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TMI Blog2020 (11) TMI 850X X X X Extracts X X X X X X X X Extracts X X X X ..... se. Thus, the role of a RP comes to an end here. Applications for Avoidance Transactions - HELD THAT:- Similar is the situation in respect of undervalued transactions, transactions defrauding creditors and extortionate credit transactions. In the present case however, this Court is only concerned with preferential transactions - A perusal of Section 43, would show that not all transactions with related or unrelated parties would fall within this category. The same is limited by time. In relation to a related party, the transaction would be preferential if it has taken place two years before the insolvency commencement date and if it has put such party in a beneficial position as against other creditors, sureties or guarantors. In case of an unrelated party, the period is one year. Chronology of Events - HELD THAT:- This Court had entertained the writ petition as there were fundamental issues of jurisdiction which were raised by the Petitioner. Vide order dated 23rd August, 2019, parties were directed to seek an adjournment before the NCLT. The said order continues till date - The matter was part-heard, when court hearings had been suspended due to the lockdown caused by p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een approved. This is however subject to any clause in the Resolution Plan to the contrary, permitting the RP to function for any specific purpose beyond the approval of the Resolution Plan. In the present case, no such clause has been shown to exist. The Resolution Applicant whose Resolution Plan is approved itself cannot file an avoidance application. The purpose is clear from this itself i.e., that the avoidance applications are neither for the benefit of the Resolution Applicants nor for the company after the resolution is complete. It is for the benefit of the Corporate Debtor and the CoC of the Corporate Debtor. The RP whose mandate has ended cannot indirectly seek to give a benefit to the Corporate Debtor, who is now under the control of the new management/Resolution Applicant, by pursuing such an application. The ultimate purpose is that any benefit from a preferential transaction should be given to the Corporate Debtor prior to the submission of bids and not thereafter. The fact that the new management can take a decision in respect of any agreement which is deemed to be not beneficial to it also supports the interpretation that after the Plan is approved, the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lan, is thus under challenge. Brief Background 4. The brief background of this case is that Respondent No. 3 i.e. M/s Bhushan Steel Ltd. (now known as Tata Steel BSL Ltd.) (hereinafter, Corporate Debtor ) was the subject of Corporate Insolvency Resolution Process (hereinafter, CIRP ) before the NCLT, initiated by the State Bank of India by a petition being C.P. No.(IB) - 201(PB)/2017 titled State Bank of India v. Bhushan Steel Ltd filed on 26th July, 2017. 5. On the same date when the CIRP was initiated, the NCLT appointed Mr. Vijay Kumar Iyer i.e. Respondent No. 4 as an Interim Resolution Professional (hereinafter, IRP ) for the Corporate Debtor. A public announcement was made in accordance with Section 15 of the IBC, inviting submissions of claims against the Corporate Debtor. The Committee of Creditors (hereinafter CoC ) was thereafter constituted and its first meeting was held on 24th August, 2017, when the IRP was also confirmed as the Resolution Professional (hereinafter, RP ) for the Corporate Debtor. 6. On 20th March, 2018, the CoC approved the Resolution Plan proposed by Respondent No. 2 i.e. Tata Steel Ltd. (hereinafter, successful Resolution App ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was neither heard nor decided on merits. 11. On 18th May, 2018, the Resolution Plan was finally closed and the new management took over the Corporate Debtor. On 24th July, 2018, the NCLT passed an order in the avoidance application, C.A. No. 284/2018, which was filed prior to the approval of the Resolution Plan to the following effect: CA-284(PB)/2018 CA-284(PB)/2018 has been filed by RP on 09.04.2018 prior to the approval of the Resolution Plan. Let notice be issued to the entities and the company as per the list provided by the Ld. for the R.P. Let the reply if any be filed before the next date of hearing. Let all the pending applications come up together on 09.08.2018. CA-593(PB)/2018 Ld. counsel for the applicant Vistratpal Real Estate Pvt. Ltd. requests for withdrawal of the application. Ld. counsel for the applicant submits that he wants to withdraw the application and to proceed as per law in that regard. The request for withdrawal of CA-593(PB)/2018 is accepted. The application is disposed of accordingly. Let the pleadings in other applications be complete on or before the next date of hearing with a copy in advance to the other side. