2021 (3) TMI 464 - Tri - Insolvency and Bankruptcy

Preferential, undervalued and fraudulent transactions by Respondent - survival of application filed under Section 43 for avoidance of preferential transactions beyond the conclusion of the resolution process - role of the RP in pursuing such applications - HELD THAT - On a perusal of Section 43 of the I B Code, it is clear that to adjudicate the applicability of Section 43, one must look back two years from the date of commencement of CIRP, for a transaction with a related party and one year from the date of commencement of CIRP, for a transaction with a person other than a related party. Here, the application was admitted and CIRP initiated on 15.01.2018, the Resolution Plan was approved by the CoC on 28.12.2018 and approved by the Adjudicating Authority on 23.01.2019. This application was first heard before the Tribunal on 03.10.2018 and NCLT, Chennai Bench had posted it for making final submissions. But from the proceedings, it is seen that the applicant as well as Respondents sought several adjournments and which is beyond the approval of Resolution Plan approval on 28.12.2018. A perusal of the chronology of events would show that the avoidance application in this case was filed before the CoC had approved the Resolution Plan and almost end of the submissions on the Resolution Plan being heard by the NCLT. The NCLT did not pass any orders on the avoidance application before or at the time of approval of the Resolution Plan - This Tribunal is of an opinion that 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 form, 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. Any property transferred or sum acquired in an order passed in respect of a preferential transaction would have to form part of the final Resolution Plan. The Resolution Plan would have to take into consideration such amounts and benefits which can be given to the Corporate Debtor for the benefit of the CoC. 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 benefit of orders passed in respect of such transactions may be passed on to the Corporate Debtor which may assist in liquidating the company at the final stage. However, that is not the case in the present application. The NCLT ought not to be permitted to now adjudicate the preferential nature of the transaction, after the approval of the Resolution Plan. This Tribunal is of the view that after the approval of Resolution Plan, this Tribunal has no jurisdiction to entertain and decide avoidance applications, in respect of a Corporate Debtor, which is now under a new management. i.e., M/s Acme Chem Limited. - Application dismissed.

Summary

Issues Involved:
1. Allegations of preferential, undervalued, and fraudulent transactions.
2. Barred by limitation as per IBBI Regulations.
3. Role and jurisdiction of the Resolution Professional (RP) after approval of the Resolution Plan.
4. Whether avoidance applications can survive post-resolution plan approval.

Issue-wise Detailed Analysis:

1. Allegations of Preferential, Undervalued, and Fraudulent Transactions:
The applicant, the Resolution Professional (RP) of the Corporate Debtor, filed an application under Sections 43(1) and 66 of the Insolvency and Bankruptcy Code (IBC), alleging that Respondents 2 to 4 engaged in preferential, undervalued, and fraudulent transactions. The RP identified payments totaling ?9.49 Crores as preferential and fraudulent. These transactions were categorized into four heads:
- Illegal adjustment in favor of a related party.
- Repayment of unsecured loans.
- Payment to related parties over other creditors.
- Sale of assets at a lesser value.

The RP argued that these transactions were not in the ordinary course of business and were intended to defraud other creditors, thus requiring the respondents to contribute to the Corporate Debtor’s assets.

2. Barred by Limitation as per IBBI Regulations:
Respondents contended that the application was barred by limitation under Regulation 35A of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, which prescribes timelines for determining and filing preferential and other transactions. The application was filed after 255 days from the commencement of CIRP, exceeding the 135 days limit. The respondents argued that the RP had flouted these timelines, rendering the application time-barred.

3. Role and Jurisdiction of the RP after Approval of the Resolution Plan:
The respondents argued that under the IBC, once the CIRP concludes, the RP can no longer file or pursue applications on behalf of the Corporate Debtor. They cited the Supreme Court decision in Interim Resolution Professional V. Axis Bank Ltd. and the Delhi High Court decision in Venus Recruiters Pvt. Ltd. Vs UOI & Ors., which held that the RP’s role is finite and cannot extend beyond the approval of the Resolution Plan. The RP’s mandate ends with the approval of the Resolution Plan, and any avoidance applications should be adjudicated before this approval.

4. Whether Avoidance Applications can Survive Post-Resolution Plan Approval:
The Tribunal examined whether an application under Section 43 for avoidance of preferential transactions can survive beyond the resolution process. It concluded that the benefit of such applications is meant for creditors before the approval of the Resolution Plan and not for the Corporate Debtor in its new form. The Tribunal referenced Section 44 of the IBC, which outlines the orders that can be passed in case of preferential transactions, benefiting the Corporate Debtor prior to the Resolution Plan’s approval. Once the Resolution Plan is approved and new management takes over, no proceedings remain pending except issues related to the Resolution Plan itself.

Findings:
The Tribunal found that the avoidance application was filed before the CoC approved the Resolution Plan but was not adjudicated before the plan’s approval. The Tribunal held that after the approval of the Resolution Plan, it has no jurisdiction to entertain and decide avoidance applications for a Corporate Debtor under new management. The role of the RP is limited to managing the Corporate Debtor during the CIRP and not beyond. The Tribunal dismissed the application, stating that the RP cannot act on behalf of the Corporate Debtor after the Resolution Plan’s approval.

Conclusion:
The application TMA/42/KOB/2019 in CP/689/IB/2017 (C.B) was dismissed on the grounds that the Tribunal lacks jurisdiction to entertain avoidance applications post-approval of the Resolution Plan, and the RP's role does not extend beyond the CIRP period.