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Avoidance Application vis a vis Resolution Plan


[This article is authored by Priya Dutt* and Rishi Dutt**]


Avoidance of Vulnerable Transaction is a crucial segment of the Corporate Insolvency Resolution mechanism. Resolution Professionals (RP) are under obligation to recognize such pregnable transaction(s) and inform them to the Adjudicating Authority, who in turn, upon satisfaction of happening of such Vulnerable Transaction(s), is required to neutralize such transaction(s) in the interest of the creditors. This article presents various flaws in the case of Venus Recruiters Private Limited v. Union of India [1] wherein the Delhi High Court adjudicated on Vulnerable Transactions.


The Delhi High Court, by its decision in the matter of Venus Recruiters Private Limited v. Union of India [2] dated 26 November 2020 held that an application filed for the avoidance of a Preferential Transaction before the approval of resolution plan, will not be adjudicated and heard by National Company Law Tribunal (“NCLT”), at the reference of the RP.


Facts of the case

An application was filed for the avoidance of Preferential Transaction of the resolution process, before the Resolution Plan being approved. The petitioner made the contention that, when the corporate insolvency resolution process (“CIRP”) reaches its conclusiveness, the RP mandates automatically expires, as it accomplishes its purposes for which it was created and no longer authorized to pursue the application. The RP can file an application under Section 43 to 51 and Section 66 of the Insolvency and Bankruptcy Code (IBC) to reverse the effect of Preferential Transaction given by Corporate Debtor to related/unrelated party before the insolvency commencement date.


Issues

The issues before the court were:

•Whether the RP has authorized locus to perform after the endorsement of Resolution Plan?

•Whether NCLT can entertain avoidance proceedings post the approval of the Resolution Plan?

•Who will get the advantages of the avoidance transaction after the approval of the Resolution Plan?


Judgment and Analysis

The High Court repudiates the avoidance application by presenting numerous grounds elaborated below.


•The High Court ruled out that RP role in a finite and administrative, which subsequently comes to an end after the approval of a Resolution Plan as stated in Section 31 of the IBC. Section 23 specifies that the RP role is limited in nature and entirely can extend the task by the approval of the Resolution Plan under Section 31(1) or liquidator appointment under Section 34. The RP cannot persist in an activity on account of the Corporate Debtor, as the CIRP ends with the approval of the Resolution Plan. The Court referred Supreme Court’s Judgement in Committee of Creditors of Essar Steel [3] and perceives that the former RP has no locus standi to commence avoidance proceedings. Further, the Court relied upon the Innoventive Industries [4] for strict timeline and state that “Certainty and timeliness is the hallmark of the IBC, 2016. Therefore, if RP acts after the resolution plan would be considered as indefinite and contrary to its competency.


-The High Court accentuated the execution of CIRP and avoidance proceedings on the “strict timeline”. However, the Report of the Insolvency Law Committee [5] made a contradiction for stringent timelines for setting up avoidance proceedings. The Committee opined that prescriptive timelines are not mandatory to follow for initiating these proceedings. Moreover; the RP in its legal capacity filed an avoidance application before the approval of the resolution process, which was distinctively neglected. The Court did not examine it as an error of NCLT that avoidance application was not listed before the approval of a resolution plan.


•Secondly, NCLT has exercised its jurisdiction, post the approval of the insolvency resolution plan. The Court referred Section 60 of the IBC for the NCLT jurisdiction issue and stated that adjudicating authority has no jurisdiction to deal with insolvency resolution and liquidation for corporate persons’ after the approval of the resolution plan. The High Court wrongfully denied the jurisdiction to adjudicate the matter. As a result, it makes a distinction between resolution and avoidance proceedings. Section 26 of the IBC clearly stated that CIRP proceedings must not be affected by the avoidance proceedings. Moreover, the Statement of Best Practices [6] states that avoidance transaction and liquidation proceedings must be treated separately. As, the avoidance transaction is against the directors/promoters/other associated parties, where resolution/liquidation are for the Corporate Debtor. Further, In Embassy Property Developments [7], the Court held that under Section 66 of the IBC, NCLT has jurisdiction to deal with the vulnerable transactions. Additionally, in Embassy, the Court ruled out that NCLT has inherent power under Section 61 and rule 11 of the NCLT Rules, 2016 [8] to adjudicate upon avoidable transactions to effectively conclude the matter.


•Thirdly, the court submitted that avoidable proceedings are not meant to give merit to the Creditors of the Corporate Debtor in the light of Section 44 of the IBC. However, the Report of the Insolvency Law Committee referred that such distribution of profit should not be firm and must be left in the hands of the adjudicating authority and such authority must have acquaintance with the factual circumstances of the case.


Conclusion

The High Court by quashing the avoidance proceeding has set up a dangerous precedent. Since the whole aim of IBC is to curb the criminal activities from companies. But by the instant judgment, the court has allowed corruption to enter into the management of companies.


References: [1] MANU/DE/2122/2020 [2] ibid [3] 2019 SCC OnLine SC 1478 [4] MANU/SC/1063/2017 [5] Report of the Insolvency Law Committee, 20 February 2020 [6] Statement of Best Practices: “Role of Insolvency Professionals (IP) in Avoidance Proceedings”, ICSI Institute of Insolvency Professionals, 2020 <https://icsiiip.com/Portals/0/Statement%20of%20Best%20Practices-%20Role%20of%20IPs%20in%20avoidance%20proceedings_1.pdf> [7] Embassy Developments vs. State of Karnataka, 19 (IBC) 19/2020 [8] National Company Law Tribunal Rules, 2016

~About the Authors~

*Priya Dutt is a fourth year law student at NALSAR University of Law, Hyderabad.

Email: priyadutt7828@gmailcom

**Rishi Dutt is a third year law student at Bharati Vidyapeeth's New Law College, Pune.

Email: rishidutt007@gmail.com

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