Under Section 43(1), IBC-A duty imposed on RP to check presence of avoidance transaction

Under Section 43(1), IBC-A duty imposed on RP to check presence of avoidance transaction

The Disciplinary Committee affirmed that the Code envisages a time-bound process to ensure maximisation of the value of assets for the interests of all stakeholders and it was the duty of the RP to initiate forensic audit, make a determination on the avoidance transaction, and file an application before the AA to reverse the transaction instead of awaiting the orders of the AA based on the submission of Progress Reports and without taking any follow-up actions

This Order disposed of the Show Cause Notice (SCN) issued to Mr. Balaknath Bhattacharyya, the IP who was appointed as an interim resolution professional (IRP) for the corporate insolvency resolution process (CIRP) in the matter of Advance Power Infra Tech Ltd., the Corporate Debtor (CD), with the direction that he shall not seek or accept any process or assignment or render any services under the Code for a period of 6 months from the date of coming into force of this Order. He could, however, continue to conduct and complete the assignments / processes he had in hand as on the date of this order.

In this matter, the SCN alleged contraventions of several provisions of the Insolvency and Bankruptcy Code, 2016 (Code); IBBI (Insolvency Resolution Process for Corporate Persons) Regulations 2016 (CIRP Regulations);IBBI (Insolvency Professionals) Regulations, 2016 (IP Regulations); and the Code of Conduct under regulation 7(2) thereof.

It was also observed in the SCN that despite being aware that certain preferential transactions were carried out by the CD, the RP failed to file application under Section 43(1) of the Code before the AA (Hon'ble National Company Law Tribunal/NCLT, Bench at Kolkata) for avoidance of such transaction in accordance with Chapter III of the Code.

The IP submitted that in the 4th and 5th progress reports, he had intimated to the AA detailing all the preferential transactions and a separate application before the Hon'ble AA detailing every preferential transaction was also made but due to the RP's ignorance, the application was not made in accordance with specific court procedure and no response from the AA was received due to the fact that the application was not made as per court procedure.

The Disciplinary Committee(DC) of the IBBI opined that the provision of Section 43 cast a duty to file a separate application under Section 43 (1) before the AA (addressed to the AA) if any avoidance transaction is identified by the RP. Therefore, it is the duty of an IP to perform his assignments under the Code with utmost care and diligence, so that the interests of all the stakeholders are protected.

Further, the CIRP Regulations state that the determination of the avoidance transactions as well as the filing of an application on the avoidance transaction before the AA has to be done by the RP within time as stipulated under Regulation 35A, so that the CD can be resolved in a time-bound manner.

The DC noted that a bare perusal of section 43 of the Code and regulation 35A of the CIRP Regulations reveals that the RP is to make an independent determination on the avoidance transaction and then he shall apply to the AA for appropriate relief on or before the 135th day of the insolvency commencement date. But in the present case the IP after finding the avoidance transaction merely intimated the AA about such transaction through progress reports but did not file application before the AA under section 43(1) of the Code.

Though the RP had observed that preferential transaction has taken place, no further scrutiny or any action to recover the amount had been undertaken. The vague reply of the ex-Directors and complacency of the CoC was sufficient for the RP to not investigate any further into the attempts to defraud the creditors of CD. Even though he was not aware of Court procedures, the RP should have been more diligent to recover the amount instead of whiling away 180 days of the CIRP period.

Further, the submission of the IP that since the AA had pointed out issues in their observations, the liquidator was bound to initiate forensic audit and reverse the transactions was held to be untenable.

The DC affirmed that the Code envisages a time-bound process to ensure maximisation of the value of assets for the interests of all the stakeholders and it was the duty of the RP to initiate forensic audit, make a determination on the avoidance transaction, and file an application before the AA to reverse the transaction instead of awaiting the orders of the AA based on the submission of Progress Reports and without taking any follow-up actions.

Hence, his conduct was held to be in explicit contravention of Sections 25(2)(j), 43(1), 208(2) (a) and (e) of the Code, Regulation 35A of the CIRP Regulations 2016, and Regulations 7(2)(a) and 7(2)(h) of the IP Regulations, read with Clause(s) 10 and 14 of the Code of Conduct in the First Schedule of the IP Regulations.