Avoidance applications relating to preferential transactions doesn’t survive beyond conclusion of CIRP: Delhi HC [Read Order]

Avoidance applications relating to preferential transactions doesn’t survive beyond conclusion of CIRP: Delhi HC [Read Order]

Avoidance applications - preferential transactions - CIRP - Delhi High Court - Taxscan

The Delhi High Court while quashing the orders passed by the NCLT held that the avoidance applications relating to preferential transactions under Section 43 of Insolvency and Bankruptcy Code (IBC) do not survive beyond the conclusion of the insolvency resolution process (CIRP).

The Corporate Debtor, M/s Bhushan Steel Ltd. was the subject of CIRP before the NCLT, initiated by the State Bank of India by a petition.

On the same date when the CIRP was initiated, the NCLT appointed Mr. Vijay Kumar Iyer as an Interim Resolution Professional (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 (CoC) was thereafter constituted and its first meeting was held on 24th August, 2017, when the IRP was also confirmed as the Resolution Professional (RP) for the Corporate Debtor.

Almost 5 weeks after filing of the avoidance application, the NCLT approved the Resolution Plan proposed by Tata Steel Ltd. The said Resolution Plan had found favor 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.

The Resolution Plan was finally closed and the new management took over the Corporate Debtor. The NCLT passed an order in the avoidance application, which was filed prior to the approval of the Resolution Plan.

The NCLT’s order approving the Resolution Plan was thereafter upheld by the NCLAT. However, the NCLT impleaded the Petitioner as a party 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 by the petitioner.

The court while relying on Sections 43 and 44 IBC and Regulation 35A of CIRP Regulations which gives a specific timeline for the formation of an opinion on objectionable transactions by the Resolution Professional, said that the assessment by the RP of the objectionable transactions including preferential transactions cannot be an unending process. The examination has to commence on the insolvency commencement date. The RP has to form an opinion by the 105th day (pre-amendment) and 75th day (post-amendment). If the RP comes to the conclusion that the Corporate Debtor has been subject to preferential transactions, the determination has to be made by the 115th day. The RP also has to apply to the NCLT for appropriate relief on or before the 135th day.

The Single Judge Bench of Justice Prathiba M Singh held that the continuation of a Resolution Professional beyond CIRP for the purpose of prosecuting an avoidance application is beyond the contemplation of IBC.

“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 court said.

The court while setting aside NCLT impleading the Petitioner and any consequential orders held that 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.

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