Delhi High Court: Adjudication of an Avoidance Application is independent of Resolution of Corporate Debtor and can survive CIRP

Delhi High Court: Adjudication of an Avoidance Application is independent of Resolution of Corporate Debtor and can survive CIRP

The Delhi High Court while adjudicating an appeal filed in Tata Steel BSL Limited vs. Venus Recruiter Pvt. Ltd. and others., held that that avoidance applications filed under Insolvency and Bankruptcy Code, 2016 (in short IBC) can survive even after approval of the resolution plan, in cases where Resolution Plans are unable to account for such applications. These applications can be heard even post-closing of Corporate Insolvency Resolution Proceedings (in short CIRP).

The facts of the case were that the corporate debtor/appellant- M/s. Bhushan Steel Ltd. was admitted into CIRP by an application moved by the State Bank of India on 26 July, 2017. Mr. Vijay Kumar Iyer was appointed as the Interim Resolution Professional (in short IRP) and thereafter confirmed as the Resolution Professional.

On 20 March, 2018, the Committee of Creditors (in short CoC) approved the resolution plan proposed by Tata Steel Ltd., (hereinafter referred to as "Successful Resolution Applicant/SRA"). On 15 May, 2018, the resolution plan was approved by the Adjudicating Authority- National Company Law Tribunal, New Delhi bench (in short NCLT) and was implemented.

However, on 9 April, 2018 the Resolution Professional had filed avoidance applications under Section 25(2)(j), Sections 43 to 51 and Section 66 of the IBC against Venus Recruiter Pvt. Ltd. and others (Respondents). The Adjudicating Authority issued notice in the said applications to the Respondents, while observing that applications were made prior to the approval of the Resolution Plan and hence could be entertained.

Aggrieved by the Order of the NCLT issuing notice in the avoidance application, the respondent filed writ petition before the Ld. Single Judge seeking issuance of a writ declaring the proceedings borne out of the avoidance application, pending before the NCLT, as void and non-est since CIRP had concluded and the successful Resolution Applicant, Tata Steel Limited had assumed control of Bhushan Steel Limited in terms of the IBC.

The Single Judge vide an order dated 26 November, 2022 held that an application under Section 43 of IBC for avoidance of preferential transactions cannot survive beyond the conclusion of CIRP. The Corporate Debtor filed a Letter Patent appeal before the High Court against the order dated 26 November, 2022.

The division bench comprising of Chief Justice Satish Chandra Sharma and Justice Subramonium Prasad observed that phrase "arising out of" or "in relation to" under Section 60(5)(c) of the IBC is of a wide import. Such applications must be appropriately adjudicated by either NCLT or NCLAT, notwithstanding that the CIRP has concluded and the SRA has stepped into the shoes of the promoter of the Corporate Debtor.

"CIRP and avoidance applications, are, by their very nature, a separate set of proceedings wherein, the former, being objective in nature, is time bound whereas the latter requires a proper discovery of suspect transactions that are to be avoided by the Adjudicating Authority. The scheme of the IBC reinforces this difference. Accordingly, adjudication of an avoidance application is independent of the resolution of the corporate debtor and can survive CIRP," the Court stated.

The Court opined that it cannot be accepted that avoidance applications will be rendered infructuous in situations wherein the resolution plan could not have accounted for avoidance applications due to exigencies that delayed initiation of action in respect of avoidable transactions beyond the submission of a resolution plan before the adjudicating authority. Such an interpretation will render the provisions pertaining to suspect transactions otiose and let the beneficiaries of such transactions walk away, scot-free, added the bench.

Therefore, the High Court held that such transactions could not be accounted, the Adjudicating Authority would continue to hear the application. Such benefit cannot be given in cases where the RP had already applied for prosecution of avoidance applications and the applicant ought to have been cognizant of pending avoidance applications but did not account for the same in its resolution plan.

The Court set aside the order passed by the NCLT and ordered it to proceed with the hearing of avoidance application and directed that as per Sections 44 to 51 of the IBC, 2016, the amount which was recovered can be distributed amongst the secure creditors in accordance with law as determined by the NCLT.