The recent judgement by the Delhi High Court in the case of Tata Steel BSL Ltd. v. Venus Recruiter Pvt. Ltd.[1] sparked fire by overturning the long-established position rekindled in Venus Recruiters v. Union of India[2]. In the latest judgement, the court held that avoidance proceeding can survive beyond the conclusion of Corporate Insolvency Resolution Process(‘CIRP’). While deciding the case, the court averted the law in the impugned judgement of Venus Recruiters’ v. Union of India and relied on the Insolvency Law Committee Report published as latest as June, 2022 to understand the scheme of Insolvency and Bankruptcy Code(the ‘Code’), 2016. The court gave objective interpretation to various provisions of the Code in such a way that it only gave prominence to some of the objectives in complete disregard to other objectives of the code.
In light of the same, the author considers it necessary to analyse the judgement and points out the place where the court misinterpreted the provisions, and thereby faltered in deciding the issues allied to deciding the case. First, the article highlights how the court contradicted itself in deciding the jurisdiction of adjudicating authority in this case. Then, it is of utmost prominence to bring it to attention how the court adopted wrong reasoning in holding the authority of Insolvency Professional (‘IP’) beyond the completion of CIRP. Furthermore, the court classified one set of corporate bodies from other upon which separate requirement under the Code in violation of the principle of intelligible differentia. At last, the article would address how the decision of the court on various issues is not in conformity with decided objectives of the Code.
How Independent is CIRP from Avoidance Proceeding?
At several instances, the court assessed the scheme of the Code and thereafter observed that avoidance proceeding and CIRP are a separate set of proceedings. And therefore, the court held the role of IP in relation to CIRP is altogether different from the role of IP in relation avoidance proceeding. Additionally, the court observed that the applicability of the sections under the Code in context of Insolvency proceeding cannot be extended to Avoidance Proceeding. The position of the court can be reflected from the observation made by a judge in the course of deciding the case as mentioned below:
“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 there solution process need not await the outcome of the exercise.”
On the contrary, while interpreting S. 60(5)c of the Code, the court observed that the avoidance proceeding would come within the wider import of the phrase “in relation to” or “arising out of insolvency proceeding” in the furtherance of deciding the jurisdiction of National Company Law Tribunal to adjudicate such petitions. It is apparent that the court contradicted itself in the same judgement.
The Insolvency Law Committee in its May, 2022 Report observed as reproduced hereunder:
“2.23 The Committee concurred with its earlier conclusion. It agreed that the Legislature’s intent behind Section 26 was to make proceedings for avoidable transactions independent of the CIRP proceedings.”
The report buttresses the point that the CIRP is independent and different from Avoidance Proceeding and the same can be taken as a legislative intent. Hence, in the absence of the appropriate explanation by the court in adopting this interpretation, the court faltered on the logic to interpret the provision of the Code while affirming the jurisdiction of NCLT to decide the application relating to the Avoidance Proceeding after the completion of CIRP.
Insolvency Professional’s authority to pursue avoidance proceeding beyond CIRP
Here, the High Court held the IP can act post completion of CIRP since the insolvency proceeding is independent from avoidance proceeding. Further the court clarified, the applicable laws upon IP with respect to Avoidance Proceeding does not bar him to act beyond the CIRP. However, there is neither express provision to this effect available in the Code and the regulations allied thereto nor the precedential law on this. Furthermore, in Venus Recruiters’ v. Union of India, the Delhi High Court held that the approval of questionable transaction by IP cannot be an unending process and has to be in conformity with timelines as mentioned in CIRP Regulations. Furthermore, the court clarified that the role of IP commences from the commencement of CIRP and ends with the completion of CIRP and if such role is continued it would result in the interference with the new management. The court held basis oft-cited case of the apex court in Committee of Creditors of Essar Steel India Ltd. through Authorised Signatory v. Satish Kumar Gupta wherein the court affirmed that the role of the IP is limited. Further, the court limited the authority of the IP to not act beyond the completion of Insolvency Proceeding.[3] Here, the High Court, in complete disregard of the precedent of the apex court, held that the IP can pursue avoidance proceeding after CIRP even if its office gets functus officio upon the conclusion of CIRP. In light of the divergent position of the courts in various cases, the legal position on this is ambiguous and unclear.
Interpretation of Code by Court is not in conformity with objective of Code
As mentioned under Section 43 and 44 of the Code, the avoidable transactions 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. In this case, while the avoidance application came before NCLT for its approval, the Committee of Creditors have already issued “No Due” after Tata Steel(Resolution Applicant) paid to it the agreed sum under the Resolution Application. Furthermore, applying S. 43 and 44 of the code upon the conclusion of Insolvency Proceeding amounts to creating different class of companies that are separate from other going concern without any intelligible differentia. Applying such provision upon the conclusion of CIRP does not bear any reasonable with the objectives of the Code that is, among others, to enhance the realization of dues by the creditors post completion of the proceeding related to preferential transaction. Moreover, here, the Resolution Application was approved by the Adjudicating Authority before the approval of the avoidable transaction was about to be obtained from the NCLT. Therefore, it is not serving the purpose of making the Corporate Debtor attractive for the Resolution Applicant to bid.
Conclusion
Upon dealing with each of the issues associated with the judgement in the required depth, the judgement erred on various dimensions. The court observed that the applicability of the sections under the Code in context of Insolvency proceeding cannot be extended to Avoidance Proceeding. On the contrary, while interpreting S. 60(5)c of the Code, the court observed that the avoidance proceeding would come within the wider import of the phrase “in relation to” or “arising out of insolvency proceeding” in the furtherance of deciding the jurisdiction of National Company Law Tribunal to adjudicate such petitions. The High Court held the IP can act after the completion of CIRP since the insolvency proceeding is independent from avoidance proceeding. Further the court clarified, the applicable laws upon IP with respect to Avoidance Proceeding does not bar him to act beyond the CIRP. However, there is no express provision to this effect available in the Code and the regulations allied thereto. Hence, the legal position on this is unclear. The Delhi High Court erred in constructing the authority of IP beyond CIRP. As already discussed, the court didn’t took into account some of the objectives of the Code in deciding the case.
[1] Tata Steel BSL Ltd. v. Venus Recruiter (P) Ltd., 2023 SCC OnLine Del 155
[2] Venus Recruiter (P) Ltd. v. Union of India, 2020 SCC OnLine Del 1984
[3] Essar Steel India Ltd. Committee of Creditors v. Satish Kumar Gupta, (2020) 8 SCC 531
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