Introduction
The Insolvency and Bankruptcy Code, 2016 (Code) contains four types of avoidable transactions that are to be avoided, otherwise it would affect the financial position of the corporate debtor – preferential, undervalued, defrauding creditors and extortionate transactions. The Code mandates that the Resolution Professional / the Liquidator (Insolvency Professional) should determine if the corporate debtor has been subject to any avoidance transactions in the past, and if so, also casts an obligation on the Insolvency Professional to file an application (Avoidance Application) before the National Company Law Tribunal (NCLT) for reversing these transactions. The rationale behind Avoidance Applications is to broaden the corporate debtor’s asset pool by identifying and bringing back assets that have been illegally diverted by the erstwhile management of the debtor.
As the Code does not provide any time limit for adjudication of these Avoidance Applications, there were instances where the Corporate Resolution Insolvency Process (CIRP) was concluded and resolution plans were approved, while the Avoidance Applications were still pending before the NCLT. The issue was considered by a single bench of the Delhi High Court in Venus Recruiters Pvt. Ltd. v. Union of India and Ors. and it was held that the NCLT would have no jurisdiction to entertain and decide Avoidance Applications after the approval of the resolution plan, unless a provision is made to the contrary in the resolution plan. The decision was challenged before the Division Bench of the Delhi Court. In the present article, we discuss the judgment of the Division Bench of the Delhi High Court in TATA Steel BSL Ltd. v. Venus Recruiter Pvt. Ltd. & Ors. (TATA v. Venus) which held that Avoidance Applications survive even after approval of the resolution plan, in cases where plans do not account for such applications, and these Avoidance Applications can be heard even after CIRP stands concluded.
Brief facts of case
During the CIRP of Bhushan Steel Ltd. (Corporate Debtor), the Committee of Creditors approved the resolution plan of TATA Steel Ltd. (Successful Resolution Applicant). Meanwhile, the Insolvency Professional filed an application before the NCLT regarding certain avoidable transactions between the Corporate Debtor and Venus Recruiters Pvt. Ltd. (Venus). Before the application could be adjudicated, the NCLT approved the resolution plan of the Successful Resolution Applicant.
Subsequently, the NCLT heard the Avoidance Application and issued a notice to Venus. Aggrieved, Venus approached the Delhi High Court praying that the Avoidance Application proceedings be declared void, since CIRP had concluded, and the Successful Resolution Applicant had already assumed control of Corporate Debtor. The Single Judge held that an Avoidance Application under the Code cannot survive beyond the conclusion of CIRP. The Single Judge’s order was then challenged in an appeal before the Division Bench.
Ruling of the Division Bench
The Division Bench noted that under the Code, the filing of an Avoidance Application by the Insolvency Professional does not affect the CIRP[i]. Further, the NCLT has jurisdiction “to entertain or dispose of any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor.”[ii] Relying upon earlier precedents[iii] of the Supreme Court, the Division Bench ruled that the phrase “arising out of or in relation to” is of wide import, thereby extending the jurisdiction of the NCLT on all subject matters related to the insolvency resolution of the corporate debtor. Further, the phrase, “to entertain or dispose of”, suggests that the jurisdiction of the NCLT is not limited to entertaining a question of law or fact. Instead, it also extends to the disposal of Avoidance Application proceedings. Therefore, the Division Bench held that the Code allows the NCLT to adjudicate over proceedings related to avoidable transactions even after the conclusion of the CIRP.
The Division Bench also held that as there is no time limit prescribed under the Code for the NCLT to adjudicate the Avoidance Applications, the NCLT or any court cannot impose any condition that the applications are to be adjudicated during the CIRP. The Division Bench held that though CIRP is a time-bound process, adjudication of Avoidance Applications requires proof beyond reasonable doubt, which is time-consuming. Since CIRP and Avoidance Applications both are of distinct nature; the adjudication of Avoidance Application can exist independently of the resolution of the corporate debtor and even beyond it. If the Avoidance Applications are declared infructuous after the completion of CIRP, then fraudulent beneficiaries will walk away scot-free with public money.
As there was a clear demarcation between the scope and nature of the CIRP and Avoidance Application, the Division Bench held that the Insolvency Professional can continue to pursue such applications even after completion of the CIRP. The method and manner of the Insolvency Professional’s remuneration ought to be decided by the NCLT itself. However, such benefit will not be extended to cases where the Insolvency Professional had already filed the Avoidance Application and the resolution applicant was aware of the pending Avoidance Application but did not account for the same in its resolution plan.
Accordingly, the Division Bench set aside the Single Judge’s order and directed the NCLT to proceed with the hearing of the Avoidance Application. It was also directed that any amount recovered through the Avoidance Application must be distributed amongst the creditors of the Corporate Debtor[iv].
Conclusion
One of the most critical aspects for maximization of value of a corporate debtor is to ensure reversal of transactions that are either preferential, undervalued, fraudulent or extortionate in nature. The basic purpose of identifying and red flagging such transactions is to ensure that whatever value has been lost due to such transactions is recovered. In TATA v. Venus, the Division Bench of the Delhi High Court noted that one of the objectives of the Code is maximization of the value of the assets of the corporate debtor. So, where funds have been diverted from the debtor, endeavor must always be made to ensure maximum recovery of that money to the creditors. Therefore, the authors are of the view that the TATA v. Venus judgment will be celebrated by the creditors of resolved corporate debtors as the proceeds of such applications must necessarily be distributed to these creditors under the Code.
While the judgment of the Division Bench is indeed favorable, it might have certain unintended consequences. It should be noted that out of the 553 resolved corporate debtors, 131 Avoidance Applications to the tune of INR 367 billion have been pending before the NCLT[v]. With the Division Bench ruling that no timeline can be imposed on the NCLT for adjudication of Avoidance Applications, creditors should now be wary of protracted proceedings, and any expeditious recovery under the Avoidance Application seems unlikely. Judicial delay was one of the major reasons for the failure of the insolvency regime that was in effect prior to the Code, and the authors believe that unless the NCLT is sensitive to the effect of such delays and deals with languishing Avoidance Applications, the beneficiaries of such fraudulent transactions will continue to enjoy the fruits of such transactions.
Authors: Souvik Ganguly, Renjith Nair and Altamash Qureshi
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[i] Section 26 of the Code
[ii] Section 60(5)(c) of the Code
[iii] Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta, (2021) 7 SCC 209
[iv] IBBI’s Discussion Paper on Corporate Liquidation Process dated 27 April 2019 states that “If any money is recovered after dissolution of the CD, the same may be distributed as per waterfall in section 53 of the Code and the excess recoveries and unclaimed amounts may be credited to the Insolvency and Bankruptcy Fund.”
[v] IBBI Quarterly Newsletter, July to September 2022 https://ibbi.gov.in/uploads/publication/f3ddc90d7391bcae84ef2f87f793eb3c.pdf