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (hereinafter, 2016 CIRP Regulations ) are referred to, to argue that there are specific timelines which are prescribed for the purpose of the RP to determine whether any transaction was preferential, undervalued, fraudulent or extortionate and also to file an application before the NCLT, both within the prescribed 180-day period. Accordingly, it is submitted that avoidance of any such transactions ought to be undertaken before conclusion of the CIRP. The said preferential transactions would also form part of the Resolution Plan, which is submitted to the CoC. 17. Ld. Sr. counsel submits that the question as to whether the transaction was a suspect transaction or a third-party related transaction and whether any financial benefits were earned from the said transaction ought to have been gone into, prior to finalisation of the Resolution Plan. From the facts, it is highlighted that the Forensic Audit Report was submitted to the RP on 3rd April, 2018 and the avoidance application was filed before the NCLT on 9th April, 2018. However, till the time when the final Resolution Plan was approved on 15th May, 2018, n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 23. Mr. V. P. Singh, ld. counsel appearing for Respondent No.3 i.e. Tata Steel BSL Ltd. (formerly Bhushan Steel Ltd./Corporate Debtor) submits that the Petitioner is related to the erstwhile promoters of the Company. He submits that the transaction in respect of which the present petition had been filed is not the only transaction. There were various suspect transactions involving the erstwhile Corporate Debtor qua which the avoidance application was filed and other entities have raised their issues before the NCLT itself. He further submits that despite receiving the notice in the avoidance proceedings in April, 2018, the Petitioner has approached this Court only in 2019 and thus it would not be entitled for discretionary jurisdiction to be exercised in its favour. 24. He further submits that the intention of the IBC is to delink the CIRP proceedings from avoidance transactions inasmuch as the adjudication of such transactions could take much longer than timelines fixed in the adjudicatory process. He further submits that after the introduction of Section 26 in the IBC, it is clear that the power of the RP is independent of the CIRP proceedings. 25. Mr. V.P. Singh, ld. coun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C)], wherein the Supreme Court recently held that although timelines would be an important factor in the CIRP proceedings, the word mandatorily was struck down from Section 12 as being violative of Article 19(1)(g) of the Constitution. The Court, therefore, read down the provision to interpret it in line with the object of the statute. 30. Ld. counsel submits that there were two instances of vulnerable transactions entered into by the erstwhile promoters of Respondent No.3 involving an onerous employment contract and an onerous rent contract, wherein the premises of Vistrat Real Estate Pvt. Ltd. ( Vistrat ) were shown as the office space of Respondent No.3, with extremely high rent. The NCLT ruled that Vistrat and the Corporate Debtor were associated parties. This finding was upheld by NCLAT. 31. He further relies upon the judgment of this Court in IOCL v. UOI Ors. [W.P.(C) 13775/2019, decided on 23rd December, 2019] wherein a ld. Division Bench of this Court has held that there is a statutory appeal provided under Section 61 of the IBC and thus in the presence of an efficacious alternative remedy, a writ petition would not be maintainable. Finally, ld. counsel subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction has to approach the NCLT. Such transactions can be declared as void and the NCLT can reverse the effect of the transaction, meaning thereby that any monetary benefit given to any related party can be reversed. If the RP or the Liquidator does not declare the transaction as undervalued, any member/creditor can approach the NCLT. 35. He further submits that under Section 26 of the IBC, there is no fixed time limit for deciding an avoidance application. In this case, the allegation is that the Petitioner has been paid 10% extra for supply of manpower, which has caused loss to the company and in effect, there was diversion of the company s funds. Ld. Sr. counsel submits that the NCLT can upon receiving such an application restore the position as existed prior to the transaction. The provisions apply only in respect of extortionate credit transactions and not bona fide transactions. He submits that the application in this case was filed prior to the Resolution Plan being approved. However, notice was issued in the application on 24th July, 2018 after the RP s services were terminated on 18th May, 2018. Thus, the important stage is the stage of filing of the application a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us options which can be exercised once they are adjudicated by the NCLT i.e. under Section 44 of IBC, if the transactions are held to be preferential, benefits of the transaction can be given either to the erstwhile Corporate Debtor itself or