HC Delhi (26.11.2020) in Venus Recruiters Private Limited vs. Union of India & Ors. [Company Appeal [W.P.(C) 8705/2019 & CM Appl. 36026/2019] held that;
Once the Plan is approved and the new management takes over, it is completely up to the new management to decide whether to continue a transaction or agreement or not. Thus, if the CoC or the RP are of the view that there are any transactions which are objectionable in nature, the order in respect thereof would have to be passed prior to the approval of the Resolution Plan.
The above discussion is only in the context of Resolution processes and would however not apply in case of liquidation proceedings. In the case of a liquidation process, the situation may be different inasmuch as the liquidator may be able to take over and prosecute applications for avoidance of objectionable transactions. The benefit of orders passed in respect of such transactions may be passed on to the Corporate Debtor which may assist in liquidating the company at the final stage
Excerpts of the order;
# 2. The present writ petition has been filed by the Petitioner seeking issuance of a writ declaring the proceedings pending before the National Company Law Tribunal (Principal Bench) New Delhi (hereinafter, ‘NCLT’) in C.A.No.284(PB)/2018 in C.P.No. IB(201)PB/2017 as void and non-est.
# 3. The question that has arisen is whether under the Insolvency and Bankruptcy Code, 2016 (hereinafter, ‘IBC’), an application filed under Section 43 for avoidance of preferential transactions can survive beyond the conclusion of the resolution process and the role of the RP in filing/pursuing such applications. The jurisdiction of the NCLT to hear applications under Section 43 after the approval of the Resolution Plan, is thus under challenge.
Brief Background
# 4. The brief background of this case is that Respondent No. 3 i.e. M/s Bhushan Steel Ltd. (now known as Tata Steel BSL Ltd.) (hereinafter, ‘Corporate Debtor’) was the subject of Corporate Insolvency Resolution Process (hereinafter, ‘CIRP’) before the NCLT, initiated by the State Bank of India by a petition being C.P. No.(IB) - 201(PB)/2017 titled State Bank of India v. Bhushan Steel Ltd filed on 26th July, 2017.
# 5. On the same date when the CIRP was initiated, the NCLT appointed Mr. Vijay Kumar Iyer i.e. Respondent No. 4 as an Interim Resolution Professional (hereinafter, ‘IRP’) for the Corporate Debtor. A public announcement was made in accordance with Section 15 of the IBC, inviting submissions of claims against the Corporate Debtor. The Committee of Creditors (hereinafter ‘CoC’) was thereafter constituted and its first meeting was held on 24th August, 2017, when the IRP was also confirmed as the Resolution Professional (hereinafter, ‘RP’) for the Corporate Debtor.
# 6. On 20th March, 2018, the CoC approved the Resolution Plan proposed by Respondent No. 2 i.e. Tata Steel Ltd. (hereinafter, ‘successful Resolution Applicant’) and the said Plan was filed by the RP to seek approval before the NCLT on 28th March, 2018.
# 7. Thereafter on 9th April, 2018, the RP filed an avoidance application being CA No.284(PB) of 2018 under Section 25(2)(j), Sections 43 to 51 and Section 66 of the IBC. In the said application, various transactions were enumerated as `suspect transactions’ with related parties. The said avoidance application was a result of a Forensic Audit Report, submitted by a Forensic Consultant, which was attached to the application as well. The prayer in the application was as under:
“In view of the foregoing, it is most humbly prayed that this Hon'ble Tribunal may be pleased to:
a) take on record the Forensic Consultant's report and pass appropriate directions in accordance with the Code in respect of the suspect transactions; and
b) pass any other order(s) which this Hon'ble Tribunal may deem fit in the facts and circumstances of the case in the interest of equity, justice and good conscience.”
# 10. Almost five weeks after filing of the said avoidance application, the NCLT approved the Resolution Plan proposed by Tata Steel Ltd., vide a detailed judgment dated 15th May, 2018. The said Resolution Plan had found favour with the CoC and accordingly, the NCLT passed various orders and directions on the said date. Insofar as the pending avoidance application in respect of the suspect transactions was concerned, there was no separate order passed by the NCLT. The final order contained one line i.e. “all other applications are also disposed off”. In effect, therefore, the application filed by the RP in relation to the suspect transactions was neither heard nor decided on merits.
