IBC UPDATE | AVOIDANCE PROCEEDINGS CANNOT SURVIVE BEYOND THE TERM OF CIRP
The Delhi High Court has recently passed an order in Venus Recruiters Private Limited vs Union of India & Others, wherein it has held that proceedings for avoidance of preferential and / or other kinds of suspect transactions cannot survive after the term of Corporate Insolvency Resolution Process (CIRP).
- CIRP was instituted against Bhushan Steel Limited (Corporate Debtor) and thus, a Resolution Professional (RP) was appointed for conducting the CIRP of the Corporate Debtor.
- Thereafter, the resolution plan submitted by Tata Steel Limited was approved by the Committee of Creditors (CoC) and the same was filed with the National Company Law Tribunal, Principal Bench, New Delhi (NCLT) seeking its approval.
- In the interim i.e. before approval of the Resolution Plan, the RP filed an avoidance application under Section 43 of the Insolvency and Bankruptcy Code, 2016 (IBC), enumerating various transactions as `suspect preferential transactions’ with related parties (Avoidance Application).
- NCLT approved the Resolution Plan. However, there was no separate order passed by the NCLT with respect to the Avoidance Application. NCLT’s order approving the Resolution Plan was upheld by the National Company Appellate Law Tribunal (NCLAT).
- After approval of the Resolution Plan, the NCLT, vide an order (Order), impleaded Venus Recruiters Private Limited (Petitioner), as a party in the Avoidance Application, and issued notice to it.
- The said Order of the NCLT, was challenged by the Petitioner, by way of a writ petition before the Delhi High Court.
The Delhi High Court held:
- The role of the RP is finite in nature and comes to an end after the approval of the resolution plan. Hence, the RP cannot act on behalf of the Corporate Debtor after the approval of the Resolution Plan. Thus, the “Former RP” does not possess the required locus standi to initiate avoidance proceedings.
- The Court observed that once the Resolution Plan was approved by the NCLT and the management of the Corporate Debtor was handed over to the successful resolution applicant i.e. Tata Steel Limited, the NCLT had no further jurisdiction to adjudicate, except on issues pertaining to the Resolution Plan itself.
- Therefore, the Court held that since the Resolution Plan was approved by the NCLT before the date of passing the Order, CIRP of the Corporate Debtor had come to an end, and thus, the NCLT lacked jurisdiction to adjudicate upon the Avoidance Application subsequently.
- The Court further held that from a perusal of section 44 of the IBC, the orders that can be passed by the NCLT are supposed to benefit the creditors and not the new management of the corporate debtor. Since after the approval of the Resolution Plan, the proceeds of preferential transactions cannot be included in the Resolution Plan to be distributed amongst the creditors, the Avoidance Application cannot be permitted.
- Thus, in light of the above, the High Court held that the process of determination of preferential or suspect transactions would run parallel to the other steps involved in the CIRP and avoidance applications cannot survive beyond the term of CIRP as the same would be contrary to the mandate of the IBC.
MHCO Comment :
The judgment of the Delhi High Court would ensure that third parties are not dragged into litigation, even after the conclusion of CIRP over alleged suspect transactions. However, it also implies that applications pertaining to preferential and / or other suspect transactions should be decided before the conclusion of the CIRP in order to ensure that avoidance proceedings are decided on merits.
This update was released on 22 Dec 2020.
Legal Update Team
MANSUKHLAL HIRALAL & COMPANY
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