Tata Steel BSL Limited Vs Venus Recruiter private Limited & Ors (Delhi High Court)
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.
FULL TEXT OF THE JUDGMENT/ORDER OF DELHI HIGH COURT
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:
a. Upon default in repayment of its credit facilities, State Bank of India (“SBI”) filed a petition, being C.P. No. (IB) – 201(PB)/2017 under Section 7 of the IBC before the NCLT seeking initiation of CIRP of M/s Bhushan Steel Limited.
b. On 26.07.2017, the National Company Law Tribunal, New Delhi (hereafter, “NCLT”) passed an order admitting Bhushan Steel Limited to CIRP. Mr. Vijay Kumar Iyer was appointed as the Interim Resolution Professional. Thereafter, pursuant to the procedure laid down in the IBC, a public announcement was made inviting submission of claims by prospective resolution applicants and the Committee of Creditors was constituted.
c. On 24.08.2017, the CoC convened for the first time wherein it inter alia confirmed the appointment of Mr. Vijay Kumar Iyer as the Resolution Professional of Bhushan Steel Limited.
d. On 20.03.2018, the CoC approved the resolution plan proposed by Tata Steel Ltd.
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.
Contentions of the parties
I. Tata Steel BSL Ltd.
14. Ramji Srinivasan, Ld. Senior Counsel, appearing on behalf of Tata Steel BSL Ltd., has submitted that Respondent No. 1 ought to have pursued remedy under the IBC by preferring an appeal against the said order under Section 61 of the IBC before the NCLAT. The thrust of his argument is that avoidance applications are to be filed as per the provisions of the IBC and the Ld. NCLT is the appropriate and concerned forum for the same. Further, Sections 44, 48, 49, 51, 66 and 67 categorically provide for the NCLT to pass orders in respect of avoidance applications. In view of the same, the Ld. Single Judge could not have assumed jurisdiction and proceeded to pass the Impugned Judgment de hors the NCLT. Reliance has been placed upon the Order of this Court in W.P.(C) 13774/2019 titled Indian Oil Corporation Limited versus Union of India and Ors. dated23.12.2019, wherein this Court had refrained from interfering in to stay orders passed in respect of invocation of certain bank guarantees provided by a corporate debtor and proceeded to remand the matter to the Ld. NCLT.
15. On the issue of whether an avoidance application survives after conclusion of CIRP, Mr. Srinivasan submits that the Ld. Single Judge erred in holding that an avoidance application cannot be heard after conclusion of CIRP. He vehemently contends that the requirement of the IBC, as is evident from the wordings of Section 25(2)(j), is that the RP is only required to file an avoidance application and that burden has been discharged in the present matter. By virtue of Section 26, it becomes abundantly clear that while the RP during his/her tenure is to collate information and basis the same file an Avoidance Application during CIRP, the same need not be completed during CIRP and neither will the pendency of the same delay and/or affect the CIRP.
16. It was further contended that it flows from Section 26 that the timelines envisaged under the IBC for the purposes of CIRP cannot be extended to proceedings borne out of avoidance applications. Timelines within IBC and its rules and regulations (for instance, Regulations 35A and 40A of the CIRP Regulations, 2016) are indicative in nature, endeavoring to make the whole process time efficient whereas proceedings under the IBC are more often than not, subject to extensions granted by NCLT, as had been done in the present matter as well vide the Order dated 21.12.2017. Attention of this Court was drawn to Chapter 3 of the ILC Report dated 20.02.2020, which states that proceedings for avoidable transactions should be initiated by the RP during the CIRP or liquidation process and prescriptive timelines for initiating such proceedings may not be necessary. The Report further states that resolution plans may provide for preservation of claims and manner of pursuing these proceedings after the plan is operational, therefore, such proceedings were never envisaged to be bound by strict timelines. It is also imperative to note that the timeline within Regulation 35A only requires the RP to form an opinion, determine and file an application before NCLT. There is no timeline for the NCLT to adjudicate such applications, once filed.
17. He further submits that proceedings pertaining to avoidable transactions, by their very nature are such that they will meet resistance. The IBBI has acknowledged the same in its Discussion Paper on Corporate Liquidation Process‟ dated 27.04.2019. This buttresses the interpretation that Section 26 of the Code, in fact, clarifies that the filing of an avoidance application under section 25 by the RP shall not affect the proceedings of the CIRP. Therefore, being independent of CIRP, avoidance proceedings can continue parallelly and beyond CIRP. Reliance has also been placed on IBBI‟s document titled Dealing with Avoidable Transactions dated 27.03.2019 which acknowledges that applications may not be adjudicated before conclusion of CIRP and such an eventuality is acceptable in view of Section 26.
