Settling the Dust of avoidance application: In light of Venus Recruiter v. Tata Steel

[By Rituraj Singh Parmar & Devyani Mishra]

The authors are students of National Law Institute University, Bhopal.

 

Introduction:

Avoidance application is the action against preferential or fraudulent transactions made by company which has gone into insolvency. The IBC 2016 in order to reverse such transactions has developed a mechanism which is stipulated under chapter 3 of the code (Section 43-51). The avoidance application can be adjudicated at three possible stages viz., during CIRP, liquidation stage and post resolution. However, the single bench of Delhi high court ruled that Avoidance application ends with the conclusion of CIRP and therefore can’t be adjudicated once CIRP is completed. Overruling this, in the case of Tata steel v Venus recruiter (Venus Recruiters) the division bench of Delhi High court rectified the mistake made by single judge bench and held that avoidance application can be pursued post CIRP. This particular judgment by Delhi high court is landmark because it is not restricted to stage of adjudication of avoidance application but also deals with various other important fragments relating to it.

In light of this ruling of Delhi High Court, the article attempts to analyse the implications of the judgement. First Section of this post will first delve into the background of the case; thereafter author will explore and discuss the different aspects of the judgement. The article will conclude by analysing the case within the broader context of IBC vis-à-vis avoidance application and the possible reasons of lower rate of adjudication of such applications.

Brief background of the case:

In the instant case, RP moved an avoidance application under Section 43 IBC after the submission of resolution plan to NCLT. Upon approval of Resolution Plan, Tata Steels BSL Ltd. subsumed the control of Bhushan Steel Ltd. NCLT upon the observation that avoidance application was submitted before the approval of Resolution Plan, proceeded to issue notice to the Respondent (Venus Recruiter pvt ltd). Aggrieved by the same, respondent moved petition before the Ld. Single Judge thereby, challenging the legality of avoidance application. In light of this, court upheld that avoidance application cannot be pursued post CIRP and that; RP becomes functus officio to the further proceedings.

Expanding the Ambit of Section 60(5) of IBC

The Single Judge bench of Delhi High Court narrowed down the jurisdiction of NCLT under Section 60(5) IBC while holding that the phrase “arising out of or in relation to the insolvency resolution” only includes matter pertaining to CIRP and NCLT becomes functus officio once CIRP is concluded.  Due to the very same reason, the single bench allowed the appellant to approach the high court for want of any other efficacious alternative remedy under IBC.

Overruling this, the present court held that phrase “in relation to insolvency resolution” connotes a wider import. The court has placed reliance on report of the Bankruptcy Law Reforms Committee (BLRC), Titaghur Paper Mills v State of Odisha, Swiss Ribbons v Union of India, Gujarat Urja Vikas Nigam  v Amit Gupta to conclude that dispute arising out of any local statute has to be remedied by exhausting the remedy present under that statute first. Court also referred to Essar Steelv Satish Kumar Gupta (Essar Steel)wherein the apex court held that no other court other than NCLT has jurisdiction to deal with proceedings mentioned under 60(5).

 Building upon the rationale of these authorities, the division bench has categorically held that

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 underSection 61 of the IBC and the NCLAT itself was the appropriate forum to decide the controversy posed before the Ld. Single Judge”

Thus, the present court while widening the ambit of NCLT has fairly settled the law relating to adjudication of Avoidance application that any petition or application arising out of the adjudication application of a corporate person shall be dealt by NCLT first and then as a second appeal to the NCLAT.

Effects of Regulation 35A and 38(2)(d) of CIRP Regulations, 2016 post the conclusion of CIRP:

The Ld. Single Judge via its impugned judgement held that avoidance applications cannot continue after the conclusion of CIRP. In the present matter, the avoidance application was held to be infructuous because the same wasn’t filed within the timelines prescribed by Regulation 35A of the CIRP Regulations, 2016.

The division bench overturned the impugned judgement and upheld that avoidance application can be pursued upon the conclusion of CIRP process. The bench ruledthat

“The timelines prescribed under regulation 35A are merely directory and not mandatory in nature”.

It further cited the case of Essar Steel,wherein, Hon’ble Supreme Court upheld that CIRP process in itself is not mandatorily bound by the prescribed timelines.Section 25(2)(j) under IBC provides that RP needs to file avoidance application before the conclusion of CIRP, the said obligation, in the present matter, had been discharged.

The respondent (Venus Recruiter pvt ltd) argued that on account of Regulation 38(2)(d), earlier, avoidance application wouldn’t survive after the approval of Resolution Plan. However, the bench upheld that the said regulation has no bearing on the instant matter. Regulation 38(2)(d) mandates Resolution Plan to provide for the ways to deal with avoidance applications and the proviso further sets cut-off date for the implementation of the regulation i.e., 14 June 2022. The Resolution Plans prior to cut-off date is not required to clarify the manner in which these applications are to be dealt with. Therefore, the NCLT does have jurisdiction over the avoidance applications submitted by Resolution Professionals.

