Accordingly, adjudication of an avoidance application is independent of the resolution of the corporate debtor and can survive CIRP.
RP will not be functus officio with respect to adjudication of avoidance applications in a situation, as described hereinabove. There being a clear demarcation between the scope and nature of the CIRP and avoidance application within the scheme of the IBC,
The RP can continue to pursue such applications. The method and manner of the RP‟s remuneration ought to be decided by the Adjudicating Authority itself.
in cases where treatment of such applications could not be accounted in the plan, must be given to the creditors of the erstwhile corporate debtor,
The benefit arising out of the adjudication of the avoidance application is not for the corporate debtor in its new avatar since it does not continue as a debtor and has gone through the process of resolution.
This amount should be made available to the creditors who are primarily financial institutions and have taken a haircut in agreeing to accept a lesser amount than what was due and payable to them.
Excerpts of the order;
# 1. The present Letters Patent Appeals, being LPA No. 37 & 43 of 2021 have been filed by Tata Steel BSL Ltd. (hereafter, “TSBL”) and the Union of India (hereafter, “UoI”) (collectively, “Appellants”) respectively, impugning the Judgment and Order dated 26.11.2022 (“Impugned Judgment”) rendered in W.P.(C) No. 8705 of 2019 titled Venus Recruiters Pvt. Ltd. vs. Union of India & Ors., wherein the Ld. Single Judge inter-alia held that an application filed under Section 43 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) for avoidance of preferential transactions cannot survive beyond the conclusion of corporate insolvency resolution process (hereafter, “CIRP”). Accordingly, the Appellants have sought before this Court that the Impugned Judgment be set aside.
# 2. The facts of the case leading up to the filing of the present LPAs are set out hereinbelow:
. . . . . . .
e. On 28.03.2018, the RP filed the resolution plan proposed by Tata Steel before the NCLT for its approval in terms of Section 31 of the IBC.
f. On 03.04.2018, after filing of the resolution plan but before its approval, the Forensic Auditor of Bhushan Steel Ltd., Deloitte, submitted a Forensic Audit Report of the Corporate Debtor to the RP. Material on record discloses that several suspect transactions were entered into by the Corporate Debtor, namely, (i) Potential excess payment of lease rent to Vistrat Real Estate Pvt. Ltd.; (ii) Preferential credit to various international customer sand long outstanding receivables to entities such as Shree Steel Djibouti FZCO and Shree Global Steel FZE; (iii) Excess payments to Manpower companies/contractors; (iv) Uncontracted payment of interest on advance to Peak Minerals and Mining Private Ltd. for cancelled sale-and-lease back transactions. The transactions included a transaction entered into by the writ petitioner/Venus Recruiters Pvt. Ltd., the Respondent No.1 herein. On 03.10.2009, M/s Bhushan Steel Limited (now Tata Steel BSL Ltd.) entered into an agreement for supply of manpower with Venus Recruiters Pvt. Ltd. (hereafter, “Respondent No. 1”), which inter-alia contained a clause stipulating payment of 10% service charge to Venus in lieu of the manpower supplied under the agreement. The allegation is that 10% service charge was paid in lieu of manpower supply could have been preferential in nature.
g. On 09.04.2018, the RP filed an application before the NCLT, being C.A.No.284(PB)/2018 in C.P. No. IB(201)PB/2017,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”).
h. On 15.05.2018, NCLT approved the Resolution Plan of Tata Steel filed by the RP before the NCLT on 28.03.2018. On 18.05.2018, the Resolution Plan was implemented in finality and the new management being Tata Steel BSL Ltd., the Appellant herein assumed control of Bhushan Steel Limited.
i. NCLT observed that CA-284(PB)/2018, i.e., the avoidance application, has been filed by RP on 09.04.2018 prior to the approval of the Resolution Plan and proceeded to issue notice to the respondent companies made party to the application.
j. Parallelly, on 10.08.2018, the NCLAT upheld the Order dated 15.05.2018, passed by the NCLT approving the Resolution Plan of Tata Steel.
k. Aggrieved by the Order of the NCLT issuing notice in the avoidance application, the Respondent filed W.P.(C) 8705 of 2019 before the Ld. Single Judge seeking issuance of a writ declaring the proceedings borne out of the avoidance application, pending before the NCLT, as void and non-est since CIRP had concluded and the successful Resolution Applicant, Tata Steel Limited had assumed control of Bhushan Steel Limited in terms of the IBC.
# 3. After duly considering the averments made by the parties, the Ld. Single Judge was of the view that the quintessential question to be answered was 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. The question entailed three dimensions, which, as stated in Para 57 of the Impugned Judgment, are: -
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 Resolution Plan?
# 4. For the sake of convenience and ease of reference, we have discussed the findings of the Ld. Single Judge issue wise.
(A) Issue of alternate efficacious remedy before the NCLAT
# 5. Ld. Single Judge, at the very outset, deemed it appropriate to deal with the issue of maintainability of the writ petition in view of the Appellants‟ argument that the writ petition ought to have been dismissed on account of the existence of an efficacious alternate remedy since orders made in exercise of the powers under Section 60 of the IBC are appealable before the NCLAT under Section 61 of the IBC. The Ld. Single Judge observed that there is “no doubt” that in terms of 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", however, the issue is whether the proceedings in question were in relation to insolvency resolution or not.