18. He has pointed out that pursuant to such observations, the IBBI in the paper dated 27.03.2019, therefore, recommends an approach that ―Enable the Resolution Applicant to pursue the matter, in case the CIRP has ended in approval of resolution plan‖. Reliance was also placed on the Draft statement on Best Practices – Role of Ips in avoidance applications wherein it is stated that the application for avoidance transactions is against the promoters/directors/related parties, however the resolution/liquidation is for the Corporate Debtor, making this separate class of proceedings and should therefore, these two should be treated separately. Even if the corporate debtor is resolved/liquidated, the application of avoidance transactions will be carried on. The Draft statement goes on to contemplate in para (n) also contemplates, the possibility of the Resolution Professional to continue with the Avoidance application subject to Ld. NCLT or IBBI deciding the Resolution professional rights, duties and remuneration.
19. Mr. Srinivasan proceeds to submit that the ILC report in Para 2 of Chapter 3 suggests that 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. The IBBI itself recommends the Resolution Applicant to pursue the avoidance proceedings if CIRP ends with a Resolution Plan. He submits that the Ld. Single Judge has erred in observing that that the purpose of avoidance of transactions is for the benefit of the creditors of the Corporate Debtor and that no benefit would come to the creditors after the Plan is approved. He submits that the approval of the Plan has no nexus with benefits to creditors as: –
(i) Section 26 provides for avoidance applications to not have effect on CIRP,
(ii) Avoidance applications continue beyond CIRP and the Resolution Applicant may pursue it,
(iii) Therefore, benefits can be distributed to creditors or RA or
(iv) the NCLT may decide who the benefits ought to be accorded to
20. It has also been submitted that if the Impugned Judgment is allowed to continue, it will directly result in all pending Avoidance Applications post CIRP being rendered infructuous thereby destroying the relevant provisions of the IBC, making avoidance applications nugatory, permitting wrong-doers who have participated in extracting monies beyond fair-market value, related parties taking advantage of unjust enrichment without any consequences and directly causing losses to the creditors and the corporate debtor in terms of value.
II. Union of India
21. Mr. Chetan Sharma, Ld. ASG appearing on behalf of the Union of India, contends that the phrases ―arising out of” or ―in relation to” in Section 60(5)(c) are of wide import, thereby extending the jurisdiction of the NCLT on subject matters related to the insolvency resolution of the corporate debtor. Chapter VI of the Code, Section 60 included, deals with the adjudication procedure under the Code, therefore, language of wide amplitude is used therein. If a proceeding is permissible under Chapter II and Chapter III of Part II of the Code, NCLT will have the jurisdiction to in respect of the same. Further, the phrase entertain or dispose of employed in Section 60(5) suggests that the jurisdiction of NCLT is not limited to entertain a question of law or facts, its jurisdiction extends to disposal of such proceedings. Accordingly, the Impugned Judgment is against dicta of the judgment of the Hon‟ble Supreme Court of India in Innoventive Industries Ltd. v. ICICI Bank, (2018) 1 SCC 407, whereby the Court has held that the IBC is a complete code and is exhaustive in nature.
22. It has been further submitted that if orders of the NCLT are ruled to be amenable to judicial review by High Courts under Article 226 of the Constitution of India, the whole object of IBC, 2016 will be defeated. Writ jurisdiction is exercisable in cases where vires of a provision is itself under challenge or where private or public wrongs are so inextricably mixed up and the prevention of public injury and the vindication of public justice require it that recourse may be had to Article 226 of the Constitution. It certainly cannot be exercised in cases where enactments are a code unto themselves and contain comprehensive procedures. Reliance has been placed upon United Bank of India vs Satyawati Tondon &Ors, AIR 2010 SC 3413; & Assistant Collector of Central Excise, Chandan Nagar, West Bengal v. Dunlop India Ltd. and others, (1985) 1 SCC 260.
23. The RP is discharging a statutory function while forming an opinion that a transaction should be avoided under the provisions of the code. It is performing a statutory function for initiating proceedings in this regard before the NCLT. The avoidance proceedings are not personal to the insolvency professional acting as the RP. A perusal of the nature of orders that can be passed under Section 44, suggests that the immediate recipient of the outcome of the avoidance proceedings is the corporate debtor. Therefore, after the conclusion of the CIRP, the office of the RP does not become functus officio and the avoidance proceedings do not come to an end.
