The authors are Rituraj Singh Parmar and Devyani Mishra, third year students at NLIU Bhopal.
Avoidance Application is an action against preferential or fraudulent transactions made by a company which has become insolvent. The Insolvency and Bankruptcy Code, 2016 (“IBC”) in order to reverse such transactions has developed a mechanism which is stipulated under Chapter 3 of the IBC (Sections 43-51). An Avoidance Application can be adjudicated at three possible stages viz., during CIRP, at the stage of liquidation and post resolution.
However, a Single Bench of the Delhi High Court has ruled that the validity of Avoidance Application ends with the conclusion of the CIRP and therefore can’t be adjudicated once the CIRP is completed. Overruling this, in the case of Tata steel v Venus Recruiter (“Venus Recruiters”), a Division Bench of the Delhi High Court held that Avoidance Application can be pursued post CIRP.
In light of this ruling of the Delhi High Court, this article attempts to analyse the implications of the judgement. The first section will delve into the background of the case; thereafter the author will explore and discuss the different aspects of the judgement. The article will conclude by analysing the case within the broader context of IBC vis-à-vis Avoidance Application.
Brief Background of the Case
In the instant case, the Resolution Professional (“RP”) moved an Avoidance Application under Section 43 of the Code after the submission of the Resolution Plan to the NCLT. Upon approval of the Resolution Plan, Tata Steels BSL Ltd. subsumed the control of Bhushan Steel Ltd. The NCLT, upon the observation that the Avoidance Application in question was submitted before the approval of Resolution Plan, proceeded to issue notice to the Respondent (Venus Recruiter Pvt Ltd). Aggrieved by the same, the Respondent moved a petition before the Learned Single Judge of the Delhi High Court, thereby challenging the legality of the Avoidance Application. In light of this, the court upheld that the Avoidance Application cannot be pursued post CIRP and that the RP becomes functus officio to further proceedings.
Effects of Regulation 35A and 38(2)(d) of CIRP Regulations, 2016 Post the Conclusion of the CIRP
The Division Bench held that Avoidance Application can be pursued upon the conclusion of the CIRP. The bench ruled that:
“The timelines prescribed under regulation 35A are merely directory and not mandatory in nature”.
In Essar Steel, the Hon’ble Supreme Court held that the CIRP in itself is not mandatorily bound by the prescribed timelines. Section 25(2)(j), IBC provides that the RP needs to file the Avoidance Application before the conclusion of CIRP and the said obligation had been discharged in the present case.
The Respondent argued that on account of Regulation 38(2)(d), Avoidance Application previously wouldn’t survive after the approval of the Resolution Plan. However, the Bench ruled that the said Regulation had no bearing on the instant matter. Regulation 38(2)(d) mandates Resolution Plan to provide for the ways to deal with Avoidance Applications and the proviso further sets the cut-off date for the implementation of the Regulation i.e., 14 June 2022. The Resolution Plans prior to the cut-off date are not required to clarify the manner in which these applications are to be dealt with. Therefore, the NCLT does have jurisdiction over the Avoidance Applications submitted by Resolution Professionals and thereby, it can be pursued post CIRP as well.
Position of RP vis-à-vis CIRP on One Hand and Avoidance Application on the Other
The arguments put forth by the Respondent that the RP becomes functus officio upon the successful conclusion of the CIRP and accordingly cannot pursue Avoidance Application, holds no ground because the objective of IBC provides for intelligible demarcation between the proceedings of CIRP and Avoidance Application. Section 26, IBC states that the application to avoid certain transactions i.e., preferential or fraudulent ones by the RP should not affect the proceedings of the CIRP. The said provision makes the use of word “shall” thereby making it a mandatory provision.The Bench observed that:
“The role of the RP vis-à-vis the resolution process ends, and rightly so, with the successful resolution of the corporate debtor. However, the Scheme of IBC makes it clear that Avoidance Applications and CIRP are a separate set of proceedings.”