# 6. In Para 68 of the Impugned Judgment, it has been stated that CIRP ended with approval of the Resolution Plan on 15.05.2018 and after the passing of the order approving the plan, no proceedings remain pending except issues pertaining to the Plan itself. Certainty and timeliness are the hallmark of the IBC, speeding up of the CIRP is a core objective of the IBC and the continuation of the jurisdiction of NCLT beyond what is permissible under the IBC is contrary to its ethos. Accordingly, in the opinion of the Ld. Single Judge the writ petition was maintainable.
(B) RP being functus officio after CIRP
# 7. Since the question framed by Ld. Single Judge was whether an avoidance application could be heard after CIRP, at the instance of the RP, an inevitable corollary to this question is whether the RP becomes functus officio after resolution of the corporate debtor. The Ld. Single Judge observed that the role of the RP is an administrative one and not adjudicatory in nature. Thus, the RP cannot continue beyond an order under Section 31 of the IBC, as the CIRP comes to an end with a successful Resolution Plan having been approved unless there is a clause in the Resolution Plan to the contrary, permitting the RP to function for any specific purpose beyond the approval of the Resolution Plan.
# 8. It has been held that there is a “START and FINISH line for the Resolution Process” and the role of the RP is to manage affairs of the corporate debtor during this process and not thereafter. After enactment of proviso to Section 23, the mandate of the RP was extended until approval of the plan or appointment of liquidator, making it clear that RP‟s authority is limited. Proviso to Section 23(1) sets an outer limit for its functioning. In view of the scheme of the IBC, RP cannot continue to act as former RP as it would be violative of the legislative intention and the statutory prescription.
# 9. The Ld. Single Judge has further observed that a perusal of Section 30(4) also makes it adequately clear that the CIRP period has to be completed within the time period specified under Section 12(3) meaning that the IBC does not contemplate the continuation of the RP beyond the CIRP period. In terms of the Impugned Judgment, an RP can only continue if a clause permitting the RP to do so exists in the approved Resolution Plan, however, there is no such clause to that effect in the present matter.
(C) Adjudication of avoidance applications after CIRP
# 10. Ld. Single Judge has observed that the CIRP Regulations, 2016 under Regulation 35A, provide a specific timeline by which the RP has to form an opinion if the corporate debtor has been subjected to any of the objectionable transactions and under Regulation 39, the RP has to submit, along with the Resolution Plans, details of the objectionable transactions including preferential transactions. As is evident from the flowchart provided in Para 72 of the Impugned Judgment, the RP has to commence examination as on the insolvency commencement date, form an opinion by 75th day (post-amendment), make a determination by 115th day and if he comes to the conclusion that the Corporate Debtor has indulged in preferential transactions, apply to the NCLT for appropriate relief on or before the 135th day. As per Ld. Single Judge, the purpose of these timelines is that RP includes these details in Resolution Plans and the same are available before the NCLT before it approves the Plan.
# 11. Ld. Single Judge proceeded to observe that the Resolution Applicant whose Resolution Plan is approved itself cannot file an avoidance application since 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. It was held that allowing the adjudication of the avoidance application after resolution of the debtor tantamount to NCLT stepping in the shoes of the new management to decide what is good for it. The power to decide whether to continue an agreement vests with the new management after resolution. Therefore, any order with respect to suspect transactions would have to be passed prior to approval of the resolution plan.
# 12. It was further held that Section 26 of the IBC cannot be read in a manner so as to mean that an application for avoidance of transactions under Section 25(2)(j) can survive after the CIRP process. Once the CIRP process comes to an end, an application for avoidance of transactions cannot be adjudicated. The purpose of avoidance transactions is clearly for the benefit of the creditors of the Corporate Debtor in its erstwhile avatar and no benefit would come to the creditors after the Plan is approved.
(D) Beneficiaries of avoidance applications
# 13. The Ld. Single Judge relied upon Clause 2.4 of the ILC Report dated 20.02.2020 to show that the IBC envisages that the successful Resolution Applicant cannot be permitted to file an avoidance application, as the same was not factored into the bid. Therefore, the Resolution Applicant whose Resolution Plan is approved itself cannot file an avoidance application making it clear that the purpose of avoidance applications is neither to the benefit the Resolution Applicants nor for the company after the resolution is complete but the Corporate Debtor and the CoC of the Corporate Debtor before the resolution of the debtor. It has been further held that the fact that the new management can take a decision in respect of any agreement which is deemed to be not beneficial to it also supports the interpretation that after the Plan is approved, the company is completely in the hands of the new management and neither the NCLT nor the RP has any right or power in respect of the said company.
Issues for consideration
# 55. In light of the foregoing, the issues that arise for the consideration of this Court are: -
(i) Whether an alternate efficacious remedy existed before the NCLAT?
(ii) Whether avoidance applications survive CIRP in cases where Resolution Plans are unable to account for such applications?
(iii) If avoidance applications survive CIRP in such cases, who pursues them? Whether RP is rendered functus officio upon conclusion of CIRP? Findings and Conclusion
# 56. In light of the above observations, we proceed to deal with the pertinent issues that have arisen in the peculiar facts of this case.
(a) Alternate efficacious remedy before NCLAT
# 57. At the outset, we deem it apt to consider the preliminary issue regarding maintainability of the writ petition preferred before the Ld. Single Judge. Ld. 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 import given to the phrase “in relation to insolvency resolution‟ has been narrowed down by the Ld. Single Judge to mean that applications/petitions must only pertain to CIRP and after conclusion of CIRP, no issue survives for consideration of the NCLT, making NCLT functus officio in respect of any application/petition with respect to erstwhile corporate debtor.