Position of RP vis-à-vis CIRP on one hand and avoidance application on the other:

The arguments put forth by respondent that Resolution Professional (RP) becomes functus officio upon the successful conclusion of CIRP and accordingly, cannot pursue avoidance application, holds no ground because the objective of IBC provides for intelligible demarcation between the proceedings of CIRP and avoidance application. Section 26 of IBC states that the application to avoid certain transactions i.e., preferential or fraudulent by the RP should not affect the proceeding of CIRP. The said provision makes the use of word “shall” making it a mandatory provision.The bench observed that:

“The role of the RP vis-à-vis the resolution process ends, and rightly so, with the successful resolution of the corporate debtor. However, the Scheme of IBC makes it is clear that avoidance applications and CIRP are a separate set of proceedings.”

Unearthing of transactions which are preferential or dubious in nature is a cumbersome process because it involves answering both questions of law and fact. The adjudication of such applications by AA might take time beyond CIRP proceedings, consequently, scheme of the code provides that resolution of corporate debtor should not be impeded due to pendency of avoidance application. In pursuant to this, bench sternly held that RP are merely functus officio with respect to CIRP proceedings and not to the adjudication of avoidance applications. Hence, RP can pursue avoidance application even after the conclusion of CIRP.

Beneficiary of Avoidance Application

The insertion of regulation 38(2)(d) in the code makes it mandatory for the Resolution applicant to disclose the beneficiary of avoidance transaction at the time of submitting the Resolution plan and thereafter, the proceeds of avoidance applications shall be distributed in the manner provided in the RP. However, in the present case the Resolution plan didn’t account for such particulars due to initiation of avoidance application after the submission of the plan. In light of this, the single judge assumed that if avoidance application is adjudicated post CIRP then its benefit will be appropriated by the corporate debtor in its new avatar rather than the Creditor.

In the opinion division bench, the profits realized out of adjudication of avoidance application won’t benefit corporate debtor post resolution because it no longer remains a debtor once CIRP is concluded. The same won’t benefit resolution applicant either since the expectation of extra cash was not present at the time of approval of resolution plan. It will rather augment the asset pool available at the disposal of creditors who initially took haircut and accepted much lesser amount then what they should have been paid. The court held,

“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 above view is also in consonance with the purpose of avoidance application which is to prevent unjust enrichment of one party at the cost of creditors.

Analysis

The decision of the division bench of Delhi High Court is ground breaking on various Counts, because, firstly, it brings clarity to all the cases, relating to sub judice avoidance application filed before the enactment of regulation 38(2)(d) i.e., 14.06.2022, wherein initiation of avoidance application was done after the submission of Resolution plan. The bench clarified resolution plans submitted prior to cut-off date is not required to provide for the measure to deal with claims of avoidance application.

Secondly, it underpins the object and purpose of Insolvency code. In Swiss bank, court held that apart from maximizing the assets of the corporate debtor, the preamble also signifies that IBC is to look after the benefits of all stakeholders including corporate debtor after finalization of Resolution Pan. The Division bench by allowing RP to pursue avoidance application post CIRP and letting the distribution of the amount amongst committee of creditors, has rightly upheld the preamble of the code.

Lastly, the ruling by Delhi High Court will slacken off the time period required for the conclusion of CIRP. As has already been mentioned that CIRP process is not strictly bound by its timelines. Hence, after the impugned judgement of Venus recruiters, when the proceedings of avoidance applications were needed to be completed prior to conclusion of CIRP, to wrap up the avoidance application CIRP was delayed. It will further uphold the scheme of IBC by allowing CIRP process to be completed in time bound manner, Afterall Certainty and timeliness is the hallmark of the Insolvency and Bankruptcy Code, 2016 as has been emphasized inInnovative Industries v ICICI bank.

Nonetheless, the judgment still lags behind in certain aspects and has not settled the dust relating to various other issues pertaining to avoidance application.

Firstly, unlike other procedures of IBC neither the statute nor the present judgement provides for timelines for the completion of avoidance application. Adjudication of Avoidance application post CIRP will not in itself guarantee timely and efficient disposal of avoidance application. As per the data from the Insolvency and Bankruptcy Board of India (IBBI), out of 777 such applications that were filed as of March 31, 2022, AA decided merely 71 cases which resulted in total recovery of only 50 crores. Therefore, there arises a need to frame an outer time limit for disposing avoidance application after conclusion of CIRP thereby bringing certainty to various claims of the stakeholders.

Another point of contention being who would bear the cost of litigation for avoidance application once the CIRP process has been concluded. In the present case, counsels for appellant (Tata Steels BSL Ltd.) raised this issue and cited excerpt of the IBBIs Discussion Paper titled Dealing with Avoidance Transactions, wherein, it was emphasized that resolution applicant will bear the cost, if the CIRP ends with resolution plan and the IBBI will incur the expenses, if the liquidation process is completed. However, the bench itself was silent on this issue, thereby leaving it into an unchartered territory.

Conclusion:

Avoidance applications has the potential to unlock humongous amount of money and, can be used to increase the asset pool available for dispersal to the creditors in a fair manner and Delhi High Court through this landmark judgement has cut the first turf for the proper treatment of avoidance application without stalling the CIRP process. However, taking into account the current faith of such applications, it is must for the policymakers to scrutinize the current legislation and strive to improve the mechanism for dealing with avoidance applications. In the opinion of authors, due to the complex nature of these proceedings, the tribunals are not appositely equipped to hear these applications. Nevertheless, in the light of this judgement plausible amendments is expected to be introduced.

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