VENUS RECRUITERS PT. LTD. V. UOI: EXPOUNDING AVOIDANCE APPLICATION FILED POST APPROVAL OF RESOLUTION
[Sanskar Modi and Vijpreet Pal are second year students at National Law Institute University, Bhopal]
The Insolvency and Bankruptcy Code 2016 (‘IBC’) is a continuously evolving legal instrument. The jurisprudence surrounding it has developed through legislative measures and judicial decisions. In the same spirit, the Delhi High Court (‘Court’) recently in Venus Recruiters Private Limited v. Union of India clarified the position regarding the status of Avoidance Applications filed by Resolution Professional (‘RP’) post the approval of Resolution Plan under the IBC. In doing so, however, the Court has overlooked the factual matrix surrounding the case which has resulted in several judicial fallacies. Before analysing the present judgment, it is important to touch upon the background and verdict of the Court.
The State Bank of India (‘SBI’) initiated the Corporate Insolvency Resolution Process (‘CIRP’) against the Corporate Debtor M/s Bhushan Steel Limited on 26th July 2017. Resolution Applicant proposed a Resolution Plan which got approved by Committee of Creditors (‘CoC’) and thereafter the RP filed it before the NCLT on 28th March 2018 to obtain approval.
However, on 9th April 2018, an application was filed by the RP for avoiding transactions that were considered to be suspicious, subject to Sections 25(2) (j), 43 to 51 and 66 of the IBC by placing reliance on the Forensic Audit Report. Nevertheless, NCLT went ahead and approved the Resolution Plan on 15th May 2018 leaving the avoidance application unheard. Finally, the avoidance application was heard by NCLT on 24th July 2018 after the approval of Resolution Plan.
The present case was filed before the Court by way of writ petition by Venus Recruiters Pt. Ltd. for declaring the avoidance proceedings pending before the NCLT as void. It must be highlighted that Venus Recruiters was one of the parties who entered into alleged suspicious transaction with the corporate debtor. This petition raised the following questions before the Court:
Does the RP become functus officio after the acceptance of Resolution Plan?
Whether NCLT possesses necessary jurisdiction to adjudicate avoidance application after the acceptance of Resolution Plan?
Who would likely to be profited by such proceedings of suspicious transactions?
Analysis of the decision
The Court while allowing the petition held that the RP becomes functus officio after the acceptance of Resolution Plan. The Court relied upon Regulation 39 of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 which provides that RP has to submit all the particulars of objectionable transactions along with the Resolution Plan. The Court further added that Clause 2.4, under Chapter III, of the Insolvency Law Committee Report also substantiates the point that once the Resolution Plan of the Resolution Applicant is accepted, the latter is not allowed to file an avoidance application.
This was further supplemented by section 30(2) (a) read with Section 5(13) of the IBC, strengthening the contention that RP cannot perform post CIRP. The Court also emphasized the strict time-bound nature of CIRP under IBC to conclude that suspicious transactions must be dealt with in a timely manner. To this end, it made reference to the preamble of the IBC, the IBBI Regulations 2016 and the decision of the Supreme Court in Innoventive Industries Ltd. v. ICICI Bank &Anr.
The next issue before the Court was pertaining to the jurisdiction of the NCLT to adjudicate avoidance application post the acceptance of Resolution Plan. The question in this regard was whether proceedings pending before the NCLT after the approval of the Resolution Plan formed part of the insolvency process or not. This is because under the Section 60 of the IBC, NCLT possesses the jurisdiction to adjudicate only the cases of insolvency resolution and liquidation for corporate persons. In this regard, the Court held that since the Resolution Plan has already been approved by the NCLT, the latter does not have any jurisdiction to entertain the avoidance applications.
Finally, on the issue regarding the proceeds of avoidance transaction, the Court opined that since the orders emanating from Section 44 of the IBC aims to benefit the creditors and not the new management of the corporate debtor, the instant avoidance application is not maintainable.