# 58. Mr. Srinivasan submitted on behalf of Tata Steel BSL Ltd. that avoidance applications are filed as per the provisions of the IBC and accordingly it is the Ld. NCLT that is the appropriate and concerned forum for the same and Sections 44, 48, 49, 51, 66 and 67 categorically provide for the NCLT to pass orders in the avoidance applications. In similar vein, Ld. ASG has also submitted that the purpose and intent of the IBC being to serve as a complete code in respect of insolvency laws, the language of Section 60(5) has to be given wide import.
# 59. It is evident from the judgments of the Honorable Supreme Court in the Swiss Ribbons (supra) and Innoventive Industries (supra) that the one of the primary objectives of the IBC was to bring insolvency laws in India under a single, unified umbrella.
# 60. At this juncture, we must also refer to the judgment of the Hon‟ble Supreme Court in Gujarat Urja Vikas Nigam Ltd. vs. Amit Gupta, (2021) 7 SCC 209, wherein the Hon‟ble Supreme Court has, in a comprehensive manner, interpreted and laid down the scope and import of the phrase “arising out of” and “in relation to” in the specific context of Section 60(5)(c) of the IBC. It was held: -
“I.1. Section 60(5)(c):“arising out of” and “in relation to”
49. It has been submitted before us on behalf of the appellant that NCLT does not have any inherent powers, and its exercise of jurisdiction is circumscribed by the provisions of IBC. As such, it does not have the jurisdiction to entertain all disputes or all issues related to the corporate debtor. On the other hand, the respondents have made a limited submission that while NCLT may not have jurisdiction to adjudicate upon contractual disputes that arise independent of the insolvency of the corporate debtor, it has the sole jurisdiction to decide a dispute that arises from or relates to the insolvency of the corporate debtor or where the property of the corporate debtor (in this case its rights under PPA) is sought to be taken away on the ground of insolvency. For their argument, the respondents have relied on Section 60(5)(c) to submit that NCLT is vested with a wide jurisdiction to consider questions of law or fact “arising out of” or “in relation to” insolvency resolution proceedings.
*****
53. While the phrases “arising out of” and “relating to” have been given an expansive interpretation in the above cases, words can have different meanings depending on the subject or context. Words are after all, a vehicle for communicating ideas, thoughts and concepts. A one-size-fits-all analogy may not always hold good when we construe similar words in entirely distinct settings. Justice G.P. Singh in his authoritative commentary on the interpretation of statutes, Principles of Statutory Interpretation, has noted that the same words used in different sections of the same statute or used at different places in the same clause or section can have different meanings [ G.P. Singh, Principles of Statutory Interpretation (1st Edn., Lexis Nexis 2015)] . Therefore, it is necessary to bear in mind the context in which the phrases have been used. Justice G.P. Singh has stated in his commentary that [ G.P. Singh, Principles of Statutory Interpretation (1st Edn., Lexis Nexis 2015)] :
“When the question arises as to the meaning of a certain provision in a statute, it is not only legitimate but proper to read that provision in its context. The context here means, the statute as a whole, the previous state of the law, other statutes in pari materia, the general scope of the statute and the mischief that it was intended to remedy.”
55. . . . . . . . Therefore, while construing of Section 60(5), a starting point for the analysis must be to decipher parliamentary intent based on the object underlying the enactment of IBC. The Statement of Objects and Reasons leading up to the enactment to IBC conveys a strong sense of the intent of the legislature. According to it:
“Statement of Objects and Reasons.”There is no single law in India that deals with insolvency and bankruptcy. Provisions relating to insolvency and bankruptcy for companies can be found in the Sick Industrial Companies (Special Provisions) Act, 1985, the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and the Companies Act, 2013. These statutes provide for creation of multiple fora such as Board of Industrial and Financial Reconstruction (BIFR), Debts Recovery Tribunal (DRT) and National Company Law Tribunal (NCLT) and their respective Appellate Tribunals. Liquidation of companies is handled by the High Courts. Individual bankruptcy and insolvency is dealt with under the Presidency Towns Insolvency Act, 1909, and the Provincial Insolvency Act, 1920 and is dealt with by the courts. The existing framework for insolvency and bankruptcy is inadequate, ineffective and results in undue delays in resolution, therefore, the proposed legislation.
2. The objective of the Insolvency and Bankruptcy Code, 2015 is to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner for maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the priority of payment of government dues and to establish an Insolvency and Bankruptcy Fund, and matters connected therewith or incidental thereto. An effective legal framework for timely resolution of insolvency and bankruptcy would support development of credit markets and encourage entrepreneurship. It would also improve Ease of Doing Business, and facilitate more investments leading to higher economic growth and development.
