Delhi High Court: A Division Bench of Satish Chandra Sharma, CJ. and Subramonium Prasad, J. held that the phrase “arising out of” or “in relation to” as situated under Section 60(5)(c) of the Insolvency and Bankruptcy Code, 2016 (IBC) was of a wide import and it was only appropriate that such applications were heard and adjudicated by the Adjudicating Authority, i.e., the NCLT or the NCLAT. Further, the Court held that adjudication of an avoidance application was independent of the resolution of the corporate debtor and could survive (CIRP) and a Resolution Professional (RP) would not be functus officio with adjudication of avoidance application.
Background
In the present case, upon default in repayment of its credit facilities, State Bank of India (SBI) filed a petition under Section 7 of the IBC before the NCLT seeking initiation of CIRP of Bhushan Steel Ltd. In 2017, the NCLT passed an order admitting Bhushan Steel Ltd. to CIRP and thereafter, a public announcement was made inviting submission of claims by prospective resolution applicants and the Committee of Creditors (CoC) was constituted. In 2018, the CoC approved the resolution plan proposed by Tata Steel Ltd. and thereafter, the RP filed the resolution plan proposed by Tata Steel before the NCLT for its approval in terms of Section 31 of the IBC. After filing of the resolution plan but before its approval, the Forensic Auditor of Bhushan Steel Ltd submitted a Forensic Audit Report wherein several suspect transactions were entered into by the Corporate Debtor and thus, the RP filed an application before the NCLT under Section 25(2)(j), Sections 43 to 51 and Section 66 of the IBC wherein various transactions were enumerated as ‘suspect transactions' with related parties (avoidance application). The NCLT approved the resolution plan of Tata Steel, and the resolution plan was implemented in finality and the new management being Tata Steel BSL Ltd. assumed control of Bhushan Steel Ltd.
The NCLT observed that the avoidance application was filed by the RP before the resolution plan’s approval. Parallelly, the NCLAT upheld the Order passed by the NCLT approving the resolution plan of Tata Steel. Aggrieved by the Order of the NCLT and NCLAT, the respondent filed a writ petition before the Single Judge seeking to declare the proceedings borne out of the avoidance application as void and non-est. The Single Judge held that an application filed under Section 43 of the IBC for avoidance of preferential transactions cannot survive beyond the conclusion of corporate insolvency resolution process. Accordingly, the appellants had sought before this Court that the Impugned Judgment of the Single Judge be set aside.
Analysis, Law, and Decision
The issues for consideration before this Court were:
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Whether an alternate efficacious remedy existed before the NCLAT?
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Whether avoidance applications survive CIRP in cases where Resolution Plans are unable to account for such applications?
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If avoidance applications survive CIRP in such cases, who pursues them? Whether RP is rendered functus officio upon conclusion of CIRP?
The Court noted that the Single Judge ruled that an alternate efficacious remedy did not exist in the present case since the proceedings pertaining to the avoidance application were not in relation to insolvency resolution of the corporate debtor. The Court opined that the phrase “in relation to insolvency resolution” had been narrowed down by the Single Judge to mean that applications/petitions must only pertain to CIRP and after conclusion of CIRP, no issue survived for consideration of the NCLT, making NCLT functus officio in respect of any application/petition with respect to erstwhile corporate debtor.
The Court relied on Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta, (2021) 7 SCC 209, wherein the Supreme Court interpreted and laid down the scope and import of the phrase “arising out of” and “in relation to”. This Court held that these phrases used under Section 60(5)(c) of the IBC were to be given wide import and therefore, the Single Judge erred in holding that the writ petition was maintainable. Lastly, the Court held that it was appropriate that such applications should be heard by NCLT or NCLAT.
The Court opined that “the timelines under Regulation 35A were directory and not mandatory in nature because Regulation 35A pertains merely to the RP discharging his statutory burden of filing an avoidance application within an outer limit of 135 days from the commencement of the CIRP. This timeline takes the date of commencement of CIRP as the reference point. However, the CIRP process itself was not strictly or mandatorily bound by its own timelines”.
