of speeding up of the insolvency process. Any continuation of the jurisdiction of the NCLT beyond what is permitted under the IBC would be contrary to its very ethos. There is a fundamental issue of jurisdiction that has been raised by the Petitioner as to whether after the approval of the Resolution Plan, the NCLT can exercise jurisdiction in respect of an avoidance application. In the opinion of this Court, the answer is in the negative.”
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.
Section 23 of the IBC distinctly stipulates that the role of the RP is to ‘manage’ the affairs of the Corporate Debtor ‘during’ the resolution process and ‘not’ thereafter. The court stated,
“Another very important function of the resolution professional is to collect, collate and finally admit claims of all creditors, which must then be examined for payment, in full or in part or not at all, by the resolution applicant and be finally negotiated and decided by the Committee of Creditor”.
How a resolution process has a start line and a finish line to it, similarly, there is a timeline to long the role of an RP can stay in effect and not thereafter. Even before the enactment of proviso to Section 23, the RP’s mandate concluded with the CIRP. Once the proviso was introduced, it merely extended the mandate of the RP till the approval of the Resolution Plan under section 31(1) or appointment of liquidation under section 34. This makes it amply clear that the RP’s authority is of limited nature and in any event, cannot extend beyond the order passed under section 31. There is an outer limit for the functioning of the RP. Hence, the continuation of a 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 once an order under section 31 is passed. The RP shall not have any connection whatsoever with the new management which takes over the Corporate Debtor. The CIRP period under section 23 is a specific period and under no circumstances can be read as a perpetual period or an indefinite period.
This article is an analysis particularly in the context of Resolution Process as discussed in the judgment delivered. The same observations of the court shall not be applicable in case of liquidation proceedings. In the 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 the company at the final stage. However, this is not the case in the present petition.
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.
It also brings about a relief for various third parties to questionable transactions that are often dragged into prolonged litigation, even when the CIRP is concluded. It further reiterates the importance of timelines in IBC legislation and shall act as a push towards analyzing the efficacy of the avoidance process as it is clear that achieving a final decision on the application of avoidance transaction within the timeframe of conclusion of CIRP is highly impractical.
About the author:
CA Anil Goel is a Chartered Accountant and an Insolvency Professional with over 36 years of experience. He is currently the Founder Chairman of AAA Group. AAA Insolvency Professional is a one of the largest IPE’s of the country handling IBC and SARFAESI matters.