to the Financial Creditor. It can also be shared in part by the new management and the creditors. He submitted that the wisdom of the CoC is sacrosanct on the said issue and in the present case, it has been dealt with in the final Resolution Plan which was approved by the NCLT. 40. He further submits that the said Resolution Plan also deals with other statutory amounts which may be received by the Company or any other loans and other receivables etc. including tax deductions, tax refunds, etc. Such amounts are always dealt with in a miscellaneous section in the Resolution Plan and these would also form a part of the preferential transactions or directed to be adjusted therefrom by the NCLT. 41. Reliance is also placed by him on the IBBI Discussion Paper and the ILC Report, to argue that in the case of both resolution and liquidation processes, the said two documents clearly support the plea that the applications can and would survive eve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icating Authority/NCLT for extension of the same has to be approved by the CoC by a vote of 66% of the voting shares. If such an application for extension is received, the NCLT can extend the period by a further period of not exceeding ninety days. Only one extension is permissible, as per the first proviso to Section 12(3) of the IBC. A mandatory outer limit of 330 days from the insolvency commencement date is prescribed for the completion of the CIRP under the second proviso to Section 12(3) w.e.f. 16th August 2019. 47. Upon an application for initiation of CIRP being admitted, the NCLT declares a moratorium under Sections 13 and 14 of the IBC. It also makes a public announcement of the initiation of the CIRP and calls for submission of claims under Section 15. Upon the declaration being made under Section 13, the moratorium period would immediately set in. 48. Under Section 13(1)(c), an IRP is then appointed by the NCLT in the manner as specified under Section 16. The IRP, who is appointed, shall take charge on the insolvency commencement date and shall continue till the appointment of a RP under Section 22. The IRP then manages the affairs of the Corporate Debtor in terms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions for its implementation. Once a Resolution Plan is approved, the moratorium order under Section 14 shall cease to have effect and the RP shall forward all the records relating to the CIRP and the Resolution Plan to the Board to be recorded on its database. Thus, the role of a RP comes to an end here. (b) Applications for Avoidance Transactions 52. The IBC contemplates various transactions which could be found to be objectionable/unacceptable and may require to be either reversed or compensated for, in some manner in order to ensure that the insolvency/liquidation process is fair to the creditors. Such transactions are of various categories namely preferential transactions, undervalued transactions, transactions defrauding creditors, and extortionate credit transactions. All transactions are dealt with under Chapter III related to liquidation processes. 53. As per Section 43, if the RP is of the opinion that any preferential transaction has taken place, by which the Corporate Debtor has given any benefit to a related party, two years prior to the insolvency commencement date or a preference to an unrelated party one year pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... court shall not, preclude such transfer to be deemed as giving of preference by the corporate debtor. Explanation . For the purpose of sub-section (3) of this section, new value means money or its worth in goods, services, or new credit, or release by the transferee of property previously transferred to such transferee in a transaction that is neither void nor voidable by the liquidator or the resolution professional under this Code, including proceeds of such property, but does not include a financial debt or operational debt substituted for existing financial debt or operational debt. (4) A preference shall be deemed to be given at a relevant time, if (a) It is given to a related party (other than by reason only of being an employee), during the period of two years preceding the insolvency commencement date; or (b) a preference is given to a person other than a related party during the period of one year preceding the insolvency commencement date. 44. Orders in case of preferential transactions. - (1) The Adjudicating Authority, may, on an application made by the resolution professional or liquidator under sub-section (1) of section 43, b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficient information of the initiation or commencement of insolvency resolution process of the corporate debtor; (ii) is a related party, it shall be presumed that the interest was acquired, or the benefit was received otherwise than in good faith unless the contrary is shown. Explanation-II. A person shall be deemed to have sufficient information or opportunity to avail such information if a public announcement regarding the corporate insolvency resolution process has been made under section 13. 