The author is Aasthita Dutta Majumder, fourth year student at University of Mumbai.
While Vidarbha Industries and Rainbow Papers still remain a concern for the legal fraternity, a recently delivered judgment by the Hon’ble High Court of Delhi (HC) clears the air around the fate of avoidance applications. On Jan 13, 2023, a Division Bench (DB) of the Hon’ble HC overruled the findings of the Ld. Single Judge in Venus Recruiters Pvt Ltd. v Union of India, and held inter alia that adjudication of an avoidance application is independent of the resolution of the corporate debtor and can survive beyond CIRP.
It is common knowledge that a resolution professional is obligated to identify certain transactions (preferential, undervalued, fraudulent, etc) as per the Insolvency and Bankruptcy Code, 2016 (IBC) and file applications for avoidance of the same in order to safeguard the interest of stakeholders. In the instant case, the Hon’ble HC has analysed the scope and nature of CIRP and avoidance application within the scheme of IBC and clarified who can continue to pursue such applications.
Facts in brief
In 2017, State Bank of India triggered insolvency against M/s Bhushan Steel Ltd (CD) under Section 7 of IBC. Subsequently, a Committee of Creditors (CoC) was constituted and a Resolution Professional (RP) was appointed. In 2018, the RP filed the approved resolution plan proposed by Tata Steel Ltd. before NCLT for its approval.
In the meantime, the RP filed an avoidance application identifying certain ‘suspect transactions’ between the CD and other parties (one of them being Venus Recruiters Pvt. Ltd. – “Venus Recruiters”). Ultimately, the NCLT approved the resolution plan and issued notices to the Respondents of the avoidance application filed by the RP.
Dissatisfied with the issue of notice/impleadment under the avoidance application, Venus Recruiters sought issuance of a writ before the Hon’ble HC declaring the pending adjudication of the avoidance application, as void since CIRP had concluded.
The Ld. Single Judge categorically held that since CIRP ended after approval of resolution plan -
1. The continuation of the jurisdiction of NCLT/Adjudicating Authority (AA) beyond what is permissible under the IBC was contrary to its ethos. Hence, the writ petition was maintainable.
2. The RP could not continue to act as former RP as it would be violative of the legislative intention and the statutory prescription.
3. The adjudication of the avoidance application after resolution of the debtor is tantamount to NCLT stepping in the shoes of the new management to decide what is good for it.
Aggrieved by the Impugned Order dated Nov 26, 2020, the Appellant(s) namely Tata Steel BSL Ltd. and the Union of India filed the instant appeal.
Jurisdiction of NCLT/AA – Scope of Section 60(5) of IBC [S.60(5)]
S. 60(5) is an overriding provision under IBC that elucidates the extent of jurisdiction that can be exercised by the NCLT/AA pertaining to matters of the corporate debtors/persons. In this regard, the DB of Hon’ble HC held that the Ld. Single Judge limited the scope of S. 60(5) and erred in holding that applications/petitions must only pertain to CIRP. Further, it was incorrectly held that – post-CIRP, NCLT/AA becomes functus officio in respect of any application/petition with respect to erstwhile corporate debtor.
The DB liberally interpreted S. 60(5) to hold that the phrases “arising out of” and “in relation to” are to be understood in a wider sense and observed that “where a right or liability is created by a statute which gives a special remedy for enforcing it, the remedy provided by that statute only must be availed of”. Hence, the writ petition was not maintainable.
Fate of Unaccounted Avoidance Applications
Regulation 38(2)(d) of CIRP Regulations, 2016 prescribes that a resolution plan shall provide the manner in which avoidance proceedings need to be pursued post approval of such resolution plan. The DB reflected on the foregoing regulation and held that a resolution plan must account for/provide for the treatment of avoidance applications (if pending) but they can’t be rendered infructuous in situations wherein the resolution plan could not have accounted for avoidance applications due to unavoidable exigencies. Therefore, “in cases wherein such transactions could not be accounted for, the AA will continue to hear the application post-CIRP”.
Role of RP vis-à-vis Avoidance Applications
The DB held that the RP will not be functus officio with respect to adjudication of avoidance applications since deciding such applications and CIRP are a separate set of proceedings. Considering the extent of discovery and investigation required for dubious transactions, the RP can continue to pursue such applications without stalling the process of CIRP. Further, “the method and manner of the RP’s remuneration ought to be decided by the AA itself”.
With respect to jurisdiction, the DB has rightly ruled that the writ petition by Venus Recruiters was not maintainable since an efficacious remedy had existed before NCLAT. From the observations made in Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta and the ILC Report, it is evident that a comprehensive interpretation of S. 60(5) deters multiplicity of proceedings, aids timely resolution of insolvency and suggests that language of Section 60 of IBC is couched in a wide manner permitting all proceedings under Part II of IBC to be adjudicated by the NCLT.
Hence, “when an alternate remedy is available, judicial prudence demands that the Court refrains from exercising its jurisdiction under the constitutional provisions”.
Also, Regulation 38(2)(d) of CIRP Regulations, 2016 has no bearing in relation to the fate of avoidance applications as it does not extinguish the pending proceedings pertaining to such transactions. In fact, a conjoint reading of S. 26 of IBC and Regulation 39(2) r/w Form-H of the Schedule of CIRP Regulations, 2016 would clarify that IBC does not put a bar on the continuity of avoidance applications even after the conclusion of CIRP. Evidently, the pre-pack scheme under the Code also envisages the same (Chapter III-A of IBC).
It is pertinent to note that, value-maximization and interest of creditors are of utmost importance under IBC, considering this the DB has interpreted the timelines prescribed under Regulation 35A of CIRP Regulations, 2016 to be directory and opined that benefit arising out of unaccounted avoidance applications shall go to the creditors rather than the erstwhile CD.
Although proceeds arising out of such applications are commonly for the benefit of the creditors, interestingly, it still remains a discretion on part of the AA to endow such benefit solely to the creditors or not. The case of Anuj Jain v Axis Bank Ltd. and 63 Moons Technologies Ltd. v DHFC Ltd. assumes importance in this context.
Approximately 1/8th of the total filed avoidance applications were disposed by the AA, as per the IBBI Data signifying an abysmally low rate of disposal. The instant decision vindicates that completion of CIRP is not dependent on avoidance proceedings, thereby diluting the priority exercised for disposing such proceedings.
While timelines are directory in case of avoidance applications, one might wonder if it means that they would continue indefinitely. In practice, CIRPs even after strict timelines fail to conclude in time. The Apex Court has stressed the importance of identifying dubious transactions and the manner in which they can be effectively dealt with. In pursuance of the same, a realistic timeline is necessary for disposing off ancillary proceedings (like avoidance proceedings) as time is the essence of the Code. This would not only free the creditors from the hassle of prolonged litigation but help them realise the proceeds of such applications more efficiently.
The Insolvency regime in India is experiencing rapid changes and development. Against this backdrop, one can hope for changes that are positive in nature. This much-awaited course correction finally took place a year post the per-incuriam decision - which had created a stir in the legal community. Though this can be identified as a respite for those involved in this case, there are still plausible questions that persist with reference to disposal of avoidance claims.
Recently, the Ministry of Corporate Affairs proposed a set of amendments to strengthen and increase the efficacy of the IBC. Two out of these proposed changes (if effected), might overturn the position created under Vidarbha Industries and Rainbow Papers.
Hope lies in expecting such future changes that would eventually streamline the adjudication and disposal of avoidance claims as well.