3. The Code seeks to provide for designating NCLT and DRT as the adjudicating authorities for corporate persons and firms and individuals, respectively, for resolution of insolvency, liquidation and bankruptcy. The Code separates commercial aspects of insolvency and bankruptcy proceedings from judicial aspects. The Code also seeks to provide for establishment of the Insolvency and Bankruptcy Board of India (Board) for regulation of insolvency professionals, insolvency professional agencies and information utilities. Till the Board is established, the Central Government shall exercise all powers of the Board or designate any financial sector regulator to exercise the powers and functions of the Board. Insolvency professionals will assist in completion of insolvency resolution, liquidation and bankruptcy proceedings envisaged in the Code. Information utilities would collect, collate, authenticate and disseminate financial information to facilitate such proceedings. The Code also proposes to establish a fund to be called the Insolvency and Bankruptcy Fund of India for the purposes specified in the Code.‖ xxx 56.9. IBC, in a clear departure from the past, separates commercial aspects of insolvency and bankruptcy proceedings from judicial aspects. 57. In the decision of this Court in Swiss Ribbons [Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17] , where the challenge was to the constitutional validity of some provisions of IBC, the judgment by R.F. Nariman, J. contains a section titled ―Prologue : the pre-existing state of the law‖. The problems which arise from multiplicities of statutes and fora in the erstwhile regime were noticed (at SCC pp. 41-42, para 14) in the report of the Bankruptcy Law Reforms Committee (2015) (“BLRC”):
“14. … The current state of the bankruptcy process for firms is a highly fragmented framework. Powers of the creditor and the debtor under insolvency are provided for under different Acts. … It is problematic that these different laws are implemented in different judicial fora. Cases that are decided at the tribunal/BIFR often come for review to the High Courts. This gives rise to two types of problems in implementation of the resolution framework. The first is the lack of clarity of jurisdiction. In a situation where one forum decides on matters relating to the rights of the creditor, while another decides on those relating to the rights of the debtor, the decisions are readily appealed against and either stayed or overturned in a higher court.
Ideally, if economic value is indeed to be preserved, there must be a single forum that hears both sides of the case and makes a judgment based on both. A second problem exacerbates the problems of multiple judicial fora. The fora entrusted with adjudicating on matters relating to insolvency and bankruptcy may not have the business or financial expertise, information or bandwidth to decide on such matters. This leads to delays and extensions in arriving at an outcome, and increases the vulnerability to appeals of the outcome. … a matrix of fragmented and contrary outcomes,…” A “debtor and creditor led process of corporate insolvency” had resulted in a matrix of fragmented and contrary outcomes rather than “coherent and consistent.… precedents”.
xxxxx
59. The enactment of IBC is in significant senses a break from the past. While interpreting the provisions of IBC, care must be taken to ensure that the regime which Parliament found deficient and which was the basic reason for the enactment of the new legislation is not brought in through the backdoor by a process of disingenuous legal interpretation. However, this is not to say that the interpretation given to the statutory provisions that existed prior to the enactment of IBC is to be rejected in toto. The interpretation given to such statutory provisions that are textually similar to Section 60(5)(c) may be relevant, provided that such interpretation is in tandem with the objective of enacting IBC, that is, inter alia, avoidance of multiplicity of fora and a timely resolution of the insolvency process.
Xxxxx
69. The institutional framework under IBC contemplated the establishment of a single forum to deal with matters of insolvency, which were distributed earlier across multiple fora. In the absence of a court exercising exclusive jurisdiction over matters relating to insolvency, the corporate debtor would have to file and/or defend multiple proceedings in different fora. These proceedings may cause undue delay in the insolvency resolution process due to multiple proceedings in trial courts and courts of appeal. A delay in completion of the insolvency proceedings would diminish the value of the debtor's assets and hamper the prospects of a successful reorganisation or liquidation. For the success of an insolvency regime, it is necessary that insolvency proceedings are dealt with in a timely, effective and efficient manner. Pursuing this theme in Innoventive [Innoventive Industries Ltd. v. ICICI Bank, (2018) 1 SCC 407 : (2018) 1 SCC (Civ) 356] this Court observed that : (SCC p. 422, para 13)
“13. One of the important objectives of the Code is to bring the insolvency law in India under a single unified umbrella with the object of speeding up of the insolvency process.”
The principle was reiterated in ArcelorMittal [ArcelorMittal (India) (P) Ltd. v. Satish Kumar Gupta, (2019) 2 SCC 1] where this Court held that : (SCC p. 88, para 84)
“84. … The non obstante clause in Section 60(5) is designed for a different purpose : to ensure that NCLT alone has jurisdiction when it comes to applications and proceedings by or against a corporate debtor covered by the Code, making it clear that no other forum has jurisdiction to entertain or dispose of such applications or proceedings.
Therefore, considering the text of Section 60(5)(c) and the interpretation of similar provisions in other insolvency related statutes, NCLT has jurisdiction to adjudicate disputes, which arise solely from or which relate to the insolvency of the corporate debtor. However, in doing so, we issue a note of caution to NCLT and NCLAT to ensure that they do not usurp the legitimate jurisdiction of other courts, tribunals and fora when the dispute is one which does not arise solely from or relate to the insolvency of the corporate debtor. The nexus with the insolvency of the corporate debtor must exist.
70. It is appropriate to refer to the observations in the report of the BLRC, wherein it noted the role of NCLT, as the adjudicating authority for CIRP, in the following terms: “An adjudicating authority ensures adherence to the process At all points, the adherence to the process and compliance with all applicable laws is controlled by the adjudicating authority. The adjudicating authority gives powers to the insolvency professional to take appropriate action against the Directors and management of the entity, with recommendations from the creditors committee. All material actions and events during the process are recorded at the adjudicating authority. The adjudicating authority can assess and penalise frivolous applications. The adjudicator hears allegations of violations and fraud while the process is on. The adjudicating authority will adjudicate on fraud, particularly during the process resolving bankruptcy. Appeals/actions against the behaviour of the insolvency professional are directed to the regulator/adjudicator.”