54. Similar is the situation in respect of undervalued transactions, transactions defrauding creditors and extortionate credit transactions. In the present case however, this Court is only concerned with preferential transactions. 55. A perusal of Section 43, would show that not all transactions with related or unrelated parties would fall within this category. The same is limited by time. In relation to a related party, the transaction would be preferential if it has taken place two years before the insolvency commencement date and if it has put such party in a beneficial position as against other creditors, sureties or guarantors. In case of an unrelated part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9th April 2018, was taken up for the first time on 24th July, 2018, by the NCLT. A fresh memo of parties was filed in the application by the counsel claiming to be appointed by the Former RP on 14th August, 2018. Notice was issued in the avoidance application to the non-applicants. The Petitioner was thereafter impleaded and notice was issued to it on 25th October, 2018, upon an application by the RP. The said order, impleading the Petitioner, is challenged before this Court, on the ground that the entire proceedings are without jurisdiction. 63. This Court had entertained the writ petition as there were fundamental issues of jurisdiction which were raised by the Petitioner. Vide order dated 23rd August, 2019, parties were directed to seek an adjournment before the NCLT. The said order continues till date. 64. The matter was part-heard, when court hearings had been suspended due to the lockdown caused by pandemic. Thereafter, the matter was reheard in September, 2020. In the meantime, on 26th March, 2020, the erstwhile Corporate Debtor, now managed by Tata Steel Ltd i.e. Tata Steel BSL Ltd. informed the Petitioner that the contract between them expired on 31st March, 202 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etitions in relation to insolvency resolution and liquidation for corporate persons . In this case, the issue is whether the proceedings in question were in relation to insolvency resolution or not. The insolvency resolution process had already come to an end with the approval of the Resolution Plan by the NCLT on 15th May, 2018. The NCLT chose to exercise jurisdiction post the approval of the Resolution Plan. Under the Scheme of the IBC, as set out above, the jurisdiction of the NCLT is limited to insolvency resolution and liquidation. After the approval of the Resolution Plan and the new management taking over the Corporate Debtor, no proceedings remain pending before the NCLT, except issues relating to the Resolution Plan itself, as permitted under Section 60. 69. Certainty and timeliness is the hallmark of the Insolvency and Bankruptcy Code, 2016. The Supreme Court in M/s Innoventive Industries (Supra) observed that one of the important objectives of the Code is to bring the insolvency law in India under a single unified umbrella with the object of speeding up of the insolvency process. Any continuation of the jurisdiction of the NCLT beyond what is permitted under the IBC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Regulation: 35A. Preferential and other transactions. (1) On or before the seventy-fifth day of the insolvency commencement date, the resolution professional shall form an opinion whether the corporate debtor has been subjected to any transaction covered under sections 43, 45, 50 or 66. (2) Where the resolution professional is of the opinion that the corporate debtor has been subjected to any transactions covered under sections 43, 45, 50 or 66, he shall make a determination on or before the one hundred and fifteenth day of the insolvency commencement date, under intimation to the Board. (3) Where the resolution professional makes a determination under sub-regulation (2), he shall apply to the Adjudicating Authority for appropriate relief on or before the one hundred and thirty-fifth day of the insolvency commencement date. Regulation: 39. Approval of resolution plan xxx (2) The resolution professional shall submit to the committee all resolution plans which comply with the requirements of the Code and regulations made thereunder along with the details of following transactions, if any, observed, found or determined by him:- (a) preferentia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Resolution Plan to the contrary, permitting the RP to function for any specific purpose beyond the approval of the Resolution Plan. In the present case, no such clause has been shown to exist. 