24. He proceeds to submit, even if for sake of arguments, it is presumed that the RP becomes functus officio, the NCLT can still decide those applications. The statutory duty imposed upon on the RP is to file avoidance applications in terms of Section 25(2)(j). Once it is established that the RP discharged this statutory burden, the avoidance proceedings will survive the CIRP. The reason for the same, in his opinion is, that the resolution plan cannot be linked with adjudication of avoidance transactions which is discernible from the fact that Section 12 of the Code provides time lines for completion of CIRP and the term „CIRP‟ has been defined under regulation 2(e) of CIRP Regulations as “Corporate insolvency resolution process” means the insolvency resolution process for corporate persons under Chapter II of Part II of the Code. Chapter II of Part II deals with only till approval of the resolution plan, whereas Chapter III provides for avoidance of PUFE transactions. This view is buttressed by the wordings of Section 26 of the UBC which effectively delinks CIRP and avoidance transactions.
25. Ld. ASG has submitted that Regulation 35A does not specify any adverse consequence in case of the failure of the RP to file the avoidance application in terms of the timelines provided therein, therefore indicating that such timelines ought to be treated that the timelines provided under Regulation 35A may only be treated as directory and not mandatory. He further submits that in holding that the Code bars the survival of avoidance applications beyond CIRP, the Impugned Judgment is in the nature of legislation, ignoring the mandate of Section 26 and the fact timelines applicable to CIRP cannot be extended to avoidance applications which are a separate set of proceedings. In his view, the legislature was cognizant that admission proceedings require adjudication based on an objective criterion whereas the proceedings related to avoidable transactions would involve findings with respect to questions of law and facts.
26. Reliance has been placed upon other provisions of the IBC such as Section 47, which provides that where RP or liquidator do not report the undervalued transactions, the creditor, member or a partner of the corporate debtor may make an application to the NCLT to declares such transactions as void and reverse their effect, to further the argument that the impugned judgment is not based on sound reason insofar it holds that when RP becomes functus officio, the PUFE applications cannot be decided. Hence, the adjudication of avoidance transaction does not depend upon filing by RP or time lines of CIRP.
27. Ld. ASG concludes by highlighting that there are two purposes for providing provisions for avoidance of certain transactions, first, for the benefit of the creditors in general and a fair allocation of an insolvent debtor‟s assets to the creditors and second, to create a fair commercial conduct before declaration of insolvency and having deterrent effect to discourage creditors from pursuing individual remedies in the period leading up to insolvency. The implications of these provisions are restricting the right of parties to such transactions to benefit the same by sending the proceeds back to the corporate debtor also incidentally benefitting creditors. In the present case, the avoidance proceedings are subsisting after approval of the resolution plan by the NCLT and conclusion of CIRP. While incidental benefits to the creditors during the CIRP does not exist anymore, such proceedings do not become infructuous as parties to such impermissible preferential transactions are still benefiting out of the same.
III. Resolution Professional
28. Mr. Manmeet Singh, Ld. Counsel for the RP has made limited submissions, expressing concurrence with the stance adopted by Tata Steel BSL Ltd. and the Union of India. He submits that the Respondent No. 1 cannot be allowed to go scot-free merely because the RP is rendered functus officio under Sections 30, 31 of the Code. He further submits that there exists no requirement for the RP to pursue the avoidance application and the same can be done by the Corporate Debtor upon the successful resolution of the CIRP. The Corporate Debtor being the beneficiary of the recovered monies under an Avoidance Application in the first instance, would be entitled to substitute the Resolution Professional and pursue the Avoidance Application. Such an eventuality would be entirely consistent with the scheme of the Code
IV. Venus Recruiters Pvt. Ltd.
29. Per contra, Kapil Sibal, ld. Senior Counsel, appearing on behalf of Respondent No. 1 has submitted, at the outset, that on 14.6.2022, Regulation 38(2)(d) was inserted in the CIRP Regulations, 2016 by virtue of which the present Appeal is infructuous, inasmuch as, the possibility of continuation of proceedings regarding the avoidance transaction is no more possible in respect of Resolution Plans “submitted before 14.06.2022” and the Resolution Plan submitted in the present case is on 28.3.2018. It is his submission that insertion of Regulation 38(2)(d) shows that it was not possible even under the old regime to have allowed the continuation of Avoidance Applications post approval of the Resolution Plan.