As such, it is important to remember that NCLT's jurisdiction shall always be circumscribed by the supervisory role envisaged for it under IBC, which sought to make the process driven by trained resolution professionals.
xxx…..
# 61. The ILC Report of May 2022 has documented the issue of jurisdiction of the Adjudication Authority, i.e., the NCLT and NCLAT in matters pertaining to avoidance applications after conclusion of CIRP. It has been stated: -
“2.24. The Committee also considered if a consequential change would be required to clarify the jurisdiction of the Adjudicating Authority to entertain proceedings for avoidance of transactions and improper trading beyond the CIRP period. The language of Section 60 is couched in a wide manner, and all proceedings permissible under Part II of the Code are to be adjudicated by the NCLT.
2.25. As per Section 60(1), the NCLT is the Adjudicating Authority in relation to insolvency and liquidation of corporate persons. Section 60(5)(c) provides that the NCLT has the jurisdiction to entertain or dispose of any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings. The Committee noted that the phrases “in relation to” or “arising out of” are of wide import, thereby extending the jurisdiction of the NCLT on subject matters related to the insolvency resolution of the corporate debtor. Further, the phrase “entertain or dispose of” suggests that the jurisdiction of the NCLT is not limited to entertaining a question of law or fact. Instead, it extends to disposal of such proceedings. Given this, the Committee felt that Section 60 read with Section 26 allows the NCLT to adjudicate over proceedings related to avoidable transactions and improper trading even after the conclusion of the CIRP. Consequently, it agreed that amendments to Section 60 may not be required in this regard.”
# 62. In light of the aforesaid, it becomes evident that the phrase “arising out of” and “in relation to” is to be given wide import. Therefore, the Ld. Single Judge erred in holding the writ petition was maintainable. An appeal ought to have been preferred by Respondent No. 1 before the NCLAT under Section 61 of the IBC and the NCLAT itself was the appropriate forum to decide the controversy posed before the Ld. Single Judge.
# 63. There is no doubt that IBC is clearly special statute that seeks to be a single source guide for all issues relating the issue of insolvency. The Hon‟ble Supreme Court, in Titaghur Paper Mills Co. Ltd vs State of Orissa, 1983 SCC (2) 433, has observed that:
“Under the scheme of the Act, there is a hierarchy of authorities before which the petitioners can get adequate redress against the wrongful acts complained of. The petitioners have the right to prefer an appeal before the prescribed authority under sub-s. (1) of s. 23 of the Act. If the petitioners are dissatisfied with the decision in the appeal, they can prefer a further appeal to the Tribunal under sub-s. (3) of s. 23 of the Act, and then ask for a case to be stated upon a question of law for the opinion of the High Court under s. 24 of the Act. The Act provides for a complete machinery to challenge an order of assessment and the impugned orders of assessment can only be challenged by the mode prescribed by the Act and not by a petition under Art. 226 of the Constitution. It is now well recognised that where a right or liability is created by a statute which gives a special remedy for enforcing it, the remedy provided by that statute only must be availed of.” (emphasis supplied)
# 65. Similarly, while dealing with the issues regarding writ petitions under Article 226 of the Constitution of India in matters arising out of Recovery of Debts Due to Banks and Financial Institutions Act, 1993, the Apex Court in Punjab National Bank vs. O.C. Krishnan and Others, (2001) 6 SCC 569 has observed as under:
6. The Act has been enacted with a view to provide a special procedure for recovery of debts due to the banks and the financial institutions. There is a hierarchy of appeal provided in the Act, namely, filing of an appeal under Section 20 and this fast-track procedure cannot be allowed to be derailed either by taking recourse to proceedings under Articles 226 and 227 of the Constitution or by filing a civil suit, which is expressly barred. Even though a provision under an Act cannot expressly oust the jurisdiction of the court under Articles 226 and 227 of the Constitution, nevertheless, when there is an alternative remedy available, judicial prudence demands that the Court refrains from exercising its jurisdiction under the said constitutional provisions. This was a case where the High Court should not have entertained the petition under Article 227 of the Constitution and should have directed the respondent to take recourse to the appeal mechanism provided by the Act.
# 67. Avoidance of certain transactions such as preferential transactions or undervalued transactions are special remedies envisaged only under the IBC to benefit a special creature of the Code itself, i.e., the Committee of Creditors. In view of the purpose and policy behind enactment of the IBC, it is only befitting that any petition or application arising out of the insolvency resolution or liquidation of a corporate person includes proceedings under Part III of the IBC.
# 68. However, we consider it apt to delve into the issues posed before us since they are important questions of law requiring our consideration.
(b) Effect of Regulation 38(2)(d)of CIRP Regulations, 2016
# 69. During the course of hearing of the present LPAs, the IBBI amended the CIRP Regulations, 2016 to insert Clause (d) in Regulation 38(2) of the principal Regulation. The amendment was brought on 16.09.2022 w.e.f. 14.06.2022. The Regulation is reproduced hereunder: -
“38. Mandatory contents of the resolution plan.
(1)The amount payable under a resolution plan – (a) to the operational creditors shall be paid in priority over financial creditors; and (b) to the financial creditors, who have a right to vote under sub-section (2) of section 21 and did not vote in favour of the resolution plan, shall be paid in priority over financial creditors who voted in favour of the plan.
(1A) A resolution plan shall include a statement as to how it has dealt with the interests of all stakeholders, including financial creditors and operational creditors, of the corporate debtor.