# 12. NCLT’s order dated 15th May, 2018, approving the Resolution Plan, was thereafter upheld by the National Company Law Appellate Tribunal (hereinafter, ‘NCLAT’) vide judgment dated 10th August, 2018. However, on 25th October, 2018, the NCLT impleaded the Petitioner as a party in CA No. 284(PB)/2018 and issued notice to it on the basis of a fresh memo of parties filed by the former RP. It is the said order impleading and issuing notice to the Petitioner, which is being challenged in the present petition.
Submissions
# 13. Mr. Kapil Sibal, ld. Senior Counsel appearing for the Petitioner raises a legal issue as to the jurisdiction of the NCLT. His submission is that under the scheme of the IBC, once the CIRP has reached finality, the Resolution Professional (RP) becomes functus officio and can no longer file or pursue any application on behalf of the company. He refers to various provisions of the IBC to submit that the RP merely conducts and manages the operations of the Corporate Debtor, during the CIRP process and not beyond.
# 20. It is further emphasized that avoidance applications cannot be filed by the Company or by the Resolution Applicant but only by the CoC or the RP, prior to the Resolution Plan being approved.
# 44. Mr. Sibal, in rejoinder submits that reopening of the resolution process in this manner would have enormous adverse implications. According to him, Section 26 merely means that the avoidance application would not affect the resolution process and it cannot be read to mean that the avoidance application could continue after the resolution process concludes. Mr. Sibal further refutes the Respondent’s submission based on the IBBI Discussion Paper. He submits that this would have no application in the present case, as it deals with liquidation and not the resolution process.
Analysis and Findings:
(a) Structure of the IBC 2016 and Role of Resolution Professionals
# 45. The jurisdiction of the NCLT to decide an application pursued by a former RP of a Corporate Debtor, after the conclusion of the CIRP process, is under challenge in the present petition.
(b) Applications for Avoidance Transactions
# 52. The IBC contemplates various transactions which could be found to be objectionable/unacceptable and may require to be either reversed or compensated for, in some manner in order to ensure that the insolvency/liquidation process is fair to the creditors. Such transactions are of various categories namely –
preferential transactions,
undervalued transactions,
transactions defrauding creditors, and
extortionate credit transactions.
All transactions are dealt with under Chapter III related to liquidation processes.
# 56. The question that has arisen is whether an application for avoidance of a preferential transaction, though filed prior to the Resolution Plan being approved, can be heard and adjudicated by the NCLT, at the instance of the RP, after the approval of the Resolution Plan.
# 57. There are three dimensions to this question:
i. Whether a RP can continue to act beyond the approval of the Resolution Plan?
ii. Whether an avoidance application can be heard and adjudicated after the approval of the Resolution Plan?
iii. Who would get the benefit of an adjudication of the avoidance application after the approval of the Resolution Plan?
(c) Chronology of Events
# 58. In the present case, the alleged preferential transaction was a manpower resource agreement entered into between the Petitioner – Venus Recruiters and the erstwhile Corporate Debtor – M/s Bhushan Steel Ltd. (BSL). The said agreement was entered into on 3rd October, 2009. The application for initiation of CIRP was admitted by the NCLT on 26th July, 2017. The IRP was also appointed and a call for submissions was made. On 20th March, 2018, the CoC approved the Resolution Plan, proposed by Tata Steel Ltd. The approved Resolution Plan was filed by the RP under Section 31 before the NCLT on 28th March, 2018.
(d) Findings and Conclusions
# 68. There is no doubt that as per Section 60 of the IBC, the NCLT/Adjudicating Authority has the jurisdiction to deal with all applications and petitions “in relation to insolvency resolution and liquidation for corporate persons”. In this case, the issue is whether the proceedings in question were in relation to insolvency resolution or not. The insolvency resolution process had already come to an end with the approval of the Resolution Plan by the NCLT on 15th May, 2018. The NCLT chose to exercise jurisdiction post the approval of the Resolution Plan. Under the Scheme of the IBC, as set out above, the jurisdiction of the NCLT is limited to insolvency resolution and liquidation. After the approval of the Resolution Plan and the new management taking over the Corporate Debtor, no proceedings remain pending before the NCLT, except issues relating to the Resolution Plan itself, as permitted under Section 60.
