Appellate Tribunal rules against Resolution Applicant appropriating recoveries from avoidance applications under Insolvency Code

The Appellate Tribunal concluded that the provision in the Resolution Plan allowing the Resolution Applicant to appropriate recoveries from avoidance applications filed under Section 66 of the Insolvency and Bankruptcy Code was deemed illegal. The Tribunal held that such recoveries should benefit the creditors of the Corporate Debtor and not the Resolution Applicant. Consequently, the Tribunal set aside the term in the Resolution Plan permitting the Successful Resolution Applicant to appropriate such recoveries and directed reconsideration of the Resolution Plan by the Committee of Creditors on this issue.

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Issues Involved:
1. Whether the stipulation in DHFL's Resolution Plan of recoveries from avoidance transactions enuring to the benefit of the Resolution Applicant amounted to illegality.
2. Whether the action of approving the resolution plan to give the benefit of avoidance transactions to the Resolution Applicant was within the domain of the commercial wisdom of the CoC.
3. If it was illegality, whether it could be saved by any majority strength within the CoC voting in favor of the Resolution Plan.
4. Whether the Successful Resolution Applicant can appropriate recoveries from avoidance applications filed under Section 66 of the Insolvency and Bankruptcy Code, 2016.

Detailed Analysis:

1. Whether the stipulation in DHFL's Resolution Plan of recoveries from avoidance transactions enuring to the benefit of the Resolution Applicant amounted to illegality:

The Appellant argued that the avoidance applications are meant to benefit the creditors of the Corporate Debtor, not the Corporate Debtor in its new avatar post-approval of the Resolution Plan. The Appellant cited the judgment of the Delhi High Court in the case of Venus Recruiters Private Limited, which held that avoidance applications were meant to benefit the creditors of the Corporate Debtor, not for the Corporate Debtor in its new avatar or for the benefit of the Resolution Applicant after the resolution was complete.

2. Whether the action of approving the resolution plan to give the benefit of avoidance transactions to the Resolution Applicant was within the domain of the commercial wisdom of the CoC:

The Respondents contended that the treatment of recoveries from avoidance applications falls within the domain of the commercial wisdom of the CoC. They argued that the CoC, in its commercial wisdom, decided to let the Resolution Applicant take the benefits of the proceeds arising out of avoidance applications in exchange for a higher upfront amount. The Respondents relied on the principle that the commercial wisdom of the CoC is paramount and not open to judicial review, as laid down in several judgments by the Hon'ble Supreme Court.

3. If it was illegality, whether it could be saved by any majority strength within the CoC voting in favor of the Resolution Plan:

The Appellant argued that a Resolution Plan, which is otherwise illegal or contains terms contrary to law, cannot be countenanced based merely on the strength of the majority that votes for such a plan. The plea of estoppel is not available to the Respondents on the ground that the Appellant voted in favor of the Resolution Plan. The Appellant relied on the principle that there cannot be any estoppel against the law.

4. Whether the Successful Resolution Applicant can appropriate recoveries from avoidance applications filed under Section 66 of the Insolvency and Bankruptcy Code, 2016:

The Appellant contended that the benefit of recoveries from avoidance transactions should enure to the creditors of the Corporate Debtor and not the Resolution Applicant. The Appellant relied on various authoritative external aids, including the UNCITRAL Legislative Guide on Insolvency Law, the Report of the Bankruptcy Law Reforms Committee, and the Insolvency Law Committee Reports, which support the principle that recoveries from avoidance transactions should benefit the creditors.

Conclusion:

The Appellate Tribunal concluded that the stipulation in the Resolution Plan allowing the Resolution Applicant to appropriate recoveries from avoidance applications filed under Section 66 of the Code amounted to illegality. The Tribunal held that such recoveries should benefit the creditors of the Corporate Debtor and not the Resolution Applicant. The Tribunal set aside the term in the Resolution Plan that permitted the Successful Resolution Applicant to appropriate recoveries from avoidance applications and directed that the Resolution Plan be sent back to the CoC for reconsideration on this aspect.

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