(IB) A resolution plan shall include a statement giving details if the resolution applicant or any of its related parties has failed to implement or contributed to the failure of implementation of any other resolution plan approved by the Adjudicating Authority at any time in the past.
(2) A resolution plan shall provide (a) the term of the plan and its implementation schedule; (b) the management and control of the business of the corporate debtor during its term; and (c) adequate means for supervising its implementation. (d) provides for the manner in which proceedings in respect of avoidance transactions, if any, under Chapter III or fraudulent or wrongful trading under Chapter VI of Part II of the Code, will be pursued after the approval of the resolution plan and the manner in which the proceeds, if any, from such proceedings shall be distributed:
Provided that this clause shall not apply to any resolution plan that has been submitted to the Adjudicating Authority under sub-section (6) of section 30 on or before the date of commencement of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Second Amendment) Regulations, 2022. ……………….” (emphasis supplied)
# 70. A perusal of the said amendment demonstrates that the authorities were aware that many a times a company was driven to insolvency due to dubious transactions which are extremely complicated. The Resolution Professional has a very limited time to unearth these transactions by which time the period of resolution process gets over and the Committee of Creditors are forced to take a haircut. In order to get over this, it has now become mandatory that the Resolution Plan will necessarily have to take into account these fraudulent transactions which if are set aside would give Committee of Creditors that extra amount which they would otherwise have lost because of the fact that the Resolution Process has come to an end. The contention of Mr. Sibal that the fact that this Resolution has come into effect only from 14.06.2022 means that all the resolution processes which have come into effect prior to 14.06.2022 cannot be re-opened and that the NCLT and the Resolution Professional becomes functous officio once the Committee of Creditors has accepted the Resolution Plan and which has been approved by the NCLT, cannot be accepted. If such an interpretation is accepted it will go against the very purpose of the IBC. The scheme of IBC is just not a commercial call taken by the Committee of Creditors. It was enacted by the legislature to ensure maximum recovery due to the creditors who had lent money to a corporate entity. The endeavour must always be to ensure maximum recovery of that money to the Committee of Creditors because it is public money and public cannot be made to suffer on account of dubious/nefarious transactions entered into by the company which has gone into the process of insolvency. The fact that after 04.06.2022, the Resolution Plan must also take into account all the dubious transactions does not give any less credence to the fact that such plans which have been approved by the Creditors prior to 14.06.2022, the NCLT will have jurisdiction to the application by the Resolution Professional for setting aside certain transactions so that the money can be recovered through the account of the Committee of Creditors. The argument of the learned Counsel for the Tata Steel BSL Ltd. that the money must come to the coffers of the company cannot be accepted because the price that has been offered by the Resolution applicant is a commercial decision. He has accepted to take over the entity at a particular price. He cannot be a beneficiary of that amount because that amount was actually paid by the Committee of Creditors which is a public money. Resolution Process is for the corporate debtor and also to ensure that the Committee of Creditors are not put to a loss because the amount lost by the Committee of Creditors is principally public money.
# 71. Ld. Senior Counsel appearing on behalf of Respondent No. 1 has argued that by virtue of insertion of the said clause, the dispute does not survive since it was not possible under the old regime to have allowed the continuation of Avoidance Applications post approval of the Resolution Plan.
# 72. In our view, Respondent No. 1‟s reliance upon this clause is misplaced. This clause has no bearing on the dispute in the present matter. Regulation 38 is titled “Mandatory contents of the Resolution Plan”. Regulation 38(2) requires that a resolution plan “shall” contain whatever is listed under sub-clauses (a) to (d). Therefore, the understanding is that Regulation 38(2)(d) necessitates a resolution plan to provide for the manner in which the resolution applicant seeks to deal with a pending avoidance application and the proviso sets a cut-off date for the applicability of the new regulation. Therefore, all resolution plans submitted before the NCLT for approval on or after 14.06.2022 must mandatorily provide for the manner in which they seek to deal with a sub-judice avoidance application and resolution plans submitted for approval before 14.06.2022 are not necessitated to provide for the manner in which the resolution applicant seeks to deal with such claims. Therefore, the provision only deals with what ought to be in resolution plans and cannot be interpreted to extinguish proceedings pertaining avoidable transactions in resolution plans submitted before 14.06.2022 altogether.
(c) Avoidance applications can be heard after conclusion of CIRP and benefits derived from adjudication will be appropriated by the creditors
# 73. In holding that avoidance applications cannot survive CIRP, the Impugned Judgment operates on a two-fold premise, i.e.: -
(i) Avoidance applications are required to be filed in terms of the timelines prescribed under Regulation 35A of the CIRP Regulations, 2016 and the details of such applications ought to be available before the NCLT at the time of the approval of the Resolution Plan under Section 31 of the IBC.
(ii) An avoidance application is not meant to benefit the corporate debtor in its new avatar after the approval of the resolution plan.
# 74. The first prong on which the Impugned Judgment holds that avoidance applications, in facts of the present case, are infructuous is because they have not been filed as per the prescribed timelines. However, it is our understanding that the timelines under Regulation 35A are directory and not mandatory in nature. This is 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 date of commencement of CIRP as the reference point. However, the CIRP process itself is not strictly or mandatorily bound by its own timelines. The same has been held by the Hon‟ble Apex Court in Essar Steel India Ltd. Committee of Creditors v. Satish Kumar Gupta,(2020) 8 SCC 531.