# 70. An avoidance application for any preferential transaction is meant to give some benefit to the creditors of the Corporate Debtor. The benefit is not meant for the Corporate Debtor in its new avatar, after the approval of the Resolution Plan. This is clear from a perusal of Section 44 of the IBC, which sets out the kind of orders which can be passed by the NCLT in case of preferential transactions. The benefit of these orders would be for the Corporate Debtor, prior to approval of the Resolution Plan. Any property transferred or sum acquired in an order passed in respect of a preferential transaction would have to form part of the final Resolution Plan. The Resolution Plan would have to take into consideration such amounts and benefits which can be given to the Corporate Debtor for the benefit of the CoC. The benefit of an avoidance application is not meant for the company, after the Resolution Plan is considered by the CoC and approved by the NCLT.
# 73. The prescribing of the above timelines has a purpose. The said purpose is that the RP includes these details in the Resolution Plan submitted under Section 30 to the NCLT. These details ought to be available before the NCLT at the time of approval of the Resolution Plan under Section 31. The argument that avoidance applications relating to preferential and other transactions can therefore survive beyond the conclusion of the CIRP is contrary to the Scheme of the Code.
# 74. Moreover, an RP cannot continue to file applications in an indefinite manner even after the approval of a Resolution Plan under Section 31. The role of a RP is finite in nature. He or she cannot continue to act on behalf of the Corporate Debtor once the Plan is approved and the new management takes over. ………….
# 75. The Supreme Court of India in Committee Of Creditors Of Essar (supra) has held that the detailed provisions of the IBC read with the 2016 Regulations make it clear that the RP is a person who is to manage the affairs of the Corporate Debtor as a going concern from the stage of admission of an application under Sections 7, 9 or 10 of the Code till a Resolution Plan is approved by the NCLT. The relevant extract of the decision is as under:
“27. The detailed provisions that have been stated hereinabove make it clear that the resolution professional is a person who is not only to manage the affairs of the corporate debtor as a going concern from the stage of admission of an application under Sections 7, 9 or 10 of the Code till a resolution plan is approved by the Adjudicating Authority, ….
# 86. Thus, the Resolution Applicant whose Resolution Plan is approved itself cannot file an avoidance application. The purpose is clear from this itself i.e., that the avoidance applications are neither for the benefit of the Resolution Applicants nor for the company after the resolution is complete. It is for the benefit of the Corporate Debtor and the CoC of the Corporate Debtor. The RP whose mandate has ended cannot indirectly seek to give a benefit to the Corporate Debtor, who is now under the control of the new management/Resolution Applicant, by pursuing such an application. The ultimate purpose is that any benefit from a preferential transaction should be given to the Corporate Debtor prior to the submission of bids and not thereafter.
# 88. Moreover, if an avoidance application for preferential transactions is permitted to be adjudicated beyond the period after the Resolution Plan is approved, in effect, the NCLT would be stepping into the shoes of the new management to decide what is good or bad for the Company. Once the Plan is approved and the new management takes over, it is completely up to the new management to decide whether to continue a transaction or agreement or not. Thus, if the CoC or the RP are of the view that there are any transactions which are objectionable in nature, the order in respect thereof would have to be passed prior to the approval of the Resolution Plan.
# 89. In the present petition, this Court is concerned with a Corporate Debtor, in respect of which the Resolution Plan was approved by the NCLT and an application is sought to be filed by the RP as former RP through its counsel. The RP cannot wear the hat of the `Former RP’ and pursue an avoidance application in respect of preferential transactions after the hat of the Corporate Debtor has changed and it no longer remains a Corporate Debtor. This would be wholly impermissible in law as the mandate of the RP has come to an end. ……….
# 93. The above discussion is only in the context of Resolution processes and would however not apply in case of liquidation proceedings. In the case of a liquidation process, the situation may be different inasmuch as the liquidator may be able to take over and prosecute applications for avoidance of objectionable transactions. The benefit of orders passed in respect of such transactions may be passed on to the Corporate Debtor which may assist in liquidating the company at the final stage. However, that is not the case in the present petition.
# 94. In view of the above findings, the order of the NCLT impleading the Petitioner and any consequential orders are liable to be set aside. The proceedings qua the Petitioner before the NCLT under the Avoidance application are accordingly quashed.
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