30. He also submits that the jurisdiction of the NCLT ceases to exist since Section 60 of the IBC provides that the NCLT is the Adjudicating Authority “in relation to insolvency resolution process and liquidation for corporate persons‖. Therefore, all powers, authority and jurisdiction conferred upon the Ld. Adjudicating Authority have to be construed in the context of either a CIRP Process or Liquidation Process. If there is neither a CIRP Process nor a Liquidation Process, then the Ld. Adjudicating Authority has no jurisdiction.
31. He proceeds to submit that IBC being a law providing for resolution of a corporate debtor in a time bound manner, does not provide for continuation of an avoidance application after conclusion of CIRP. He has relied on Innoventive Industries (supra) wherein the Hon‟ble Supreme Court has held that the raison d’etre of the IBC, taking into account numerous committee reports, expert discussions, Statement of Objects and Reasons and the legislative history, was to emphasize upon the necessity for speedy resolution under the IBC while recording the serious problems under the previous legal framework. Therefore, the wordings of Section 26, when accorded literal interpretation, the phrase “shall not affect the proceedings of the corporate insolvency resolution process” is construed to mean that the CIRP proceedings shall be parallel to the Avoidance proceedings. He states that the Appellants seek to introduce the word “by” and change the phrase to “shall not be affected by the proceedings of the corporate insolvency resolution process”. In his view, this misconceived interpretation alters the entire meaning of section 26 of the IBC since by means of Section 26 of the IBC, the Parliament has retained the focus of the proceedings before the Ld. Adjudicating Authority only to the CIRP process. With the interpretation advanced by the Appellants the focus is shifted to Avoidance Application which was never the intention of the Parliament.
32. He further submits that it has been admitted by the RP itself he became functus officio upon conclusion of CIRP. He has also relied upon various provisions of the IBC to contend that the tenure of the RP cannot be extended beyond CIRP. Attention of this Court was drawn Section 23(1) read with the Proviso which, as argued by Mr. Sibal, demonstrates that the role of the Resolution Professional is confined to: (i) conduct of the CIRP; (ii) managing the operations of the corporate debtor during the CIRP period; and (iii) if a resolution plan has been submitted to the Ld. Adjudicating Authority, then to continue to manage the operations of the corporate debtor until the plan is approved by the Ld. Adjudicating Authority. Further, in terms of Section 30(2)(a) of the IBC, the resolution plan has to necessarily provide for payment of the insolvency resolution process costs. Such costs in terms of the definition of “insolvency resolution process cost” under Section 5(13) of the IBC includes the fee payable to any person acting as a Resolution Professional. This is an indicator of RPs limited role.
33. He proceeds to place reliance upon Section 31(3)(b) of the IBC which states that upon approval of the resolution plan by the Ld. Adjudicating Authority, the RP is bound to forward all records relating to the conduct of the CIRP and the Resolution Plan to the IBBI, which demonstrates that the process culminates upon approval of the resolution plan by the Ld. Adjudicating Authority. Under Section 43(1) of the IBC, an application for avoidance of preferential transactions may only be preferred by a RP or a liquidator. Since RP is functus officio and mandate of Section 43 is that only RP can pursue the application, no other person can be allowed to do so.
34. To conclude his submissions, Mr. Sibal submits that that Sections 43 and 44 of the IBC lay down an exclusive statutory framework wherein, transactions, which cannot be normally avoided by a company under general law, may be avoided to (a) make the Corporate Debtor attractive for the Resolution Applicant to bid; (b) bring back secreted funds to the Committee of Creditors; (c) keep the Corporate Debtor a going concern. He is of the view that in the present case the proceedings achieve neither of the avowed objectives of avoiding a so-called preferential transaction. This is because the Resolution Applicant i.e., Tata Steel Ltd did not make avoidance of the transaction with the Venus the basis of its bid. The Committee of Creditors have already issued a “No dues Certificate” after the receipt of monies from Tata Steel. The Corporate Debtor i.e., Tata Steel BSL Ltd. was always a going concern and the Venus‟ contract did not affect its status.