The Court in concluding that Avoidance Applications cannot survive post approval of the Resolution Plan, overlooked various factual circumstances before it in the present case.
Failure to take cognizance of error committed by NCLT
The factual matrix of the case clearly mentions that the avoidance application was filed on 9th April 2018 and five weeks later, the Resolution Plan was approved. The Order of the NCLT approving the Resolution Plan failed to discuss the issue of pending avoidance applications as is apparent from the concluding statement of the order, i.e., “all other applications are also disposed-off”. In effect, the application filed by the RP in relation to the suspect transactions was neither heard nor decided on merits. Shockingly, the High Court also in its present judgment failed to consider the judicial fallacy on behalf of the NCLT in not listing the Avoidance Application prior to the approval of Resolution Plan.
Unjustified reasoning of the court for ignoring avoidance application
The process of Avoidance Application was filed on 9th April 2018 soon after the submission of Forensic Audit Report on 3rd April 2018 which mentioned the presence of Suspicious Transaction undertaken by the erstwhile Corporate Debtor. Therefore, the Court’s justification for dodging the avoidance application is fallible. There wasn’t any delay in taking cognizance of the avoidance application by the Resolution Applicant.
Deviation from the Report of the Insolvency Law Committee
The High Court primarily gave the reasoning that the main objective of IBC is timely completion of CIRP and therefore rejected the avoidance application filed after the approval of Resolution Plan. But, the Court overlooked Clause 2.4 of the IBC Law Committee Report, 2020 which opined that “avoidance application may continue even beyond the closure of the resolution proceedings”. The Report further recommended that the timelines for Avoidance Proceedings have not been mentioned in the Code and therefore, there should be lenient approach towards the timeline.
Failure to delink the Insolvency Proceedings with Avoidance Proceedings
The High Court erred in its reasoning, by merging Insolvency Proceedings with Avoidance Proceedings and considering them as being part of same application. Section 26 of the Code in express terms states that “filing of an application for avoidance of transactions by the resolution professional shall not affect the CIRP of the corporate debtor.” Further, the Paper ‘Statement of Best Practices’ published by “The Institute of Company Secretaries of India” (ICSI), also observes “The application for avoidance transactions is against the promoters/directors/related parties however the resolution is for the CD.” Therefore, these two ought to be treated separately.
Encroaching upon the Jurisdiction of the NCLT/NCLAT
Section 61 of the Code clearly provides the aggrieved party with an option to appeal before the NCLAT against the Order of NCLT. But, in the present case, the petitioner bypassed the available remedy. In the presence of an efficacious effective remedy, the Writ Petition filed by the Petitioners should have been held to be not maintainable. The position in India, laid down in the case of Union Bank of India v. Satyawati Tandon is that “where a liability not existing at Common Law is created by a statute, which also gives a special and particular remedy for enforcing it, the remedy provided by the statute must be followed.” However, the Court in its judgment failed to entertain this jurisdictional issue and opined that the petitioner is correct to approach the High Court.
This approach clearly signifies that the Court is considering Avoidance Applications differently from that of CIRP, however on the contrary, the Court in its other segment has expressly mentioned that avoidance proceedings are part of CIRP and once the Resolution Plan gets approved, all these proceedings come to an end. This shows that this judgment has inherent contradictions.
The judgment passed by the Court, on one hand, is remarkably a landmark judgment in vehemently sending a message to the NCLTs’ to mark priority in disposing off of all the avoidance applications. However, on the other hand it sets a menacing precedent by allowing the defaulters to go scout free. The judgment by prioritizing one objective of IBC i.e. timely disposition of Insolvency Proceedings has flouted the other basic objective of IBC which is balancing the interests of all the stakeholders. The rejection of avoidance application in the instant case has limited the Insolvency Proceedings merely to the process of distribution of assets among the Creditors. The chief intent behind the avoidance proceedings i.e. to annul the suspect transactions seems to be overlooked by the Hon’ble Judge. Hence a thorough judicial probe is the demand of this judgment.