Avoidance Applications Survive CIRP, Can Be Heard After Approval Of Resolution Plan: Delhi High Court

Background Facts

On an application made by the State Bank of India, M/s Bhushan Steel Limited. (“Corporate Debtor”) was admitted into Corporate Insolvency Resolution Process (“CIRP”) on 26.07.2017. Mr. Vijay Kumar Iyer was appointed as the Interim Resolution Professional (IRP) and thereafter confirmed as the Resolution Professional.

On 20.03.2018, the Committee of Creditors (CoC) approved the resolution plan submitted by Tata Steel Ltd. (“Successful Resolution Applicant/SRA”). Subsequently, the resolution plan was approved by the Adjudicating Authority (NCLT) on 15.05.2018 and was fully implemented.

In the meanwhile, on 09.04.2018 the Resolution Professional had filed avoidance applications under Section 25(2)(j), Sections 43 to 51 and Section 66 of the IBC against Venus Recruiter Pvt. Ltd. and others (Respondents). The Adjudicating Authority issued notice in the said applications to the Respondents, while observing that applications were made prior to the approval of the Resolution Plan and hence could be entertained.

The Respondents filed a writ petition before Delhi High Court seeking issuance of a writ declaring the proceedings of avoidance application as void, since CIRP was concluded and the SRA had assumed control of Corporate Debtor. The Single Judge vide an order dated 26.11.2022 held that an application under Section 43 of IBC for avoidance of preferential transactions cannot survive beyond the conclusion of CIRP. The Corporate Debtor filed a Letter Patent appeal before the High Court against the order dated 26.11.2022.

High Court Verdict

The Bench observed that phrase “arising out of” or “in relation to” under Section 60(5)(c) of the IBC is of a wide import. Such applications must be appropriately adjudicated by either NCLT or NCLAT, notwithstanding that the CIRP has concluded and the SRA has stepped into the shoes of the promoter of the Corporate Debtor.

Further, CIRP and avoidance applications are separate set of proceedings. While CIRP is time bound, the avoidance applications require a proper discovery of suspect transactions that are to be avoided by Adjudicating Authority. IBC reinforces this difference and therefore adjudication of an avoidance application is independent of the resolution of the Corporate Debtor and can survive CIRP.

“…it cannot be accepted that avoidance applications will be rendered infructuous in situations wherein the resolution plan could not have accounted for avoidance applications due to exigencies that delayed initiation of action in respect of avoidable transactions beyond the submission of a resolution plan before the adjudicating authority. This is because such an interpretation will render the provisions pertaining to suspect transactions otiose and let the beneficiaries of such transactions walk away, scot-free……Therefore, in cases such as the present one, wherein such transactions could not be accounted, the Adjudicating Authority will continue to hear the application. Such benefit cannot be given in cases where the RP had already applied for prosecution of avoidance applications and the applicant ought to have been cognizant of pending avoidance applications but did not account for the same in its resolution plan.”

The Bench further held that the Resolution Professional will not be functus officio with respect to adjudication of avoidance applications and the manner of the Resolution Professional’s remuneration is to be decided by the Adjudicating Authority.

The Bench set aside the order dated 26.11.2022. The NCLT has been directed to proceed with the hearing of avoidance application. It has been directed that 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.

Case Title: Tata Steel BSL Limited v Venus Recruiter Pvt. Ltd. & Ors.

Citation: 2023 LiveLaw (Del) 51

Counsel for Appellant: Mr. V. P. Singh, Ms. Anindita Roy Chawdhury, Ms. Vatsala Rai and Ms. Simran Bhat, Advocates.

Counsel for Respondent: Mr. Kapil Sibal, Sr. Advocate with Ms. Ranjana Roy Gawai, Ms. Vasudha and Ms. Aarushi Tiku, Advocates for respondent No.1. Mr. Chetan Sharma, Additional Solicitor General with Mr. Anurag Ahluwalia, CGSC, Mr. Amit Gupta, Mr. Rishav Dubey, Mr. Danish Faraz Khan, Mr. Saurabh Tripathi, Mr. Sahag Garg and Mr. Aakarsh Srivastava, Advocates. Mr. Manmeet Singh, Ms. Nishtha Chaturvedi and Ms. Shatakshi Tripathi, Advocates for respondent No.3.

Mr. Chetan Sharma, Additional Solicitor General with Mr. Anurag Ahluwalia, CGSC, Mr. Amit Gupta, Mr. Rishav Dubey, Mr. Danish Faraz Khan, Mr. Saurabh Tripathi, Mr. Sahag Garg and Mr. Aakarsh Srivastava, Advocates.

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