AI Drafter 
TaxTMI 
TaxTMI 
2020 (11) TMI 850
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....nafter, 'NCLT') in C.A.No.284(PB)/2018 in C.P.No. IB(201)PB/2017 as void and non-est. 3. The question that has arisen is whether under the Insolvency and Bankruptcy Code, 2016 (hereinafter, 'IBC'), an application filed under Section 43 for avoidance of preferential transactions can survive beyond the conclusion of the resolution process and the role of the RP in filing/pursuing such applications. The jurisdiction of the NCLT to hear applications under Section 43 after the approval of the Resolution Plan, is thus under challenge. Brief Background 4. The brief background of this case is that Respondent No. 3 i.e. M/s Bhushan Steel Ltd. (now known as Tata Steel BSL Ltd.) (hereinafter, 'Corporate Debtor') was the subject of Corporate Insolvency Resolution Process (hereinafter, 'CIRP') before the NCLT, initiated by the State Bank of India by a petition being C.P. No.(IB) - 201(PB)/2017 titled State Bank of India v. Bhushan Steel Ltd filed on 26th July, 2017. 5. On the same date when the CIRP was initiated, the NCLT appointed Mr. Vijay Kumar Iyer i.e. Respondent No. 4 as an Interim Resolution Professional (hereinafter, 'IRP') for the Corporate Debtor. A public announcement wa....
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....a Steel Ltd., vide a detailed judgment dated 15th May, 2018. The said Resolution Plan had found favour with the CoC and accordingly, the NCLT passed various orders and directions on the said date. Insofar as the pending avoidance application in respect of the suspect transactions was concerned, there was no separate order passed by the NCLT. The final order contained one line i.e. "all other applications are also disposed off". In effect, therefore, the application filed by the RP in relation to the suspect transactions was neither heard nor decided on merits. 11. On 18th May, 2018, the Resolution Plan was finally closed and the new management took over the Corporate Debtor. On 24th July, 2018, the NCLT passed an order in the avoidance application, C.A. No. 284/2018, which was filed prior to the approval of the Resolution Plan to the following effect: "CA-284(PB)/2018 CA-284(PB)/2018 has been filed by RP on 09.04.2018 prior to the approval of the Resolution Plan. Let notice be issued to the entities and the company as per the list provided by the Ld. for the R.P. Let the reply if any be filed before the next date of hearing. Let all the pending applica....
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....ing as the RP. It is submitted that this indicates that the RP has no role beyond the CIRP process itself. 16. It is further submitted that there are strict timelines provided under the IBC. Reliance is placed on the Preamble of IBC which emphasizes that the purpose of the Code is to conclude the insolvency proceedings in a time bound manner. Reliance is also placed on the judgement of Innoventive Industries Ltd. v. ICICI Bank & Anr. [(2018) 1 SCC 407], passed by the Supreme Court. The Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (hereinafter, "2016 CIRP Regulations") are referred to, to argue that there are specific timelines which are prescribed for the purpose of the RP to determine whether any transaction was preferential, undervalued, fraudulent or extortionate and also to file an application before the NCLT, both within the prescribed 180-day period. Accordingly, it is submitted that avoidance of any such transactions ought to be undertaken before conclusion of the CIRP. The said preferential transactions would also form part of the Resolution Plan, which is submitted to the CoC. 17. Ld. Sr. counsel sub....
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....ct of any new transaction that the new management is overviewing. 22. Ld. Sr. counsel submits that once the Resolution Plan is approved, the CoC itself is bound up, as all the dues of CoC are paid and a No Dues Certificate is submitted. Once the No Dues Certificate is submitted, no further proceedings can be taken up by CoC. The CoC being a final arbiter of the Resolution Plan and the same being a commercial decision, if the CoC chooses not to pursue any particular transaction, the RP ought not to be allowed to pursue the same. 23. Mr. V. P. Singh, ld. counsel appearing for Respondent No.3 i.e. Tata Steel BSL Ltd. (formerly Bhushan Steel Ltd./Corporate Debtor) submits that the Petitioner is related to the erstwhile promoters of the Company. He submits that the transaction in respect of which the present petition had been filed is not the only transaction. There were various suspect transactions involving the erstwhile Corporate Debtor qua which the avoidance application was filed and other entities have raised their issues before the NCLT itself. He further submits that despite receiving the notice in the avoidance proceedings in April, 2018, the Petitioner has approached this C....
