2023 (1) TMI 644 - HC - Insolvency and Bankruptcy

Avoidance of preferential transactions - Right of claim over the amount available - conclusion of corporate insolvency resolution process - RP can continue to act beyond the approval of the Resolution Plan or not - avoidance application can be heard and adjudicated after the approval of the Resolution Plan or not - benefit of an adjudication of the avoidance application after the Resolution Plan. Whether an application for avoidance of a preferential transaction, though filed prior to the Resolution Plan being approved, can be heard and adjudicated by the NCLT, at the instance of the RP, after the approval of the Resolution Plan? Alternate efficacious remedy before the NCLAT - HELD THAT - The phrase arising out of and in relation to is to be given wide import. Therefore, the Ld. Single Judge erred in holding the writ petition was maintainable. An appeal ought to have been preferred by Respondent No. 1 before the NCLAT under Section 61 of the IBC and the NCLAT itself was the appropriate forum to decide the controversy posed before the Ld. Single Judge - There is no doubt that IBC is clearly special statute that seeks to be a single source guide for all issues relating the issue of insolvency. Avoidance of certain transactions such as preferential transactions or undervalued transactions are special remedies envisaged only under the IBC to benefit a special creature of the Code itself, i.e., the Committee of Creditors. In view of the purpose and policy behind enactment of the IBC, it is only befitting that any petition or application arising out of the insolvency resolution or liquidation of a corporate person includes proceedings under Part III of the IBC. Effect of Regulation 38(2)(d)of CIRP Regulations, 2016 - HELD THAT - Respondent No. 1 s reliance upon this clause is misplaced. This clause has no bearing on the dispute in the present matter. Regulation 38 is titled Mandatory contents of the Resolution Plan . Regulation 38(2) requires that a resolution plan shall contain whatever is listed under sub-clauses (a) to (d). Therefore, the understanding is that Regulation 38(2)(d) necessitates a resolution plan to provide for the manner in which the resolution applicant seeks to deal with a pending avoidance application and the proviso sets a cut-off date for the applicability of the new regulation. Therefore, all resolution plans submitted before the NCLT for approval on or after 14.06.2022 must mandatorily provide for the manner in which they seek to deal with a sub-judice avoidance application and resolution plans submitted for approval before 14.06.2022 are not necessitated to provide for the manner in which the resolution applicant seeks to deal with such claims. Therefore, the provision only deals with what ought to be in resolution plans and cannot be interpreted to extinguish proceedings pertaining avoidable transactions in resolution plans submitted before 14.06.2022 altogether. Avoidance applications can be heard after conclusion of CIRP and benefits derived from adjudication will be appropriated by the creditors or not - HELD THAT - There is no time limit prescribed for the NCLT to adjudicate these applications. Further, there is no express penalty clause for the RP s failure to follow the timelines provided in Regulation 35A. When the law itself does not envisage a limit for the NCLT to adjudicate such an application, the Ld. Single Judge could not have imposed such a condition. The provisions pertaining to avoidable transactions is to primarily benefit creditors. While the Corporate Debtor ceases to exist in its erstwhile avatar, in cases where the Resolution Plan is silent on the treatment of any pending applications because such information could not be made available to the applicant, the creditors of the corporate debtor can still be the beneficiaries of the sum or properties that may be recovered from adjudication of an avoidance application. The same is consistent with the scheme of the Code and in line with object sought to be achieved by it which inter-alia includes, increasing the availability of credit within the economy. RP will pursue the avoidance applications since he is only functus officio vis- -vis CIRP and not avoidance applications - HELD THAT - Sections 43-51, 66 67 of the IBC lays down various transactions that may be avoided by the resolution professional and the actions that can be taken against erstwhile management for fraudulent transactions. These provisions are primarily aimed at swelling the asset pool available for distribution to creditors and preventing unjust enrichment of one party at the expense of other creditors. The scheme of the Act suggests that proceedings for unearthing such transactions are ancillary proceedings and the resolution of the corporate debtor need not be stalled due to pendency of such proceedings. The insolvency professional has to thoroughly examine the transactions which the corporate debtor has undertaken in the period prior to commencement of the period of insolvency proceedings. This is a very cumbersome process and more so in respect of companies whose books and records do not properly document all its past transactions - Since investigation and adjudication of these transactions are time consuming this cannot allow persons who were managing the corporate debtor to escape from reversal of these transactions. The time line given in the IBC cannot be used as a premium by the unscrupulous persons who have forced the corporate entity into insolvency process. The amount that is available after the transactions are avoided cannot go to the kitty of the resolution applicant, in this case the Appellant in LPA No. 37/2021. For the resolution applicant, it was purely a commercial contract, a commercial decision whereunder the resolution applicant knew the ground reality, the assets and the liabilities. The benefit arising out of the adjudication of avoidance applications is not for the corporate debtor in its new avatar since it does not continue as a debtor and has gone through the process of resolution - The purpose of the avoidance application as stated above is to enhance the asset pool available for the decision of creditors who are primarily financial institutions and have taken the haircut in agreeing to accept a much lesser amount than what was due and payable to them. This is public money, and, therefore, the amount that is received if and when transactions are avoided and receive the imprimatur of adjudicating authority must be distributed amongst the committee of creditors in a manner determined by the adjudicating authority. The impugned Judgment is set aside. The NCLT is directed to proceed ahead with the hearing of avoidance application. In accordance with Sections 44 to 51 of the IBC, 2016, the amount which is recovered can be distributed amongst the secure creditors in accordance with law as determined by the NCLT - Appeal disposed off.

