Avoidance Application: Survival Post-CIRP in Light of the Venus Judgement
3rd Year Law Student from the Institute of Law (Nirma University)
The High Court of Delhi in its judgement in the case of Tata Steel BSL Ltd. v. Venus Recruitment Ltd. & Ors. (2023) ibclaw.in 09 HC has adjudged on the life of an “Avoidance Application” under the Insolvency and Bankruptcy Code, 2016 (hereinafter, IBC). The abovementioned question of law was addressed by the Division Bench of the High Court, which has put to rest the ambiguity with regard to the survival of an avoidance application upon the conclusion of the Corporate Insolvency Resolution Process (CIRP). In its judgement, the bench has held that the avoidance application does not die with the completion of the CIRR of a corporate debtor in cases where these transactions are not accounted for in the approved resolution plan.
Avoidance Transactions under the Code
One of the essential objectives of the IBC is the maximization of the asset’s value, availability of credit, promote entrepreneurship and distribution of equitable assets among the stakeholders while completing the resolution process in a limited time frame. There are certain transactions which are to be prevented from execution by the Corporate Debtor (CD) as it may have an adverse effect on the resolution process and the interest of the stakeholders. These transactions are thus to be avoided by the corporate debtor to not have a negative impact on the financial position of the Corporate Debtor. Section 25(2)(j) of the IBC, requires the Resolution Professional (RP) to file an application for avoidance of such transactions. The IBC through its provisions under Sections 43 to 66 deals with avoidable transactions. There are 4 types of transactions mentioned in the Code i.e., a) Preferential Transaction b) Undervalued Transaction c) transactions for defrauding creditors and d) exorbitant transactions which are to be avoided by the corporate debtor.
Factual Considerations of the Case
The present case, a Letters Patent Appeals, was filed by Tata Steel BSL Ltd. and the Union of India challenging the Judgement and Order of the Ld. Single Judge of the Delhi High Court. Bhushan Steel Ltd. was admitted into CIRP in July 2017 and Mr. Vijay Kumar was appointed as the RP. Consequent to the CIRP, the Committee of Creditors (CoC) of the CD approved the resolution plan of Tata Steel BSL Ltd. which was later approved by the National Company Law Tribunal (NCLT), Delhi. While the resolution plan was implemented, in the meanwhile the RP filed an avoidance application under Section 25(2)(j), Sections 43-51 and 61 of the IBC in April 2018 against Venus Recruiters and others. The NCLT issued notice to the respondents in this regard as the application was filed before the approval of the resolution plan by the NCLT.
Subsequently, Venus Recruiters filed a writ petition before the Delhi High Court. The petitioners herein prayed for a declaration that the procedures arising out of the avoidance applications are void and non-est as the CIRP of the Corporate Debtor had already completed and the successful resolution applicant i.e., Tata Steel BSL Ltd. had already undertaken the control of the Corporate Debtor. The Ld. Single Judge held that the avoidance application under Section 43 of the Code cannot survive beyond the conclusion of the CIRP against the Corporate Debtor. Aggrieved by the decision, Tata Steel filed this appeal before a division bench. The division bench of the High Court devised a three-pronged issue for adjudication of this appeal. The issues thus formed were i) Whether an alternative and efficacious remedy existed before the National Company Law Appellate Tribunal (NCLAT) ii) whether the avoidance application can outlive the CIRP in cases where such transactions or application was not made part of the plan and iii) if such application survives who shall pursue such an application and if the RP is rendered functus officio upon the conclusion of the CIRP.
The Position of The Court
the division bench of the court, while deliberating upon the issues formulated as mentioned in the preceding paragraph, noted that the term “in relation to” and “arising out of” as mentioned in Section 60(5)(c) of the IBC as to be given a wider interpretation and therefore the Ld. Single Judge erred in holding the maintainability of the writ petition. Further, the bench set aside the decision of the Ld. Judge and directed the NCLT to continue the hearing of the avoidance application in accordance with Sections 44-51 of the Code.
It is essential to note that while setting aside the orders of the Ld. Judge, the bench has consequently cleared the air around the survival of the application. The court held that the avoidance application can be adjudged notwithstanding the conclusion of the CIRP. The court in its judgement deliberated upon the nature of the avoidance application and noted that the application of a nature that it itself forms a separate proceeding.
A distinction was highlighted by the court that the avoidance application unlike the CIRP, which is objective, requires a detailed discovery of such vulnerable transactions. The court noted that the scheme of the IBC reiterates this distinction and therefore the adjudication of an application is independent of the CIRP. It was highlighted by the court that if the avoidance application is rendered infructuous upon the conclusion of the CIRP, in cases like the present one where such pending applications could not be accounted for in the resolution plan, the beneficiaries of such avoidable transaction would be allowed to walk off freely which will consequently cause unjust advantage upon such beneficiaries.
With regard to the question pertaining to the beneficiary of such application being adjudicated after the conclusion of CIRP, the bench held that the provisions pertaining to avoidable transactions are primarily for the benefit of the creditors of the CD and thus even in cases of similar nature as to in the present case, the creditor of the CD would still be the beneficiary of any sum or property arising out of the adjudication of such avoidance application. The court further also clarified that the RP is rendered functus officio only in respect of the CIRP and not with regard to the pursuance of an avoidance application.
Through its judgment in the present case, the Delhi High Court has confirmed the position of law with regard to avoidance application and perusing its adjudication post-conclusion of the CIRP. This decision of the Court would uphold both the letter and spirit of the law as it is often highlighted that IBC is not purely a commercial law and one of its various purposes is to ensure that public money is brought back into the system. The IBC envisages the completion of CIRP and liquidation proceedings within 330 days and 365 days respectively. However, it is not practically possible for the RP or the Liquidation Professional (LP) to identify such avoidable transactions and apply before the NCLT for their reversal within such timelines. It is also essential to note that often the adjudicating authority cannot decide upon the matter before the approval of the resolution plan as such discovery and enquiry into it can take more time than the whole CIRP process itself. Therefore, it is essential that this distinction is made between CIRP and avoidance application rather than treating it as part of a single transaction, such differential treatment would help further the objectives of the Code in its letter and spirit.
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