Avoidance application under Sec 43 IBC does not survive beyond conclusion of CIRP: Delhi High Court

The Delhi High Court has held that avoidance applications relating to preferential transactions under Section 43 of Insolvency & Bankruptcy Code do not survive beyond the conclusion of the insolvency resolution process. (M/s Venus Recruiters Pvt Ltd vs UOI)

. The court has said that the continuation of a Resolution Professional for the purpose of prosecuting an avoidance application, even after CIRP is over, is beyond the contemplation of IBC.

. A judgement to this effect was passed by a Single Judge Bench of Justice Prathiba M Singh .

. The petitioner before court, M/s Venus Recruiters Pvt Ltd, was found to be in "suspected transaction" with the Corporate Debtor, Bhushan Steel Ltd and accordingly, an avoidance application was filed by the Resolution Professional before the National Company Law Tribunal (NCLT).

. Thereafter, NCLT approved the Resolution Plan proposed by Tata Steel Ltd and disposed of all pending applications without specifically dealing with the merits of the avoidance application.

. While the new management took over the Corporate Debtor pursuant to the order, 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 vide the impugned order, Tata Steel's resolution plan had already been approved by National Company Law Appellate Tribunal.

. It was the petitioner's grievance that since the 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, inter alia , made the following submissions:

- Once the corporate insolvency resolution process (CIRP) has reached finality, the Resolution Professional 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 undertaken before conclusion of the CIRP and such preferential transactions should form part of the Resolution Plan which is submitted to the CoC.

. Opposing the petition, Tata Steel BSL Ltd (erstwhile Bhushan Steel) argued that :

. - 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.

- Power of the Resolution Professional is independent of the CIRP proceedings.

- In spite of the notice in the avoidance proceedings in 2018, the petitioner approached the High Court only in 2019.

- In view of the statutory appeal under Section 61 IBC, a writ petition would not be maintainable.

. Central government argued that the timelines to adjudicate on the avoidance transactions is independent of CIRP.

. Relying on Sections 25 & 26 IBC and Regulation 39(4) along with Form H of the 2016 CIRP Regulations, Central government said that an avoidance application could be filed/be pending when the Resolution Plan is submitted by the Resolution Professional.

. The Resolution Professional also argued that under the IBC regime, there was no fixed time limit for deciding an avoidance application, and they could always remain pending even after the Resolution Plan is accepted by the NCLT.

. FINDINGS

. The Court observed that an avoidance application for any preferential transaction is meant to give some benefit to the creditors of the Corporate Debtor and not the "Corporate Debtor in its new avatar" post-approval of the Resolution Plan.

. " The benefit of these orders would be for the Corporate Debtor, prior to approval of the Resolution Plan. Any property transferred or sum acquired in an order passed in respect of a preferential transaction would have to form part of the final Resolution Plan.", the court said.

. The court further noted 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 IBC and Regulation 35A of CIRP Regulations which gives a specific timeline for formation of an opinion on objectionable transactions by the Resolution Professional, the court said,

. "..the assessment by the RP of the objectionable transactions including preferential transactions cannot be an unending process. The examination has to commence on the insolvency commencement date. The RP has to form an opinion by the 105th day (pre-amendment) and 75th day (post-amendment). If the RP comes to the conclusion that the Corporate Debtor has been subject to preferential transactions, the determination has to be made by the 115th day. The RP also has to apply to the NCLT for appropriate relief on or before the 135th day."

. The court held that prescribing of the above timelines served a purpose i.e. inclusion of these details in the Resolution Plan submitted under Section 30 IBC to the NCLT.

. Thus, the argument that avoidance applications relating to preferential and other transactions can survive beyond the conclusion of the CIRP is contrary to the Scheme of IBC, the Court concluded.

. The court also discussed in detail the role and functions of a Resolution Professional.

. Relying on the statutory scheme, the court noted,

. "The role of a RP is finite in nature.. To continue a RP indefinitely even beyond the approval of the Resolution Plan would be contrary to the purpose and intent behind the appointment of a RP.. 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..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 after an order under Section 31 is passed. "

. Central government's reliance on Form H and Sections 26 IBC was also rejected by the court as it said that the two could not be read in a manner to mean that an application for avoidance of transactions could survive after the CIRP process.

. The court thus concluded that if the CoC or the Resolution Professsional 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 Resolution Plan.

. "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...The 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 Resolution Plan.", it said.

. The court added that parties are left to their civil and other remedies in terms of the contract between them with regards preferential transaction.

. Accordingly, the NCLT order impleading the petitioner and any consequential orders were set aside.

. Senior Advocate Kapil Sibal with Shardul Amarchand Mangaldas Advocates Misha Rohatgi, Anusha Nagarajan, Aarushi Tiku appeared for the petitioner.

. Centre was represented by Standing Counsel Anurag Ahluwalia with Advocate Abhigyan Siddhant .

. Tata Steel BSL was represented by AZB & Partners Advocates Vijayendra Pratap Singh, Aman Sharma and Samarth K. Luthra .

Senior Advocate Abhinav Vasisht with L&L Partners Advocates Manmeet Singh, Anugrah Robin Frey appeared for Resolution Professional.

. Read the judgement:

Avoidance application under Sec 43 IBC does not survive beyond conclusion of CIRP: Delhi High Court

Aditi Singh

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