2021 (5) TMI 322 - Tri - Insolvency and Bankruptcy

Dismissal of Application Against Former Directors for Insolvency Code Violations due to Procedural Failings

The Tribunal dismissed the application seeking orders on former Directors for alleged preferential, undervalued, and fraudulent transactions under the ... Avoidable transaction - Preferential transaction - Undervalued transaction - Fraudulent transaction - Lookback period for avoidance transactions - Regulation 35A timeline and independent determination by the Resolution Professional - Prohibition on filing avoidance applications after approval of the resolution plan - Limited role of the Committee of Creditors in avoidance determinationsLookback period for avoidance transactions - Regulation 35A timeline and independent determination by the Resolution Professional - Whether the Resolution Professional complied with the temporal and procedural requirements for filing avoidance applications under the Code and regulation 35A of the CIRP Regulations. - HELD THAT: - The Tribunal held that the applicant failed to specify dates of the alleged avoidable transactions and therefore the court could not determine whether the transactions fell within the statutory lookback periods applicable to related and non-related parties. The Tribunal noted the temporal sequence required by regulation 35A: the RP must form an opinion within 75 days of CIRP commencement, make a determination within 115 days of forming that opinion, and file an application within 135 days of the opinion. In this case CIRP commenced on 04.10.2019, the RP was required to form an opinion on or before 18.12.2019 and make the determination by 27.01.2020, with the application due by 16.02.2020. The present application dated 05.11.2020 was filed 398 days after CIRP initiation without explanation; further, the RP had not recorded any independent opinion or determination under regulation 35A and impermissibly relied on the transactional auditor's report without making the requisite determination himself. For these reasons the application did not comply with the statutory timelines and procedural mandate and could not be entertained. [Paras 14, 15, 16, 23]Application failed for non-compliance with lookback requirements and the timelines and independent-determination procedure mandated by regulation 35A; the RP's reliance on the auditor's report without forming the prescribed opinion and determination invalidated the application.Prohibition on filing avoidance applications after approval of the resolution plan - Whether an RP may file and maintain an avoidance application after the approval of the resolution plan and completion of the CIRP. - HELD THAT: - Relying on the reasoning in Venus Recruiters Private Limited v. Union of India & others, the Tribunal observed that the statutory scheme and regulation 35A envisage a finite timeframe for detection and prosecution of avoidance transactions during the CIRP. The Tribunal accepted that the purpose of avoidance applications is to benefit creditors during the resolution process and that this purpose is not served once the resolution plan is approved. The role of the RP ends with the order approving the resolution plan and cannot be resurrected to prosecute avoidance claims thereafter. Given that the present application was filed after the resolution plan had been considered and the order approving the plan was reserved, the Tribunal held that the application could not be maintained. [Paras 18, 19, 20, 21, 25]Filing and prosecution of the avoidance application after approval (or after the resolution plan had been placed for orders) is impermissible; the application filed post-approval does not survive the CIRP and is not maintainable.Limited role of the Committee of Creditors in avoidance determinations - Regulation 35A timeline and independent determination by the Resolution Professional - Whether the Committee of Creditors can analyze transactional-auditor reports and influence the RP's independent determination under regulation 35A. - HELD THAT: - The Tribunal held that regulation 35A(2) requires the RP to make an independent determination on the basis of the transactional auditor's report and that the CoC has no role in analyzing or deciding whether transactions are avoidable. The CoC's role is confined to approving the appointment of the auditor and fixing the fee; permitting the CoC to analyse transactional findings would amount to allowing an interested creditor to influence the RP's independent statutory function. Consequently, placing the transactional auditor's report for discussion before the CoC and relying on such discussion in lieu of the RP's own determination was improper. [Paras 14, 24]The CoC cannot substitute for or influence the RP's independent determination under regulation 35A; the RP must form and record his own opinion and determination based on the auditor's report.Final Conclusion: The Tribunal dismissed IA (IB) No. 1221/KB/2020 as devoid of merits on grounds of failure to specify transaction dates and comply with statutory lookback and regulation 35A timelines, absence of the RP's independent opinion and determination, and impermissible filing after the resolution plan was approved; additionally, the CoC was held to have no role in making the RP's statutory determination. Issues:Application for alleged preferential, undervalued, and fraudulent transactions under the Insolvency and Bankruptcy Code, 2016.Detailed Analysis:1. Alleged Transactions and Application Filing:The application was filed by the Resolution Professional (RP) of a Corporate Debtor seeking orders on former Directors for specified transactions. The RP submitted a forensic audit report identifying preferential, undervalued, and fraudulent transactions. However, the Respondents argued that the application was time-barred, lacking specific transaction dates, and filed after the resolution plan approval.2. Compliance with Code and Regulations:The Tribunal analyzed sections 43 and 46 of the Code, emphasizing the need for adherence to timelines under regulation 35A of the CIRP Regulations. The RP failed to form an opinion on avoidable transactions within the stipulated period, leading to a delayed application without proper grounds for challenging the transactions.3. Legal Precedent and Role of RP:Referring to a Delhi High Court judgment, the Tribunal highlighted that RP's role ends after resolution plan approval. The RP cannot file avoidance applications indefinitely post-approval. The judgment emphasized that the RP's actions should not extend beyond the resolution plan approval, aligning with the legislative intent of the IBC.4. Inherent Errors in the Application:The Tribunal identified four major errors in the application, including non-compliance with Code sections, regulatory timelines, lack of RP's determination on avoidable transactions, and filing post-resolution plan approval. It emphasized the independent nature of RP's determinations and the limited role of the Committee of Creditors (CoC) in such matters.5. Conclusion and Dismissal:Based on the analysis and legal principles, the Tribunal dismissed the application, citing the lack of merit and adherence to statutory requirements. It concluded that the application was filed to avoid IBBI scrutiny, highlighting the need for proper compliance with Code provisions and regulations. The order was communicated to relevant parties and authorities for further action.This detailed analysis of the judgment provides insights into the legal intricacies surrounding alleged transactions under the Insolvency and Bankruptcy framework, emphasizing the importance of procedural compliance and RP's role limitations post-resolution plan approval.