35. Therefore, applying the provisions of Sections 43 and 44 of the IBC in the context of a Corporate Debtor post resolution amounts to creating a class of companies that stands apart from other going concerns, without any intelligible differentia. Applying such special provisions post the CIRP Process also does not bear nexus with the objects of the IBC, as: (i) it is neither in furtherance of insolvency resolution nor in furtherance of liquidation; and (ii) the value, if any, resulting from the avoidance of preferential transactions would not in any manner enhance realization of dues by the creditors.
Object and purpose of the IBC
36. Before dealing with issues raised before us in the present LPAs, we consider it appropriate to discuss and analyze the object and purpose of the IBC in general and the intent behind the provisions pertaining to avoidable transactions specifically. The Apex Court had the occasion to analyze the IBC in its judgment in the case of Innoventive Industries Ltd (supra), wherein it was observed as under: –
―12. ……The Statement of Objects and Reasons of the Code reads as under:
―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 reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner for maximization 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.
4. The Code seeks to provide for amendments in the Indian Partnership Act, 1932, the Central Excise Act, 1944, Customs Act, 1962, the Income Tax Act, 1961, the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, the Finance Act, 1994, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, the Sick Industrial Companies (Special Provisions) Repeal Act, 2003, the Payment and Settlement Systems Act, 2007, the Limited Liability Partnership Act, 2008, and the Companies Act, 2013.
5. The Code seeks to achieve the above objectives.‖ The Hon‟ble Apex Court further observed: –
“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. As per the data available with the World Bank in 2016, insolvency resolution in India took 4.3 years on an average, which was much higher when compared with the United Kingdom (1 year), USA (1.5 years) and South Africa (2 years). The World Bank‗s Ease of Doing Business Index, 2015, ranked India as country number 135 out of 190 countries on the ease of resolving insolvency based on various indicia.‖
37. Thereafter, in Swiss Ribbons vs. Union of India, (2019) 4 SCC 17 the Hon‟ble Apex Court built upon the jurisprudence laid down Innoventive Industries (supra). It was observed as under: –
“10. The Preamble of the Code states as follows:
“An Act to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization 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 order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto.‖
11. As is discernible, the Preamble gives an insight into what is sought to be achieved by the Code. The Code is first and foremost, a Code for reorganization and insolvency resolution of corporate debtors. Unless such reorganization is effected in a time-bound manner, the value of the assets of such persons will deplete. Therefore, maximization of value of assets of such persons so that they are efficiently run as going concerns is another very important objective of the Code.This, in turn, will promote entrepreneurship as the persons in management of the corporate debtor are removed and replaced by entrepreneurs. When, therefore, a resolution plan takes off and the corporate debtor is brought back into the economic mainstream, it is able to repay its debts, which, in turn, enhances the viability of credit in the hands of banks and financial institutions. Above all, ultimately, the interests of all stakeholders are looked after as the corporate debtor itself becomes a beneficiary of the resolution scheme – workers are paid, the creditors in the long run will be repaid in full, and shareholders/investors are able to maximize their investment. Timely resolution of a corporate debtor who is in the red, by an effective legal framework, would go a long way to support the development of credit markets. Since more investment can be made with funds that have come back into the economy, business then eases up, which leads, overall, to higher economic growth and development of the Indian economy. What is interesting to note is that the Preamble does not, in any manner, refer to liquidation, which is only availed of as a last resort if there is either no resolution plan or the resolution plans submitted are 38 not up to the mark. Even in liquidation, the liquidator can sell the business of the corporate debtor as a going concern. [See ArcelorMittal (supra) at paragraph 83, footnote 3].
12. It can thus be seen that the primary focus of the legislation is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation. The Code is thus a beneficial legislation which puts the corporate debtor back on its feet, not being a mere recovery legislation for creditors. The interests of the corporate debtor have, therefore, been bifurcated and separated from that of its promoters / those who are in management. Thus, the resolution process is not adversarial to the corporate debtor but, in fact, protective of its interests. The moratorium imposed by Section 14 is in the interest of the corporate debtor itself, thereby preserving the assets of the corporate debtor during the resolution process. The timelines within which the resolution process is to take place again protects the corporate debtor‗s assets from further dilution, and also protects all its creditors and workers by seeing that the resolution process goes through as fast as possible so that another management can, through its entrepreneurial skills, resuscitate the corporate debtor to achieve all these ends.‖
(emphasis supplied)
38. It is discernible from the dicta of the Hon‟ble Apex Court in the aforementioned judgments that the purpose and object of the IBC is: –
(i) to consolidate all laws relating to reorganization and insolvency resolution of corporate persons and bring them under a single unified umbrella.
