2022 (1) TMI 1287 - AT - Insolvency and Bankruptcy

Approval of Resolution Plan - commercial wisdom - avoidable transactions - Fraudulent trading or wrongful trading - Section 60 (5) of the Insolvency and Bankruptcy Code, 2016 (I B Code) - effect of Venus Judgement 2020 (11) TMI 850 - DELHI HIGH COURT - HELD THAT - The observations of the Hon'ble Delhi High Court in Venus Recruiters that the benefits of avoidance transaction should be given to the creditors were when the relevant Resolution Plan did not provide any provision dealing with the treatment of recoveries arising from Resolution Plan. However, per contra in the instant case Resolution Plan specifically provides for treatment of recoveries arising out of or avoidance transactions. Further, Venus Recruiters do not deal with the situation when the COC gives up the proceeds of avoidance transactions to the Resolution Applicant in exchange for a higher upfront amount - We are fully convinced with the argument advanced by the Appellants Counsel that the ratio of the 'Venus Recruiters' case applies to the facts of this case. Further, the ratio laid down by the Hon'ble Delhi High Court is that of the constitutional court directly answering the issues before the NCLT was binding on the AA/ NCLT. Based on the different judgements of the Hon ble Supreme Court, it is undisputed that NCLT/NCLT has to adopt a hands-off approach and should not undertake a judicial review of the COC s commercial wisdom exercised. However, the question arises as to what can be considered commercial wisdom. Commercial wisdom is not defined anywhere. What would be treated under commercial wisdom can be inferred from the powers given to COC under the code. Thus, while the Adjudicating Authority cannot interfere on merits with the commercial decision taken by the Committee of Creditors, the limited judicial review available is to see that the Committee of Creditors has taken into account the fact that the Corporate Debtor needs to keep going as a going concern during the insolvency resolution process; that it needs to maximize the value of its assets; and that the interests of all stakeholders including operational creditors have been taken care of. In case of Ngaitlang Dhar v. Panna Pragati Infrastructure Pvt. Ltd., 2021 2021 (12) TMI 793 - SUPREME COURT Hon ble Supreme Court has observed that under Section 61(3)(ii) of the IBC, an appeal would be tenable if there has been a material irregularity in exercise of the powers by the RP during the corporate insolvency resolution period. It is trite law that commercial wisdom of the CoC has been given paramount status without any judicial intervention for ensuring completion of the processes within the timelines prescribed by the IBC. It has been consistently held that it is not open to the Adjudicating Authority (the NCLT) or the Appellate Authority (the NCLAT) to take into consideration any other factor other than the one specified in Section 30(2) or Section 61(3) of the IBC. In the instant case, respondents claim that Section 66 of the insolvency and Bankruptcy Code 2016 does not impede the resolution applicant's rights to avail the proceeds from the avoidance applications. Indeed, this Code does not have any provision restricting the resolution applicant to avail the benefits of avoidance proceedings initiated under Section 66. However, if there is no restriction, it can t be presumed that the code authorises the resolution applicant for the same. Whether the stipulation of future recoveries from Section 66 avoidance applications being retained by the Successful Resolution Applicant s amounts to illegality or whether the same is within the commercial domain of COC? - Whether the same can be treated under the rights of commercial wisdom of the COC? - HELD THAT - It is important to mention that Sections 66 and 67 of the Insolvency and Bankruptcy Code 2016 deal with wrongful trading. Sub-section 2 of Section 66 provides that where the adjudicating authority has passed an order either under Sub-section 1 or 2 of Section 66 of the Code, in relation to a person who is a creditor of the Corporate Debtor, the Adjudicating Authority may by order direct that the whole or any part of the debt owed by the Corporate Debtor to that person and any interest thereon shall be ranked in order of priority of payment under Section 53 after all other debts owed by the Corporate Debtor - The phrase in relation to a person who is a creditor of the Corporate Debtor and the other expression shall rank in the order of priority of payment under Section 53 used in Sub-section 2 of Section 67 of the Insolvency and Bankruptcy Code indicate that recoveries from avoidance transaction should be distributed among the creditors in order of priority given under Section 53 of the Code. Therefore, it cannot be the discretion of the Committee of Creditors to negotiate the terms against the statutory provision of the Code. However, language erred in Section 67 indicates that recoveries made under Section 66 could go only to the creditors of the Corporate Debtor. FROM TIME TO TIME, the US courts have observed that any recovery from avoidance actions must be equitably distributed to the debtor's creditors, according to the dictates of the code. The only judgment that squarely covers the facts of the present case is the Venus Judgement of the Delhi High Court. Therefore, the contention that the Venus Judgement is not applicable or is distinguishable is incorrect and an afterthought - Admittedly in the instant case, the Administrator under statutory duties under Regulation 36B of the CIRP Regulations requested for Resolution Plan (RFRP). It was provided in the RFRP that any transaction is avoided or set aside in terms of Sections 43, 45, 47, 49, 50 or 66 of the Code, and any amount is received by the 1st Respondent, Resolution Applicant or the Corporate Debtor; such sums shall be for the benefit of the CoC. In response to the said RFRP, four entities expressed interest in submitting the Resolution Plans. Before approving the Resolution Plan, the Adjudicating Authority was obligated to test the Resolution Plan in terms of Section 30 (2) of the Code. In the instant case, the Administrator referred the matter to COC to decide on the applicability of the Venus judgement of Delhi High Court in providing the outcome of avoidance transactions to the Successful Resolution Applicant. Adjudicatory power could not have been delegated to the CoC. The Adjudicating Authority has not taken any decision about the applicability of the Venus judgement on the issue of providing the outcome of avoidance transaction to the resolution applicant. The Adjudicating Authority has stated that as far as the claims of avoidance transactions, COC has consciously decided that the money realised through these avoidance transactions would accrue to the members of the CoC - factual factors such as the kind of transactions being provided, party funding the action, assignment of claims, and creditors affected by transaction or trading may be considered when deciding on the distribution of recoveries. Thus it was recommended that instead of providing anything prescriptive in this regard, the decision on the treatment of recoveries might be left to the adjudicating authority. The term in the Resolution Plan that permits the Successful Resolution Applicant to appropriate recoveries, if any, from avoidance applications filed under Section 66 of the Code ought to be set aside. The Resolution Plan be sent back to the CoC for reconsideration on this aspect - Appeal allowed.