Beneficiary of Avoidance Application
In the opinion of the Division Bench, the profits realised out of the adjudication of Avoidance Application won’t benefit corporate debtor post resolution because it no longer remains a debtor once the CIRP is concluded. The same won’t benefit the Resolution Applicant either since the expectation of extra cash was not present at the time of approval of the Resolution Plan. It will rather augment the asset pool available at the disposal of creditors who initially took a haircut and accepted much lesser amounts then what they should have been paid. The court held:
“This is public money, and therefore, the amount that is received if and when transactions are avoided and receive the imprimatur of adjudicating authority must be distributed amongst the committee of creditors in a manner determined by the adjudicating authority.”
The above view is also in consonance with the purpose of Avoidance Applications which is to prevent unjust enrichment of one party at the cost of creditors.
The decision of the Division Bench of the Delhi High Court is groundbreaking on various counts, because, firstly, it brings clarity to all the cases relating to sub-judice Avoidance Applications filed before the enactment of Regulation 38(2)(d) (i.e., before 14.06.2022) wherein the Avoidance Application was initiated after the submission of Resolution Plan. The Bench clarified that Resolution Plans submitted prior to the cut-off date are not required to provide for the measure to deal with claims of Avoidance Application.
Secondly, it underpins the object and purpose of the IBC. In Swiss bank, the Court held that apart from maximising the assets of the corporate debtor, the Preamble of the IBC also signifies that the Code is to look after the benefits of all stakeholders after finalisation of Resolution Plan. The Division bench, by permitting the distribution of the amount amongst the Committee of Creditors, has rightly upheld the spirit of the Preamble of the IBC.
Lastly, the ruling by the Delhi High Court will cut down the time period required for the conclusion of CIRP. As has already been mentioned, the CIRP is not strictly bound by its timelines and prior to the present judgement, when the proceedings of the Avoidance Applications were needed to be completed prior to conclusion of the CIRP, the CIRP used to get delayed until the wrapping up of the Avoidance Application. The present judgement will further uphold the scheme of the IBC by allowing the CIRP to be completed in a time bound manner, for after all, certainty and timeliness is the hallmark of the IBC as has been emphasized in Innovative Industries v ICICI bank.
Nonetheless, the judgment still lags behind in certain aspects and has not settled the dust relating to various other issues pertaining to Avoidance Application.
Firstly, unlike other procedures of the IBC, neither the statute nor the present judgement provides for timelines for the completion of adjudication of Avoidance Application. Adjudication of Avoidance Application post CIRP will not in itself guarantee timely and efficient disposal of the same. As per data from the Insolvency and Bankruptcy Board of India (IBBI), out of 777 such applications that were filed as of March 31, 2022, the Adjudicating Authority decided merely 71 cases resulting in total recovery of only Rs. 50 crores. Therefore, there arises a need to frame an outer time limit for disposing Avoidance Application after conclusion of the CIRP, thereby bringing certainty to various claims of the stakeholders.
Another point of contention is who would bear the cost of litigation for Avoidance Applications once the CIRP has been concluded. In the present case, counsels for the Appellant (Tata Steels BSL Ltd.) raised this issue and cited an excerpt of the IBBI’s Discussion Paper titled ‘Dealing with Avoidance Transactions’, wherein, it was emphasized that the Resolution Applicant will bear the cost if the CIRP ends with a Resolution Plan getting approved, and the IBBI will incur the expenses if the liquidation process is completed. However, the Bench itself was silent on this issue, thereby leaving it to an unchartered territory.
Avoidance Applications have the potential to unlock humongous amount of money and the Delhi High Court through this landmark judgement has cut the first turf for the proper treatment of Avoidance Applications without stalling the CIRP. However, taking into account the current fate of such applications, it is a must for the policymakers to scrutinize the current legislation and strive to improve the mechanism for dealing with Avoidance Applications. In the opinion of the authors, due to the complex nature of these proceedings, the present tribunals are not appositely equipped to hear these applications. Nevertheless, in light of this judgement, plausible amendments to this effect are expected to be introduced to the IBC.
Disclaimer: This is not the only blog where the article has been published.