The Court noted that the duty cast by the IBC under Section 25(2) (j) was with respect to the RP filing the application before conclusion of the CIRP and the said obligation had been discharged in the present case. The Court opined that the intent behind the insertion of clause 3A and 4 to Regulation 35A in fact appeared to be that a resolution applicant was able to take cognizance of the avoidable transactions at the earliest and since the premise of 35A timelines was mandatory itself, therefore, adherence The intent behind the insertion of clause 3A and 4 to Regulation 35A in fact appeared to be that a resolution applicant could take cognizance of the avoidable transactions at the earliest.
The Court also noted that there was no time limit prescribed for the NCLT to adjudicate these applications. Further, there was no express penalty clause for the RP's failure to follow the timelines provided in Regulation 35A. Thus, when the law itself did not envisage a limit for the NCLT to adjudicate such an application, then the Single Judge could not have imposed such a condition. The Court further opined that “a situation where a beneficiary of suspect transaction was absolved on account of the avoidance application becoming infructuous after conclusion of CIRP, was undesirable”.
Thus, the Court held that the avoidance application survives CIRP.
The Court noted that the Single Judge held that the RP becomes functus officio upon the conclusion of the CIRP. The Court further noted that the Scheme of IBC made it clear that avoidance applications and CIRP were a separate set of proceedings and Sections 43-51, 66 and 67 of the IBC laid down various transactions that may be avoided by the resolution professional and the actions that could be taken against erstwhile management for fraudulent transactions.
The Court opined that “in the present case, wherein the transactions could not be accounted for, the Adjudicating Authority would continue to hear the application. Such benefit cannot be given in cases where the RP had already applied for prosecution of avoidance applications and the applicant ought to have been cognizant of pending avoidance applications but did not account for the same in its resolution plan”. Therefore, the Court held that the RP will not be functus officio with adjudication of avoidance applications in this case.
The Court held that:
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The phrase “arising out of” or “in relation to” as situated under Section 60(5)(c) of the IBC was of a wide import and it was only appropriate that such applications were heard and adjudicated by the Adjudicating Authority, i.e., the NCLT or the NCLAT.
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Adjudication of an avoidance application was independent of the resolution of the corporate debtor and could survive CIRP.
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RP would not be functus officio with adjudication of avoidance application.
Thus, the Court disposed of the appeals and set aside the impugned judgment of the Single Judge.
[Tata Steel BSL Ltd. v. Venus Recruiter (P) Ltd., 2023 SCC OnLine Del 155, decided on 13-1-2023]
Advocates who appeared in this case :
For the Appellant: Additional Solicitor General Chetan Sharma, CGSC Anurag Ahluwalia, Advocate V. P. Singh, Advocate Anindita Roy Chawdhury, Advocate Vatsala Rai, Advocate Simran Bhat, Advocate Amit Gupta, Advocate Danish Faraz Khan, Advocate Saurabh Tripathi, Advocate Sahag Garg and Advocate Sahag Garg.
For the Respondents: Additional Solicitor General Chetan Sharma, CGSC Anurag Ahluwalia, Senior Advocate Kapil Sibal, Advocate Ranjana Roy Gawai, Advocate Vasudha, Advocate Aarushi Tiku, Advocate Amit Gupta, Advocate Rishav Dubey, Advocate Danish Faraz Khan, Advocate Saurabh Tripathi, Advocate Sahag Garg, Advocate Aakarsh Srivastava, Advocate Manmeet Singh, Advocate Nishtha Chaturvedi and Advocate Shatakshi Tripathi, Advocate Rishi Agarwal, Advocate Parminder Singh, Advocate Pranjit Bhattacharya, Advocate V. P. Singh, Advocate Anindita Roy Chawdhury, Advocate Vatsala Rai and Advocate Simran Bhat.
*Simranjeet Kaur, Editorial Assistant has reported this brief