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....re. In the said case, while dealing with the constitutional validity of Section 5(8)(f) of the IBC, as amended in 2018, the Supreme Court held that home buyers were to be considered financial creditors as the IBC ought to be interpreted in a manner, such that the object of the statute is achieved. 29. Similarly, reliance is placed on the decision in Committee of Creditors of Essar Steel India Ltd. through Authorised Signatory v. Satish Kumar Gupta [Civil Appeal No. 8766-67 of 2019, dated 15th November, 2019 (SC)], wherein the Supreme Court recently held that although timelines would be an important factor in the CIRP proceedings, the word 'mandatorily' was struck down from Section 12 as being violative of Article 19(1)(g) of the Constitution. The Court, therefore, read down the provision to interpret it in line with the object of the statute. 30. Ld. counsel submits that there were two instances of vulnerable transactions entered into by the erstwhile promoters of Respondent No.3 involving an onerous employment contract and an onerous rent contract, wherein the premises of Vistrat Real Estate Pvt. Ltd. ("Vistrat") were shown as the office space of Respondent No.3, with extrem....
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....applications i.e. the Resolution Professional, the Liquidator and the Creditors. He submits that the question is whether the NCLT becomes functus officio after the Resolution Plan is accepted. There is no doubt that the RP has to file an application in respect of suspect transactions before the Resolution Plan is approved but it is not necessary that the same has to be decided prior to the approval of the Resolution Plan. The RP, after arriving at a conclusion that a particular transaction is a preferential transaction has to approach the NCLT. Such transactions can be declared as void and the NCLT can reverse the effect of the transaction, meaning thereby that any monetary benefit given to any related party can be reversed. If the RP or the Liquidator does not declare the transaction as undervalued, any member/creditor can approach the NCLT. 35. He further submits that under Section 26 of the IBC, there is no fixed time limit for deciding an avoidance application. In this case, the allegation is that the Petitioner has been paid 10% extra for supply of manpower, which has caused loss to the company and in effect, there was diversion of the company's funds. Ld. Sr. counsel submi....
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....mits that the applications which were disposed of on 15th May, 2018 were only those which were related to the Resolution Plan itself and not the avoidance application in respect of preferential transactions. He submits that since the avoidance application was taken up on 24th July, 2018 and notice was issued itself shows that the NCLT was conscious of the pending application in respect of preferential transactions. 39. His further submission is that in respect of such avoidance applications, there are various options which can be exercised once they are adjudicated by the NCLT i.e. under Section 44 of IBC, if the transactions are held to be preferential, benefits of the transaction can be given either to the erstwhile Corporate Debtor itself or to the Financial Creditor. It can also be shared in part by the new management and the creditors. He submitted that the wisdom of the CoC is sacrosanct on the said issue and in the present case, it has been dealt with in the final Resolution Plan which was approved by the NCLT. 40. He further submits that the said Resolution Plan also deals with other statutory amounts which may be received by the Company or any other loans and other rece....
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....solution Professionals ("RPs"). Under the IBC a CIRP can be initiated under Sections 6 to 11 by various persons including financial creditors, operational creditors, and corporate applicants. Section 11 provides as to who is not entitled to initiate a CIRP. The time limit for completion of the resolution process is contained in Section 12. A perusal of Section 12 shows that the CIRP has to be completed within 180 days from the date of admission of the application and any application made to the Adjudicating Authority/NCLT for extension of the same has to be approved by the CoC by a vote of 66% of the voting shares. If such an application for extension is received, the NCLT can extend the period by a further period of not exceeding ninety days. Only one extension is permissible, as per the first proviso to Section 12(3) of the IBC. A mandatory outer limit of 330 days from the insolvency commencement date is prescribed for the completion of the CIRP under the second proviso to Section 12(3) w.e.f. 16th August 2019. 47. Upon an application for initiation of CIRP being admitted, the NCLT declares a moratorium under Sections 13 and 14 of the IBC. It also makes a public announcement o....
