The Delhi High Court in the case of M/s Venus Recruiters Pvt. Ltd. vs. Union of India & Others[1] held that avoidance applications relating to preferential transactions do not survive once the Corporate Insolvency Resolution Process has been concluded.
Background and Facts
· M/s Bhushan Steel Ltd., Respondent no. 3 and the Corporate Debtor herein was the subject of Corporate Insolvency Resolution Process (‘CIRP’) before the National Company Law Tribunal (‘NCLT’) initiated by State Bank of India.
· Subsequently, the NCLT appointed Respondent no. 4 as an Interim Resolution Professional (‘IRP’) for the Corporate Debtor.
· On March 20, 2018, the Committee of Creditors (‘CoC’) approved the proposed Resolution Plan by Respondent no. 2 and the same was filed before the NCLT on March 28, 2018.
· Thereafter, the Resolution Professional on April 9, 2018 filed an avoidance application under the IBC. In the said application, various transactions were enumerated as ‘suspect transactions’ with related parties. It was a result of a Forensic Audit Report, submitted by a Forensic Consultant, which was attached to the application as well.
· Almost 5 weeks after filing of the application, the NCLT approved the Resolution Plan vide judgement dated May 15, 2018. No separate order was passed for the pending avoidance application with regard to suspect transactions. However, the final order contained a line: “all other applications are disposed off”. Therefore, the application by the Resolution Professional was neither heard nor decided on merits.
· The Appellate Tribunal upheld the approval of the Resolution Plan by the NCLT vide its judgement dated August 10, 2018. Thereafter, the NCLT impleaded the Petitioner as a party and issued notice to it on the basis of a fresh memo of parties filed by the former Resolution Professional. The present petition challenges this impleading issuance of notice.
Petitioner’s arguments
The Petitioner submitted that once the CIRP has reached finality, the Resolution Professional becomes functus officio and can no longer file or pursue any application on behalf of the company. The Resolution Professional merely conducts and manages the operations of the Corporate Debtor, during the CIRP process and not beyond.
It was further submitted that in terms of Section 60 of the Act, the jurisdiction of NCLT cannot extend beyond the approval of the Resolution Plan. It was also emphasised that avoidance applications cannot be filed by the Company or by the Resolution Applicant but only by the Committee of Creditors or the Resolution Professional, prior to the Resolution Plan being approved.
Respondent’s Arguments
The Respondent argued that there were various suspect transactions involving the erstwhile Corporate Debtor due to which the avoidance application was filed, and other entities have raised their issues before the NCLT itself.
Despite receiving the notice in the avoidance proceedings in April 2018, the Petitioner has approached this Court only in 2019 and thus it would not be entitled to discretionary jurisdiction to be exercised in its favour.
That the 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.
Court’s Observations
The Court observed that the purpose of resolution or liquidation processes is for the benefit of creditors. A CoC is then constituted by the IRP which shall include all financial creditors of the Corporate Debtor.
Under Section 31, if the NCLT is satisfied with the Resolution Plan, it shall approve the same which shall be binding on the Corporate Debtor, all its employees, members, creditors, Central and State Governments, including all local authorities to whom dues may be owed, and all other stakeholders and guarantors. The NCLT has to also satisfy itself that the Resolution Plan has sufficient provisions for its implementation. Once a Resolution Plan is approved, the moratorium order under Section 14 shall cease to have effect and the RP shall forward all the records relating to the CIRP and the Resolution Plan to the Board to be recorded on its database. Thus, the role of a RP comes to an end here.
The Court concluded that the jurisdiction of the NCLT is limited to insolvency resolution and liquidation. Therefore, once the new management takes over post-resolution, no proceedings remain before the NCLT. On the Avoidance application, the Court held that such transactions are meant to benefit creditors of the corporate debtor. However, as committee of creditors ceases to exist after the insolvency process, no benefit would arise to them. And finally, it declared the Resolution Professional cannot move ahead with the title ‘former RP’ and pursue an avoidance application in respect of preferential transactions.
Conclusion
The Delhi High Court through this judgement provided some clarity on avoidance applications as per Section 43 of the Insolvency and Bankruptcy Code, 2016 once the CIRP is concluded. This decision will serve as a guide to future disputes based on the fate of avoidance applications.
[1] W.P.(C) 8705/2019 & CM APPL. 36026/2019.
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