Summary

Issues Involved:
1. Alternate efficacious remedy before NCLAT.
2. RP being functus officio after CIRP.
3. Adjudication of avoidance applications after CIRP.
4. Beneficiaries of avoidance applications.

Detailed Analysis:

(A) Issue of Alternate Efficacious Remedy Before the NCLAT:
The Ld. Single Judge addressed the maintainability of the writ petition, considering the appellants' argument that the writ petition should be dismissed due to the existence of an efficacious alternate remedy under Section 61 of the IBC. The Judge observed that the NCLT has jurisdiction over applications and petitions "in relation to insolvency resolution and liquidation for corporate persons." However, the issue was whether the proceedings in question were related to insolvency resolution. The Judge concluded that the writ petition was maintainable because the CIRP ended with the approval of the Resolution Plan on 15.05.2018, and no proceedings remained pending except issues pertaining to the Plan itself.

(B) RP Being Functus Officio After CIRP:
The Ld. Single Judge questioned whether the RP becomes functus officio after the resolution of the corporate debtor. The Judge observed that the RP's role is administrative, not adjudicatory, and cannot continue beyond an order under Section 31 of the IBC unless the Resolution Plan explicitly permits the RP to function for any specific purpose beyond its approval. The Judge emphasized that the RP's authority is limited by the proviso to Section 23(1), which sets an outer limit for its functioning. Therefore, the RP cannot continue to act as former RP after the CIRP period.

(C) Adjudication of Avoidance Applications After CIRP:
The Ld. Single Judge noted that Regulation 35A of the CIRP Regulations, 2016, provides a timeline for the RP to form an opinion on objectionable transactions and submit details to the NCLT before the approval of the Resolution Plan. The Judge held that the purpose of these timelines is for the RP to include these details in the Resolution Plans. The Judge further observed that the Resolution Applicant cannot file an avoidance application since it is for the benefit of the Corporate Debtor and the CoC before the resolution. Allowing adjudication of avoidance applications after resolution would mean the NCLT stepping into the new management's shoes. Therefore, any order on suspect transactions must be passed before the approval of the resolution plan. Section 26 of the IBC cannot be interpreted to mean that an application for avoidance of transactions can survive after the CIRP process.

(D) Beneficiaries of Avoidance Applications:
The Ld. Single Judge relied on Clause 2.4 of the ILC Report dated 20.02.2020, which states that the successful Resolution Applicant cannot file an avoidance application. The purpose of avoidance applications is not to benefit the Resolution Applicants or the company after resolution but the Corporate Debtor and the CoC before the resolution. The Judge concluded that after the Plan is approved, the company is in the hands of the new management, and neither the NCLT nor the RP has any right or power over the company.

Contentions of the Parties:
1. Tata Steel BSL Ltd. argued that the writ petition should have been dismissed due to the existence of an alternate remedy before the NCLAT. They contended that avoidance applications are filed as per IBC provisions, and the NCLT is the appropriate forum. They argued that Section 26 clarifies that filing an avoidance application does not affect the CIRP, and such applications can continue parallelly and beyond CIRP.
2. Union of India contended that the phrases "arising out of"� or "in relation to"� in Section 60(5)(c) are of wide import, extending the NCLT's jurisdiction to matters related to insolvency resolution. They argued that the RP's statutory duty to file avoidance applications survives the CIRP, and the NCLT can still decide such applications.
3. Resolution Professional concurred with Tata Steel BSL Ltd. and the Union of India, arguing that the RP can continue to pursue avoidance applications, and the Corporate Debtor can substitute the RP to pursue the applications.
4. Venus Recruiters Pvt. Ltd. argued that the jurisdiction of the NCLT ceases after CIRP, and the IBC does not provide for the continuation of avoidance applications post-CIRP. They cited the Innoventive Industries case to emphasize the necessity for speedy resolution under the IBC.

Findings and Conclusion:
1. Alternate Remedy Before NCLAT: The phrase "arising out of"� or "in relation to"� under Section 60(5)(c) of the IBC is of wide import, and the NCLT has jurisdiction to entertain such matters. The writ petition was not maintainable, and the respondent should have pursued an appeal before the NCLAT.
2. RP Functus Officio: The RP's role in CIRP ends with the successful resolution of the corporate debtor. However, the RP can continue to pursue avoidance applications as they are separate proceedings from CIRP.
3. Adjudication of Avoidance Applications: Avoidance applications can survive CIRP, and the benefit from such adjudication should go to the creditors of the corporate debtor, not the new management. The RP is not functus officio concerning avoidance applications.
4. Beneficiaries of Avoidance Applications: The benefit arising from adjudication of avoidance applications should be distributed among the creditors, not the corporate debtor in its new avatar.

Conclusion:
The impugned Judgment was set aside, and the NCLT was directed to proceed with the hearing of the avoidance application. The amount recovered should be distributed among the creditors as determined by the NCLT.