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.... If the CoC approves the Resolution Plan, the same is submitted by the RP before the NCLT for its approval. 51. Under Section 31, if the NCLT is satisfied with the Resolution Plan, it shall approve the same which shall be binding on the Corporate Debtor, all its employees, members, creditors, Central and State Governments, including all local authorities to whom dues may be owed, and all other stakeholders and guarantors. The NCLT has to also satisfy itself that the Resolution Plan has sufficient provisions for its implementation. Once a Resolution Plan is approved, the moratorium order under Section 14 shall cease to have effect and the RP shall forward all the records relating to the CIRP and the Resolution Plan to the Board to be recorded on its database. Thus, the role of a RP comes to an end here. (b) Applications for Avoidance Transactions 52. The IBC contemplates various transactions which could be found to be objectionable/unacceptable and may require to be either reversed or compensated for, in some manner in order to ensure that the insolvency/liquidation process is fair to the creditors. Such transactions are of various categories namely - * prefe....
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....est in property acquired by the corporate debtor to the extent that - (i) such security interest secures new value and was given at the time of or after the signing of a security agreement that contains a description of such property as security interest, and was used by corporate debtor to acquire such property; and (ii) such transfer was registered with an information utility on or before thirty days after the corporate debtor receives possession of such property: Provided that any transfer made in pursuance of the order of a court shall not, preclude such transfer to be deemed as giving of preference by the corporate debtor. Explanation. - For the purpose of sub-section (3) of this section, "new value" means money or its worth in goods, services, or new credit, or release by the transferee of property previously transferred to such transferee in a transaction that is neither void nor voidable by the liquidator or the resolution professional under this Code, including proceeds of such property, but does not include a financial debt or operational debt substituted for existing financial debt or operational debt. (4) A preference shall be deemed ....
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.... debtor or any interest derived from such interest and was acquired in good faith and for value; (b) require a person, who received a benefit from the preferential transaction in good faith and for value to pay a sum to the liquidator or the resolution professional. Explanation-I: For the purpose of this section, it is clarified that where a person, who has acquired an interest in property from another person other than the corporate debtor, or who has received a benefit from the preference or such another person to whom the corporate debtor gave the preference, - (i) had sufficient information of the initiation or commencement of insolvency resolution process of the corporate debtor; (ii) is a related party, it shall be presumed that the interest was acquired, or the benefit was received otherwise than in good faith unless the contrary is shown. Explanation-II. - A person shall be deemed to have sufficient information or opportunity to avail such information if a public announcement regarding the corporate insolvency resolution process has been made under section 13." 54. Similar is the situation in respect of undervalued tr....
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....(j), 43 to 51 and 66 of IBC for avoidance of this, as well as, other suspect transactions on 9th April, 2018 before the NCLT. 60. The submissions before the NCLT on the Resolution Plan commenced on 5th April, 2018 and judgment was reserved by the NCLT on 11th April, 2018. Thus, it was only two days before the judgment was being reserved by the NCLT that the avoidance application was filed by the RP. 61. On 15th May, 2018, the NCLT passed the final order approving the Resolution Plan and closing was achieved on 18th May, 2018 i.e. the 297th day after initiation of the CIRP. 62. The avoidance application filed on 9th April 2018, was taken up for the first time on 24th July, 2018, by the NCLT. A fresh memo of parties was filed in the application by the counsel claiming to be appointed by the 'Former RP' on 14th August, 2018. Notice was issued in the avoidance application to the non-applicants. The Petitioner was thereafter impleaded and notice was issued to it on 25th October, 2018, upon an application by the RP. The said order, impleading the Petitioner, is challenged before this Court, on the ground that the entire proceedings are without jurisdiction. 63. This Court had....
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....olution Plan. However, it merely had one sentence at the end stating that "all other applications are also disposed of". Thus, the avoidance application being C.A. No. 284(PB)/2018 was not separately considered or ruled on by the NCLT. 67. The first preliminary objection taken by the Respondents is that any order passed by the NCLT under Section 60 and Section 61 is appealable to the NCLAT. Thus, this Court ought not to entertain this writ petition due to an existence of an alternate remedy. 68. There is no doubt that as per 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". In this case, the issue is whether the proceedings in question were in relation to insolvency resolution or not. The insolvency resolution process had already come to an end with the approval of the Resolution Plan by the NCLT on 15th May, 2018. The NCLT chose to exercise jurisdiction post the approval of the Resolution Plan. Under the Scheme of the IBC, as set out above, the jurisdiction of the NCLT is limited to insolvency resolution and liquidation. After....
