Delhi High Court: An application for avoidance of preferential transactions under IBC cannot survive beyond the conclusion of CIRP

The role of the RP is not adjudicatory but administrative in nature. Thus, the RP cannot continue beyond an order under Section 31of the IBC, once the CIRP comes to an end.

The Insolvency & Bankruptcy Code (IBC) contemplates various transactions to overturn their effects on the finances of the ‘corporate debtor’ when a person is declared insolvent. These provisions are generally called 'avoidance provisions' and these transactions are of various categories under Chapter III related to liquidation processes–
  • Preferential transactions,
  • Undervalued transactions,
  • Transactions defrauding creditors, and
  • Extortionate credit transactions.
These avoidance provisions ensure that the value of assets of the company is maximized and all the creditors get their dues in an equitable manner. These provisions aim at setting aside transactions which are preferential in nature.

Section 43 of the IBC defines preferential transaction, as a transaction made by an insolvent debtor with its creditor(s) during the relevant period, which puts such creditor(s) in a better position than it would have been if the insolvent debtor were to be liquidated and its assets distributed in accordance with the Code. The legislature has adopted an objective criteria for determining preferential transactions, by which the IBC not only reduces the ambiguity while determining the question of preferential transactions, but also significantly reduces the effort to be put in by courts to adjudicate.

The Delhi High Court in the case of Venus Recruiters Private Limited v. Union of India held that an avoidance application pending for approval as on the date of the resolution plan, cannot be permitted to continue after the approval of the resolution plan under Section 31 of the IBC.

Facts and procedural background of the case:

Bhushan Steel Ltd., now known as Tata Steel BSL Ltd. (Corporate Debtor), was the subject of Corporate Insolvency Resolution Process (CIRP) before the NCLT, Delhi. On the same date, an Interim Resolution Professional (IRP) was also appointed for the Corporate Debtor. A public announcement was made in accordance with Section 15 of the IBC, inviting submissions of claims against the Corporate Debtor.

The Committee of Creditors (CoC) approved the Resolution Plan proposed and it was filed by the RP to seek approval before the NCLT. The RP filed an avoidance application under Section 25(2) (j), Sections 43 to 51 and Section 66 of the IBC. In the said application, various transactions were enumerated as `suspect transactions ‘with related parties.

Almost five weeks  after  filing the avoidance  application,  the NCLT  approved  the  Resolution  Plan proposed  by Tata  Steel Ltd. As for the  pending avoidance application  in respect  of  the  suspect  transactions  were  concerned,  there  was  no separate order passed by the NCLT. Therefore, the application filed by the RP in relation to the suspect transactions was neither heard nor decided on merits.

Main issues contended before the Court:

a) Whether an application filed under Section 43 of the IBC for avoidance of preferential transactions can survive beyond the conclusion of CIRP? 

Under  the  IBC, a  CIRP can  be  initiated  under  Sections  6  to  11 of the IBC by various  people  including  financial  creditors,  operational  creditors, and corporate applicants. A perusal of Section 12 of the IBC shows that the CIRP has to be completed within 180 days from the date of admission of the application.

Certainty and timeliness is the hallmark of the IBC. The Supreme Court in Innoventive Industries v. ICICI  Bank had observed that one of the important objectives of the Code was to bring the insolvency  law  in  India  under  a  single  unified  umbrella  with  the object of   speeding   up   of   the insolvency   process. Any   continuation   of   the jurisdiction of the NCLT beyond what is permitted under the IBC would be contrary to its very ethos.

A  conjoint  analysis  of  Sections  43  and  44  read  with  the  applicable Regulations clearly shows that the assessment by the RP of the objectionable transactions   including   preferential   transactions   cannot   be   an   unending process.

If  an  avoidance  application  for  preferential  transactions  is permitted to  be  adjudicated  beyond  the  period  after  the Resolution  Plane is approved, in effect, the NCLT would be stepping into the shoes of the new management to decide what is good or bad for the Company. Once the Plan is approved and the new management takes over, it is completely up to the new management to decide whether to continue a transaction or agreement or not. Thus,  if  the  CoC  or  the  RP  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.

b) What is the role of the RP in filing/pursuing such applications?

The petitioners had argued that under the  scheme  of  the  IBC,  once  the CIRP has  reached  finality,  the  RP becomes functus  officio and can no  longer file  or  pursue any application on behalf of the company. The RP merely conducts and manages the operations of the Corporate Debtor during the CIRP process and not beyond.

A mandatory outer limit of 330 days from the insolvency commencement date is prescribed for the completion of the CIRP under the second proviso to Section 12(3) of the IBC.

The purpose of resolution/liquidation processes is for the benefit of creditors. As per Section  43,  if  the  RP  is  of  the  opinion  that  any  preferential transaction  has  taken  place,  by which  the Corporate Debtor has  given  any benefit to a related party, two years prior to the insolvency commencement date or a preference to an unrelated party one year prior to the said date, they can  move  an  application  with  the NCLT for avoidance  of  the  same. 

An RP cannot continue to file applications in an indefinite manner even after the approval of a Resolution Plan under Section 31 of the IBC. The role of a RP is finite in nature. They cannot continue to act on behalf of the Corporate Debtor once the Plan is approved and the new management takes over.  To  continue  a  RP  indefinitely  even  beyond  the  approval  of  the Resolution  Plan would  be  contrary  to  the  purpose  and  intent  behind appointment  of  a  RP.  The Resolution Professional (RP), as the name itself suggests has to be a person who would enable the resolution.

The role of the RP is not adjudicatory but administrative in nature. Thus, 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. This  is however  subject  to  any  clause  in  the  Resolution Plan  to  the contrary, permitting the RP to function for any specific purpose beyond the approval of the Resolution Plan. In the present case, no such clause has been shown to exist.

A  perusal  of  Section  30(4)  also  makes  it  adequately  clear  that  the CIRP  period  has  to  be  completed  within  the  time period  specified  under Section  12(3).  Thus, the IBC does not contemplate the continuation of the RP beyond the CIRP period.

Conclusion

The judgment comes as a crucial step to bring relief to parties who were dragged in tedious litigation proceedings even after the conclusion of the CIRP. The judgement sheds light on the fate of the avoidance applications and their disposal. The judgment also clearly outlines the importance of timelines under the IBC with respect to effective disposal of avoidance applications.