(ii) to undertake the process of resolution in time bound manner with a view to maximize the value of assets of such a corporate person.
(iii) to ensure that the corporate debtor is a going concern, by separating it from its promoters and allowing for its reconstruction by substituting its management with an efficient and entrepreneurial one
(iv) to enhance and improve the availability of credit with lending institutions to promote further economic growth while balancing the interests of all stakeholders in the process.
Scheme of IBC vis-à-vis avoidable transactions
(a) Nature and purpose of provisions regarding avoidable transactions
39. The Hon‟ble Apex Court, has discussed the structure of the IBC in Anuj Jain, Interim Resolution Profession vs. Axis Bank Ltd., (2020) 8 SCC 401. It has been observed as under: –
“16.2. Keeping in view the objectives, discernible from the Preamble as also from the Statement of Objects and Reasons of the Code and the observations of this Court, we may now take an overview of the scheme and structure of the relevant parts of the Code. Part I thereof contains the provisions regarding title, extent, commencement and application of the Code as also defines various expressions used and employed in the Code. Different provisions have come into force on different dates, as permissible under proviso to subsection (3) of Section 1. Part II of the Code deals with insolvency resolution and liquidation for corporate persons. Chapter I of Part II makes provision for its applicability and also defines various expressions used in this Part (Sections 4 and 5). Chapter II of Part II contains the provisions for corporate insolvency resolution process in Sections 6 to 32 whereas Chapter III of this Part II contains the provisions for liquidation process in Sections 33 to 54.
16.3. Though the provisions relating to „preferential transactions and relevant time‟ (in Section 43 of the Code) occur in Chapter III of Part II, relating to liquidation process, but such provisions being for avoidance of certain transactions and having bearing on the resolution process too, by their very nature, equally operate over the corporate insolvency resolution process, and hence, the resolution professional is obligated, by virtue of clause (j) of subsection (2) of Section 25 of the Code, to file application for avoidance of the stated transactions in accordance with Chapter III. That being the position, Section 43 of the Code comes into full effect in CIRP too.‖
(emphasis supplied)
40. While the judgment of the Hon’ble Apex Court in Anuj Jain (supra) primarily expounds upon the concept of preferential transactions, its elements and applicability in terms of the IBC, the Hon’ble Apex Court has also shed light upon the theoretical underpinnings of avoidable transactions as a feature of insolvency laws. It was observed: –
“17.3. Coming now to the corporate personalities, it is elementary that by the very nature and legal implications of incorporation, ordinarily, several individuals and entities are involved in the affairs of a corporate person; and impact of the activities of a corporate person reaches far and wide, with the creditors being one of the important set of stakeholders. If the corporate person is in crisis, where either insolvency resolution is to take place or liquidation is imminent; and the transactions by such corporate person are under scanner, any such transaction, which has an adverse bearing on the financial health of the distressed corporate person or turns the scales in favour of one or a few of its creditors or third parties, at the cost of the other stakeholders, has always been viewed with considerable disfavour.”
(emphasis supplied)
41. In furtherance of the larger object and purpose of the IBC discussed in the paragraphs above, provisions pertaining to various types of avoidable transactions i.e., Sections 43-51 and 66 and 67 were especially made a part of the IBC so that they could be avoided by the RP (during the CIRP) or the liquidator thereafter to protect the interests of the creditors. On account of avoidable transactions undertaken by the erstwhile promoters/management of a corporate debtor, the pool of assets of the corporate debtor stands diminished, becoming detrimental to the successful resolution of the corporate debtor as it does not serve as a lucrative prospect to a Resolution Applicant. Even if the corporate debtor would proceed to liquidation, the diminished pool of assets harms the recovery prospect of creditors directly. Therefore, these provisions, largely endeavor to enhance the pool of assets of the corporate debtor available for either making it a lucrative prospect for a Resolution Applicant or in the event of liquidation, for distribution among creditors. The avoidance of these transactions essentially prevents unjust enrichment of one party at the expense of a creditor.