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....ion 35A, as amended with effect from 3rd July, 2018, a specific timeline has been provided, by which the RP has to form an opinion if the Corporate Debtor has been subjected to any of the objectionable transactions. The time limit prescribed earlier was 105 days from the insolvency commencement date, which has now been reduced to the 75th day from the insolvency commencement date. However, what is significant is the fact that under Regulation 39, the RP has to submit, along with the Resolution Plans, details of all the objectionable transactions including preferential transactions. Regulation 35A and Regulation 39(2) are set out below: "Regulation: 35A. Preferential and other transactions. (1) On or before the seventy-fifth day of the insolvency commencement date, the resolution professional shall form an opinion whether the corporate debtor has been subjected to any transaction covered under sections 43, 45, 50 or 66. (2) Where the resolution professional is of the opinion that the corporate debtor has been subjected to any transactions covered under sections 43, 45, 50 or 66, he shall make a determination on or before the one hundred and fifteenth....
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....P is finite in nature. He or she cannot continue to act on behalf of the Corporate Debtor once the Plan is approved and the new management takes over. To continue a RP indefinitely even beyond the approval of the Resolution Plan would be contrary to the purpose and intent behind appointment of a RP. The Resolution Professional (RP), as the name itself suggests has to be a person who would enable the resolution. The role of the RP is not adjudicatory but administrative 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. This is however subject to any clause in the Resolution Plan to the contrary, permitting the RP to function for any specific purpose beyond the approval of the Resolution Plan. In the present case, no such clause has been shown to exist. 75. The Supreme Court of India in Committee Of Creditors Of Essar (supra) has held that the detailed provisions of the IBC read with the 2016 Regulations make it clear that the RP is a person who is to manage the affairs of the Corporate Debtor as a going concern from the stage of admission of an application under S....
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....ution professional under sub-sections (4) of section 22, the interim resolution professional shall provide all the information, documents and records pertaining to the corporate debtor in his possession and knowledge to the resolution professional." 77. There is a START line and FINISH line for the Resolution process. Section 23 clearly stipulates that the role of the RP is to `manage' the affairs of the Corporate Debtor `during' the resolution process and NOT thereafter. In fact, until the enactment of the proviso to Section 23, which was introduced with effect from 28th December, 2019, the RP's mandate concluded with the CIRP. The proviso introduced, firstly in 2018 and thereafter in 2020, merely extended the mandate of the RP till the approval of the Resolution Plan under Section 31(1) or appointment of liquidator under Section 34. This itself makes it amply clear that the RP's authority is limited in nature and in any event, cannot extend beyond the order passed under Section 31. Thus, there is an outer limit for the functioning of the RP under the proviso to Section 23(1). The continuation of a RP or filing of an application for the purpose of prosecuting an avoidance appli....
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....d reliance on Form H of the CIRP Regulations, which is filed by the RP at the time of submitting the Resolution Plan to the NCLT. It is the submission of ld. CGSC that the avoidance applications could be pending at the stage when the RP files the Plan. He relies on the language in point no. 15 in Form H i.e. the 'Compliance Certificate' which reads as under: "15. Provide details of section 66 or avoidance application filed/ pending. SL. No Type of Transaction Date of filing with Adjudicating Authority Date of Order of the Authority Brief of the Order 1 Preferential transactions under section 43 2 Undervalued transactions under section 45 3 Extortionate credit transactions under section 50 4 Fraudulent transactions under section 66 82. Though at first blush, Mr. Ahluwalia's submission may appear attractive, a closer analysis reveals that Form H seeks to achieve what is mandated in the Regulations. Regulation 39 requires details of the objectionable transactions to be placed by the RP before the NCLT. Form H is m....
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....lution Applicant ought not to be permitted to file an avoidance application and the crux of this recommendation would, in effect, mean that the benefit for any of the avoidance applications cannot be given to the Resolution Applicant. However, a closer look at the ILC Report shows that as per Clause 2.4 the successful Resolution Applicant cannot be permitted to file such avoidance applications, as the same was not factored into the bid. The relevant extract reads as under: "2.4. The Committee also considered if the successful resolution applicant should be permitted to file such applications. However, it was agreed that this would possibly result in the resolution applicant being entitled to a return that was not factored in at the time of submitting their bid. Therefore, the Committee decided that the resolution applicant should not be permitted to file applications against improper trading or applications to avoid transactions" 86. Thus, the Resolution Applicant whose Resolution Plan is approved itself cannot file an avoidance application. The purpose is clear from this itself i.e., that the avoidance applications are neither for the benefit of the Resolution Applican....