# 75. Secondly, while Regulation 35A endeavours to ensure that an avoidance application is determined and filed at the earliest to facilitate resolution of the Corporate Debtor, it does not envisage a situation where the RP is not able to form an opinion, make a determination or file an application as per the prescribed timeline. In the peculiar facts of this case, the RP did not have the requisite records to do so as per such timelines. The intent behind the insertion of clause 3A and 4 to Regulation 35A in fact appears to be that a resolution applicant is able to take cognizance of the avoidable transactions at the earliest. The duty cast by the IBC under Section 25(2) (j) is with respect to the RP filing the application before conclusion of the CIRP. The said obligation has been discharged. The premise of 35A timelines not being mandatory itself, adherence to Regulation 35A timelines cannot be required so strictly as to render the provisions of avoidable transactions redundant.
# 76. There is no time limit prescribed for the NCLT to adjudicate these applications. Further, there is no express penalty clause for the RP‟s failure to follow the timelines provided in Regulation 35A. When the law itself does not envisage a limit for the NCLT to adjudicate such an application, the Ld. Single Judge could not have imposed such a condition.
# 77. The Ld. Single Judge has also observed that adjudication of the avoidance application in the present case does not serve any purpose as the benefit from such adjudication will accrue to corporate debtor in its new avatar. The Ld. Single Judge has noted that the purpose of the avoidance applications is to benefit the creditors of the corporate debtor and proceeded to hold the corporate debtor in its new avatar cannot be the beneficiary of the sum or property acquired from adjudication of an avoidance application. The direct implication of the Impugned Judgment is that in cases such as the present one, wherein the Resolution Plan is unable to account for pending avoidance applications, the beneficiaries of avoidable transactions are allowed to walk scot-free, thereby causing unjust enrichment in favor of such beneficiaries. This view is also resonated in the ILC Report of May 2022, wherein the Committee has opined that a situation where a beneficiary of suspect transaction is absolved on account of the avoidance application becoming infructuous after conclusion of CIRP, is undesirable.
# 78. The Ld. Single Judge operates on the assumption that the sum or property acquired upon adjudication of the avoidance application will be appropriated by the corporate debtor in its new avatar. As laid down above, the provisions pertaining to avoidable transactions is to primarily benefit creditors. While the Corporate Debtor ceases to exist in its erstwhile avatar, in cases where the Resolution Plan is silent on the treatment of any pending applications because such information could not be made available to the applicant, the creditors of the corporate debtor can still be the beneficiaries of the sum or properties that may be recovered from adjudication of an avoidance application. The same is consistent with the scheme of the Code and in line with object sought to be achieved by it which inter-alia includes, increasing the availability of credit within the economy.
(d) RP will pursue the avoidance applications since he is only functus officio vis-Ã -vis CIRP and not avoidance applications
# 79. Upon this Court being satisfied that avoidance applications survive CIRP, a contentious issue that requires determination is as to who pursues such applications after conclusion of CIRP.
# 80. The flavour of Respondent No. 1‟s argument is that it is the RP who files and pursues such applications and RP being rendered functus officio there is no agency or instrumentality within the IBC which can pursue such an application. This argument furthers Respondent No. 1‟s stance on the issue of non-survival of avoidance applications on conclusion of CIRP. Appellants have submitted that a number of approaches can be taken in such a case.
82. Attention of this Court was also drawn to Chapter III, Para 2 of the ILC Report, which states: -
“The Adjudicating Authority should decide whether the recoveries from actions filed against improper trading or to avoid transactions should be applied for the benefit of the creditors of the corporate debtor, the successful resolution applicant or other stakeholders. In arriving at this decision, the Adjudicating Authority should take note of the facts and circumstances of the case. Additionally, if the recoveries are to be vested with the creditors, they should usually be distributed per the order of priorities provided in Section 53(1) of the Code, unless the Adjudicating Authority deems an alternate manner of distribution appropriate”
# 83. The Ld. Single Judge has heavily relied upon the role of the RP in the context of the CIRP to hold that the RP becomes functus officio upon the conclusion of the CIRP. The role of the RP vis-Ã -vis the resolution process ends, and rightly so, with the successful resolution of the corporate debtor. However, the Scheme of IBC makes it is clear that avoidance applications and CIRP are a separate set of proceedings. The avoidance of a transaction requires discovery of dubious transactions which are complex in nature and adjudication of these by the adjudicating authority takes time and the resolution process need not await the outcome of the exercise. Therefore, a distinction can be drawn between the role of the RP vis-Ã -vis CIRP on one hand and avoidance applications on the other.
# 84. Accordingly, reliance placed upon sections applicable in the context of CIRP cannot be extended to the RP for the purposes of pursuing avoidance applications. The RP, before passing of the approval order, filed an application for avoidance of certain transactions, discharging the statutory burden laid out under Section 25(2) (j) of the IBC.
# 85. The judgment of the learned Single Judge goes against the grain of the Insolvency and Bankruptcy Code, 2016 which was enacted not only to consolidate all laws relating to reorganisation and insolvency resolution of corporate persons and bring them under a single unified umbrella but also to enhance and improve the availability of credit with lending institutions.