75. The Supreme Court of India in Committee Of Creditors Of Essar (supra) has held that the detailed provisions of the IBC read with the 2016 Regulations make it clear that the RP is a person who is to manage the affairs of the Corporate Debtor as a going concern from the stage of admission of an application under Sections 7, 9 or 10 of the Code till a Resolution Plan is approved by the NCLT. The relevant extract of the decision is as under: 27. The detailed provisions that have been stated hereinabove make it clear that the resolution professional is a person who is not only to manage the affairs of the corporate debtor as a going concern from the stage of admission of an application under Sections 7, 9 or 10 of the Code till a resolution plan is approved by the Adjudicating Authority, but is also a key person who is to appoint and convene meetings of the Committee of Creditors, so that they may decide upon resolution plans that are submitted in accordance with the detail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fter in 2020, merely extended the mandate of the RP till the approval of the Resolution Plan under Section 31(1) or appointment of liquidator under Section 34. This itself makes it amply clear that the RP s authority is limited in nature and in any event, cannot extend beyond the order passed under Section 31. Thus, there is an outer limit for the functioning of the RP under the proviso to Section 23(1). The continuation of a RP or filing of an application for the purpose of prosecuting an avoidance application as a `Former RP is beyond the contemplation of the IBC. The RP ceases to be one after an order under Section 31 is passed. The RP does not have any connection whatsoever with the new Management which takes over the erstwhile Corporate Debtor, after the approval of the Resolution Plan. Any other interpretation could lead to a situation where an RP could be a Former RP for years together without any definite end date. Under Section 23, the CIRP period is a specific period and cannot be read as a perpetual period or an indefinite period. The wording of the proviso in fact makes it further clear that the CIRP process in fact comes to an end immediately upon the RP submitting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 Preferential transactions under section 43 2 Undervalued transactions under section 45 3 Extortionate credit transactions under section 50 4 Fraudulent transactions under section 66 82. Though at first blush, Mr. Ahluwalia s submission may appear attractive, a closer analysis reveals that Form H seeks to achieve what is mandated in the Regulations. Regulation 39 requires details of the objectionable transactions to be placed by the RP before the NCLT. Form H is merely a format prescribed to provide the said details. The application in respect of such transactions would obviously be pending on the date when the Resolution Plan is submitted by the RP. The details of the transactions would be contained in Form H, would be filled by RP and submitted by the RP before the NCLT. However, Form H cannot be r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnot be permitted to file such avoidance applications, as the same was not factored into the bid. The relevant extract reads as under: 2.4. The Committee also considered if the successful resolution applicant should be permitted to file such applications. However, it was agreed that this would possibly result in the resolution applicant being entitled to a return that was not factored in at the time of submitting their bid. Therefore, the Committee decided that the resolution applicant should not be permitted to file applications against improper trading or applications to avoid transactions 86. Thus, the Resolution Applicant whose Resolution Plan is approved itself cannot file an avoidance application. The purpose is clear from this itself i.e., that the avoidance applications are neither for the benefit of the Resolution Applicants nor for the company after the resolution is complete. It is for the benefit of the Corporate Debtor and the CoC of the Corporate Debtor. The RP whose mandate has ended cannot indirectly seek to give a benefit to the Corporate Debtor, who is now under the control of the new management/Resolution Applicant, by pursuing such an application. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Plan is approved, the company is completely in the hands of the new management and neither the NCLT nor the RP has any right or power in respect of the said company. As can be seen in the present case, the Corporate Debtor in its new avatar has terminated the agreement with the Petitioner. 92. The parties would have to be therefore left to their civil and other remedies in terms of the contract between them. The NCLT ought not to be permitted to now adjudicate the preferential nature of the transaction under a contract which now stands terminated, after the approval of the Resolution Plan. 93. The above discussion is only in the context of Resolution processes and would however not apply in case of liquidation proceedings. In the case of a liquidation process, the situation may be different inasmuch as the liquidator may be able to take over and prosecute applications for avoidance of objectionable transactions. 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 petition. 94. In view of the above findings, the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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