Avoidance Proceedings After the Approval of the Resolution Plan

[Anjali Soni is a 2nd year student at National Law University, Odisha.]

The Insolvency and Bankruptcy Code, 2016 (“IBC”) enumerates four types of vulnerable transactions, namely preferential, undervalued, fraudulent and extortionate and provides the procedure for the avoidance of the same. The resolution professional while facilitating the resolution of the corporate debtor, is dutybound to identify such transactions and report them to the adjudicating authority. After the transactions are adjudicated upon, appropriate orders are passed to reverse the effect of such transactions in the interest of the creditors. Avoidance proceedings form an essential part of the insolvency regime.

Recently, the High Court of Delhi on 26 November, 2020 in the case of Venus Recruiters Private Limited v. Union of India passed an order quashing avoidance proceeding initiated by the National Company Law Tribunal (“NCLT”) post the approval of the resolution plan. This article intends to highlight the High Court’s misdirected take while deciding on the issue.

Facts of the Case

Corporate insolvency resolution process (“CIRP”) was initiated against Bhushan Steel Ltd. by the State Bank of India. After the admission of the petition, Mr. Vijay Kumar Iyer was appointed as the interim resolution professional and later as the resolution professional (“RP”). On 20 March, 2018 the committee of creditors approved a resolution plan proposed by Tata Steel Ltd.

On 9 April, 2018 the RP filed an avoidance application under sections 43 to 51 and section 66 of the IBC on the basis of a forensic audit report. While approving the resolution plan on 15th May, 2018 the NCLT did not pass any order regarding the avoidance proceedings. This order was upheld by the National Company Law Appellate Tribunal (“NCLAT”) on 10 August, 2018.

On 24 July, 2018 the NCLT took up the matter regarding the avoidable transactions and the petitioner in the present case was impleaded. A writ petition was filed before the High Court of Delhi challenging the said proceedings.

Ruling of the Court

Three issues for consideration:

First, whether the former RP has the required locus to file an application for avoidance of proceedings. The High Court of Delhi while allowing the petition to quash the avoidance proceedings ruled that the role of the RP is finite in nature and comes to an end after the approval of the resolution plan. Hence, he/she cannot act on behalf of the corporate debtor after the approval of the resolution plan. The court relied on the Supreme Court’s judgement in Committee of Creditors of Essar Steel to analyse the role of the RP and observed that the “Former RP” does not possess the required locus standi to initiate avoidance proceedings.

Further, the Court also emphasised on the strict timeline provided under the IBC and relied on the Supreme Court’s judgement in Innoventive Industries to state that “Certainty and timeliness is the hallmark of the Insolvency and Bankruptcy Code, 2016”. Therefore, since avoidance proceedings are time barred, they cannot take place after the completion of the CIRP.

Second is the issue of jurisdiction of the NCLT to initiate and continue avoidance proceedings after the approval of the resolution plan. Under section 60 of the IBC, the adjudicating authority has the jurisdiction to deal with all applications and petitions “…in relation to insolvency resolution and liquidation for corporate persons”. The insolvency resolution process had already come to an end with the approval of the resolution plan on 15 May, 2018 and the NCLT exercised its jurisdiction post the approval of the resolution plan. The jurisdiction of the NCLT is limited to insolvency resolution and liquidation and after the approval of the resolution plan the new management takes over.

Third, regarding the proceeds of avoidance transactions, the Court was of the opinion that from a careful perusal of section 44 of the IBC, the orders that can be passed by the NCLT are supposed to benefit the creditors and not the new management of the corporate debtor. Since after the approval of the resolution plan, the proceeds of avoidance transactions cannot be inculcated in the resolution plan to be distributed amongst the creditors the same cannot be permitted.

Analysis

The judgement of the High Court quashing the avoidance proceedings in the present matter is flawed on numerous grounds elaborated below.

Firstly, the High Court failed to consider a pertinent fact that the avoidance application was filed by the RP before the approval of the resolution plan in his appropriate legal capacity as the RP. The Court, while disregarding this fact, ruled that the RP cannot continue to file applications for avoidance of transactions indefinitely and after the approval of the resolution plan and that the “former RP” does not have the required locus to file for avoidance of transactions. The High Court did not consider that it was actually a blunder on the part of the NCLT that the avoidance proceedings were not listed prior to the approval of the resolution plan.

Further, the High Court emphasised on the timely completion of the CIRP and applied the stringent timelines on avoidance proceedings as well. However, the Report of the Insolvency Law Committee, which has been referred to in the instant judgement, provides for a contrary take stating that even though generally proceedings against avoidable transactions should be initiated during the CIRP, nevertheless, prescriptive timelines for initiating these proceedings may not be necessary. The Law Committee recommended that timelines with respect to avoidance proceedings must be lenient in nature and not strict.

Secondly, the High Court opined that the proceeds from avoidable transactions are not meant to profit the new management of the corporate debtor and since the resolution plan has already been approved, the proceeds cannot be distributed amongst the creditors. The Report of the Insolvency Law Committee, effectively addressed this issue and recommended that the provisions regarding the distribution of avoidance proceeds must not be very rigid and the decision regarding the same must be left to the prudence of the adjudicating authority. The Law Committee opined that the adjudicating authority being acquainted with the facts and circumstances of the case will be the appropriate judge (See Chapter 3 Recommendation 3.3). The High Court’s judgement is completely antithetical to the recommendations made by the Law Committee.  

Thirdly, the High Court erroneously merged the avoidance proceedings with insolvency proceedings. The Court ruled that the resolution process comes to end with the approval of the resolution plan and hence the NCLT does not have the jurisdiction to entertain applications for avoidable transactions, thereby extinguishing the distinction between the resolution process and avoidance proceedings.

Section 26 of the IBC clearly states that “…filing of avoidance proceedings by the RP shall not affect the proceedings of the CIRP”. Further, the Statement of Best Practices published by the ICSI also states that, “The application for avoidance transactions is against the promoters/directors/related parties, however the resolution/liquidation is for the CD. Therefore, these two should be treated separately and even if the CD is resolved/liquidated, the application of avoidance transactions may continue to be prosecuted.” Hence it can be concluded that the intent behind separating the two is apparent.

Once it is established that avoidance proceedings shall be distinguished from insolvency proceedings, the decision of the Supreme Court in Embassy Property Developments can be revisited to decide on the jurisdiction of the NCLT. The apex court categorically laid down that NCLT and NCLAT have the jurisdiction to inquire into fraudulent transaction under section 66. Additionally, the Supreme Court also looked down upon the act of bypassing the remedy available under section 61 and directly approaching the High Court, which has been done by the petitioner in the present case as well. The ratio laid down in Embassy can be rationally extended to sections concerning avoidable transactions. Coupling this with the inherent powers vested in the NCLT under rule 11 of the NCLT Rules, 2016, it can be effectively concluded that the adjudicating authority has ample jurisdiction to adjudicate upon avoidable transactions to meet the ends of justice. The High Court wrongfully denied the jurisdiction of the NCLT and the NCLAT to adjudicate on the matter at hand.

Concluding Remarks

The judgement sets a dangerous precedent by allowing the corrupt management to walk scot free. The IBC is a complete code that also lays down criminal liabilities on the management for defrauding creditors under section 69. This reflects on the grave nature of the offenses that are committed by the erstwhile management of companies and also that the legislative intent was not just to realise the assets of the CD but also to suitably penalise the corrupt management.

The instant judgement by quashing the avoidance proceedings has absolved the previous management of its liabilities and has limited the purpose of avoidance proceedings to merely expanding the pool of assets to be distributed amongst the creditors.

Anjali Soni

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