Summary

Issues Involved:
1. Whether the stipulation in DHFL's Resolution Plan of recoveries from avoidance transactions enuring to the benefit of the Resolution Applicant amounted to illegality.
2. Whether the action of approving the resolution plan to give the benefit of avoidance transactions to the Resolution Applicant was within the domain of the commercial wisdom of the CoC.
3. If it was illegality, whether it could be saved by any majority strength within the CoC voting in favor of the Resolution Plan.
4. Whether the Successful Resolution Applicant can appropriate recoveries from avoidance applications filed under Section 66 of the Insolvency and Bankruptcy Code, 2016.

Detailed Analysis:

1. Whether the stipulation in DHFL's Resolution Plan of recoveries from avoidance transactions enuring to the benefit of the Resolution Applicant amounted to illegality:

The Appellant argued that the avoidance applications are meant to benefit the creditors of the Corporate Debtor, not the Corporate Debtor in its new avatar post-approval of the Resolution Plan. The Appellant cited the judgment of the Delhi High Court in the case of Venus Recruiters Private Limited, which held that avoidance applications were meant to benefit the creditors of the Corporate Debtor, not for the Corporate Debtor in its new avatar or for the benefit of the Resolution Applicant after the resolution was complete.

2. Whether the action of approving the resolution plan to give the benefit of avoidance transactions to the Resolution Applicant was within the domain of the commercial wisdom of the CoC:

The Respondents contended that the treatment of recoveries from avoidance applications falls within the domain of the commercial wisdom of the CoC. They argued that the CoC, in its commercial wisdom, decided to let the Resolution Applicant take the benefits of the proceeds arising out of avoidance applications in exchange for a higher upfront amount. The Respondents relied on the principle that the commercial wisdom of the CoC is paramount and not open to judicial review, as laid down in several judgments by the Hon'ble Supreme Court.

3. If it was illegality, whether it could be saved by any majority strength within the CoC voting in favor of the Resolution Plan:

The Appellant argued that a Resolution Plan, which is otherwise illegal or contains terms contrary to law, cannot be countenanced based merely on the strength of the majority that votes for such a plan. The plea of estoppel is not available to the Respondents on the ground that the Appellant voted in favor of the Resolution Plan. The Appellant relied on the principle that there cannot be any estoppel against the law.

4. Whether the Successful Resolution Applicant can appropriate recoveries from avoidance applications filed under Section 66 of the Insolvency and Bankruptcy Code, 2016:

The Appellant contended that the benefit of recoveries from avoidance transactions should enure to the creditors of the Corporate Debtor and not the Resolution Applicant. The Appellant relied on various authoritative external aids, including the UNCITRAL Legislative Guide on Insolvency Law, the Report of the Bankruptcy Law Reforms Committee, and the Insolvency Law Committee Reports, which support the principle that recoveries from avoidance transactions should benefit the creditors.

Conclusion:

The Appellate Tribunal concluded that the stipulation in the Resolution Plan allowing the Resolution Applicant to appropriate recoveries from avoidance applications filed under Section 66 of the Code amounted to illegality. The Tribunal held that such recoveries should benefit the creditors of the Corporate Debtor and not the Resolution Applicant. The Tribunal set aside the term in the Resolution Plan that permitted the Successful Resolution Applicant to appropriate recoveries from avoidance applications and directed that the Resolution Plan be sent back to the CoC for reconsideration on this aspect.