# 86. Sections 43-51, 66 & 67 of the IBC lays down various transactions that may be avoided by the resolution professional and the actions that can be taken against erstwhile management for fraudulent transactions. These provisions are primarily aimed at swelling the asset pool available for distribution to creditors and preventing unjust enrichment of one party at the expense of other creditors. The scheme of the Act suggests that proceedings for unearthing such transactions are ancillary proceedings and the resolution of the corporate debtor need not be stalled due to pendency of such proceedings. The insolvency professional has to thoroughly examine the transactions which the corporate debtor has undertaken in the period prior to commencement of the period of insolvency proceedings. This is a very cumbersome process and more so in respect of companies whose books and records do not properly document all its past transactions. The resolution professional has to also assess if a suspicious transaction would meet the requirements that are necessary to be seen before terming it as a suspicious transaction. Not only the investigation but the adjudication of such transaction is a lengthy process and findings of these transactions by adjudicating authority involves answering questions on both law and fact and, therefore, it will be impossible to conclude these proceedings within the time frame laid down in the process. Since investigation and adjudication of these transactions are time consuming this cannot allow persons who were managing the corporate debtor to escape from reversal of these transactions. The time line given in the IBC cannot be used as a premium by the unscrupulous persons who have forced the corporate entity into insolvency process.
# 87. The concern of Union of India is that if the interpretation of the learned Single Judge is accepted then persons who were responsible for the corporate debtor to go into liquidation because of unscrupulous transactions will get away with their deeds. The submission that the scheme of IBC is not purely commercial in nature and the purpose of the Act which is also to ensure that public money is brought back into the system is not unfounded.
# 88. The amount that is available after the transactions are avoided cannot go to the kitty of the resolution applicant, in this case the Appellant in LPA No. 37/2021. For the resolution applicant, it was purely a commercial contract, a commercial decision whereunder the resolution applicant knew the ground reality, the assets and the liabilities. The benefit arising out of the adjudication of avoidance applications is not for the corporate debtor in its new avatar since it does not continue as a debtor and has gone through the process of resolution. The expectation that some more amount could come to the kitty was not present when the commercial decision was taken by the resolution applicant while agreeing to take over the corporate debtor. The purpose of the avoidance application as stated above is to enhance the asset pool available for the decision of creditors who are primarily financial institutions and have taken the haircut in agreeing to accept a much lesser amount than what was due and payable to them. This is public money, and, therefore, the amount that is received if and when transactions are avoided and receive the imprimatur of adjudicating authority must be distributed amongst the committee of creditors in a manner determined by the adjudicating authority.
# 89. Conclusion
a) The phrase “arising out of” or “in relation to” as situated under Section 60(5)(c) of the IBC is of a wide import and it is only appropriate that such applications are heard and adjudicated by the Adjudicating Authority, i.e., the NCLT or the NCLAT, as the case maybe, notwithstanding that the CIRP has concluded and the resolution applicant has stepped into the shoes of the promoter of the erstwhile corporate debtor.
b) CIRP and avoidance applications, are, by their very nature, a separate set of proceedings wherein, the former, being objective in nature, is time bound whereas the latter requires a proper discovery of suspect transactions that are to be avoided by the Adjudicating Authority. The scheme of the IBC reinforces this difference. Accordingly, adjudication of an avoidance application is independent of the resolution of the corporate debtor and can survive CIRP.
c) The endeavour of the IBC and its rules and regulations is to ensure that all processes within the insolvency framework are time efficient. While the law mandates a resolution plan to necessarily provide for the treatment of avoidance applications if the same are pending at the time of submission of resolution plans, it cannot be accepted that avoidance applications will be rendered infructuous in situations wherein the resolution plan could not have accounted for avoidance applications due to exigencies that delayed initiation of action in respect of avoidable transactions beyond the submission of a resolution plan before the adjudicating authority. This is because such an interpretation will render the provisions pertaining to suspect transactions otiose and let the beneficiaries of such transactions walk away, scot-free. Money borrowed from creditors is essentially public money and the same cannot be appropriated by private parties by way of suspect arrangements. Therefore, in cases such as the present one, wherein such transactions could not be accounted, the Adjudicating Authority will 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.
d) It follows that the RP will not be functus officio with respect to adjudication of avoidance applications in a situation, as described hereinabove. There being a clear demarcation between the scope and nature of the CIRP and avoidance application within the scheme of the IBC, the RP can continue to pursue such applications. The method and manner of the RP‟s remuneration ought to be decided by the Adjudicating Authority itself.
e) The provisions pertaining to suspect transactions exist specifically to benefit the creditors of the corporate debtor by enhancing the asset pool available for resolution of the corporate debtor. The IBC also envisages increasing credit availability in the country as one of its primary objectives. It is apposite that any kind of benefit acquired from the adjudication of avoidance applications, in cases where treatment of such applications could not be accounted in the plan, must be given to the creditors of the erstwhile corporate debtor, considering especially, that in the present case, the creditors took a massive haircut towards resolution of the corporate debtor. Giving such benefit to the creditors is in consonance with the scheme of the IBC.
f) The amount that is made available after transactions are avoided cannot go to the kitty of the resolution applicant. The benefit arising out of the adjudication of the avoidance application is not for the corporate debtor in its new avatar since it does not continue as a debtor and has gone through the process of resolution. This amount should be made available to the creditors who are primarily financial institutions and have taken a haircut in agreeing to accept a lesser amount than what was due and payable to them.
# 90. In view of the above, the impugned Judgment is set aside. The NCLT is directed to proceed ahead with the hearing of avoidance application. In accordance with Sections 44 to 51 of the IBC, 2016, the amount which is recovered can be distributed amongst the secure creditors in accordance with law as determined by the NCLT.
# 91. With these observations, the appeals are disposed of, along with pending application(s), if any.
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