42. It is pertinent to note that by its very nature, an Avoidance Application may take more time in adjudication especially in cases where multiple parties are highlighted as having possibly entered into transactions with the corporate debtor in forensic audit reports and there may be situations where the third parties including related parties of the corporate debtor may heavily contest such applications. Further, adjudication of such applications requires proper examination of facts as opposed to making mere objective determinations (as is the case with CIRP). It is discernible that an application for avoidance transactions is against the promoters/directors/related parties, however the resolution/liquidation is for the Corporate Debtor. In the Appellants‟ view, Section 26 of the IBC exists as an acknowledgment of the fact that avoidance applications ought to be separated from CIRP.
(b) Import of Section 26
43. At this juncture, it is imperative to advert to Section 26 of the IBC which states as follows: –
“26. Application for avoidance of transactions not to affect proceedings.
The filing of an avoidance application under clause (j) of sub-section (2) of section 25 by the resolution professional shall not affect the proceedings of the corporate insolvency resolution process.‖
44. There is no doubt that the entire mechanism envisaged under the IBC has been envisaged keeping in mind the considerations of timeliness and maximization of value of assets of the corporate debtor and therefore the endeavor, at all costs, should be to ensure resolution of the corporate debtor and the adjudication of avoidance applications simultaneously and as quickly as possible. However, it is apposite to construe Section 26 in furtherance of the object and scheme of the provisions pertaining to avoidable transactions.
45. The nature of avoidance applications clearly indicate that they can survive after CIRP. Section 26 only buttresses this position by clearly demarcating between the scope of proceedings pertaining to resolution on one hand and adjudication of avoidance applications on the other. Such an interpretation finds support in IBBI‟s „Discussion Paper on Corporate Liquidation Process‟ dated 27.04.2019 which states: –
“5.3. Vulnerable Transactions: The Code read with Regulations requiring filing of applications in respect of vulnerable transactions. The BLRC recognises recovery from vulnerable transaction as an additional source of value during liquidation. However, such applications meet tough resistance and litigation for long period. Section 26 of the Code therefore clarifies that the filing of an avoidance application under section 25 by the RP shall not affect the proceedings of the CIRP. Similarly, the liquidation proceeding, or dissolution of the CD should not be held up even if the matters relating to avoidance transactions are yet to be disposed of. If any money is recovered after dissolution of the CD, the same may be distributed as per waterfall in section 53 of the Code and the excess recoveries and unclaimed amounts may be credited to the Insolvency and Bankruptcy Fund‖.
While such a discussion paper is not binding in nature, as has been vehemently contended on behalf of Respondent No. 1, it sheds light on the import and purpose of Section 26 from a legislative perspective and provides constructive guidance on the treatment of avoidance applications after conclusion of CIRP.
46. It has also been brought to our attention that in the interregnum, the ILC has published a Report in May, 2022 wherein it has made certain salient observations and recommendations on the issue of survival of avoidance applications after CIRP. The relevant excerpts of the same are reproduced hereunder: –
“2.19. Independence of proceedings for avoidance of transactions and improper trading It was brought to the notice of the Committee that there is confusion regarding whether proceedings for avoidance of transactions and improper trading can continue after approval of a resolution plan in CIRP. This comes in the wake of a recent decision of the Delhi High Court in Venus Recruiters Private Limited v. Union of India 21 wherein the Court inter alia opined that the applications in respect of avoidable transactions do not survive beyond the conclusion of the CIRP and once the CIRP itself comes to an end, an application for avoidance of transactions cannot be adjudicated.
2.20. The Code does not provide a deadline for the initiation of proceedings for avoidance of transactions and improper trading (in the context of both CIRP and liquidation). Once filed, the Code also does not prescribe a time limit for conclusion of such proceedings. The CIRP Regulations, however, provide that the resolution professional shall determine if the corporate debtor has entered into any avoidable transactions by the 115th day from the insolvency commencement date and intimate the IBBI of the same. It also requires that, by the 135th day from the insolvency commencement date, the resolution professional shall apply to the Adjudicating Authority for appropriate relief. Given that these timelines are directory, this Committee had in its 2020 Report noted that ―prescriptive timelines for initiating proceedings against avoidable transactions and improper trading during the CIRP or liquidation proceedings may not be necessary.‖
2.21 The Committee deliberated whether proceedings for avoidance of transactions and improper trading should be independent of the CIRP proceedings. In other words, if the proceedings for avoidance of transactions and improper trading should be permitted to go beyond the conclusion of the CIRP proceedings. The Committee discussed that hypothetically, ifproceedings for avoidance of transactions and improper trading were not allowed to continue after the conclusion of a CIRP proceeding, it may lead to one of two scenarios –
