IBC: Application for avoidance of preferential transactions cannot survive beyond CIRP closing

IBC: Application for avoidance of preferential transactions cannot survive beyond CIRP closing

The Delhi HC opined that the 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 Delhi HC has allowed the Writ Petition filed by the Petitioner (M/s Venus Recruiters Pvt. Ltd.) seeking issuance of a writ declaring the proceedings pending before the National Company Law Tribunal(Principal Bench) New Delhi (NCLT) as void and non-est.

It has also observed that 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 the Insolvency and Bankruptcy Code.

The question that had arisen was whether under the Insolvency and Bankruptcy Code, 2016 (IBC), an application filed under Section 43 for avoidance of preferential transactions can survive beyond the conclusion of the resolution process and the role of the RP in filing/pursuing such applications.

In this matter, Respondent No. 3 i.e. M/s Bhushan Steel Ltd. (now known as Tata Steel BSL Ltd.) (Corporate Debtor) was the subject of the Corporate Insolvency Resolution Process (CIRP) before the NCLT, initiated by the State Bank of India.

On the same date when the CIRP was initiated, the NCLT appointed Mr. Vijay Kumar Iyer i.e. Respondent No. 4 as an Interim Resolution Professional (IRP) for the CD.On 9April, 2018, 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.

On 18 May, 2018, the Resolution Plan was finally closed and the new management took over the Corporate Debtor. Thereafter, the NCLT passed an order in the avoidance application wherein notice was issued to the entities and the company as per the list provided by the R.P.

The NCLT's order approving the Resolution Plan was thereafter upheld by the National Company Law Appellate Tribunal (NCLAT). However, on 25 October, 2018, the NCLT impleaded the Petitioner as a party to the avoidance application and issued notice to it on the basis of a fresh memo of parties filed by the former RP. It was this order impleading and issuing notice to the Petitioner, which was challenged in the present petition.

The Delhi HC opined that the 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. This would be wholly impermissible in law as the mandate of the RP has come to an end. The NCLT also 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.

An avoidance application for any preferential transaction is meant to give some benefit to the creditors of the Corporate Debtor. The benefit is not meant for the Corporate Debtor in its new avatar, after the approval of the Resolution Plan. This is clear from a perusal of Section 44 of the IBC, which sets out the kind of orders which can be passed by the NCLT in case of preferential transactions. The benefit of these orders would be for the Corporate Debtor, prior to approval of the Resolution Plan.

The High Court also observed that the fact that the new management can take a decision in respect of any agreement which is deemed to be not beneficial to it also supports the interpretation that after the Plan is approved, the company is completely in the hands of the new management and neither the NCLT nor the RP have any rights or powers in respect of the said company. As could be seen in the present case, the Corporate Debtor in its new avatar had terminated the agreement with the Petitioner.

According to the High Court, a conjoint analysis of Sections 43 and 44 read with the applicable Regulations clearly shows that 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.

It was also affirmed that the benefit of an avoidance application is not meant for the company, after the Resolution Plan is considered by the CoC and approved by the NCLT. The RP cannot continue to file applications in an indefinite manner even after the approval of a Resolution Plan under Section 31. 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 had been shown to exist.

It was ordered that the order of the NCLT impleading the Petitioner and any consequential orders were liable to be set aside. The proceedings qua the Petitioner before the NCLT under the Avoidance application were accordingly quashed.