The Delhi High Court recently ruled in a case that the timelines given under Regulation 35A of the ( Insolvency Resolution Process for Corporate Persons ) Regulations, 2016 ( IBBI ) for applying avoidance applications are not mandatory, but simply directory. The ruling was held in an appeal filed by the appellant/assessee TATA Steel BSL Limited before the Delhi High Court, aggrieved by the lower authority’s judgment.
The background of the case is that Bhushan Steel Limited defaulted on its credit facilities, leading the State Bank of India (SBI) to file a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) before the National Company Law Tribunal (NCLT) for the initiation of the Corporate Insolvency Resolution Process (CIRP) against the assessee.
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On 26th July 2017, the NCLT admitted Bhushan Steel Ltd into CIRP and appointed Mr. Vijay Kumar Iyer as the Interim Resolution Professional (IRP).
Following this, a public announcement was made inviting claims from prospective resolution applicants, and a Committee of Creditors (CoC) was constituted.
The CoC convened on 24th August 2017 and confirmed Mr. Iyer as the Resolution Professional (RP).
On 20th March 2018, the CoC approved the resolution plan proposed by the TATA Steel Ltd. Subsequently, the RP filed this resolution plan before the NCLT on 28th March 2018 for approval.
On 3rd April 2018, Deloitte, the forensic auditor of the Bhushan Steel Ltd, submitted a forensic audit report to the RP.
The report highlighted several suspicious transactions, including one involving Venus Recruiters Pvt. Ltd. (Respondent No. 1 in the appeal). The transactions were flagged as potentially preferential, which means they might have unfairly favored certain parties over others during the insolvency process.
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On 9th April 2018, the RP filed an avoidance application before the NCLT under Sections 25(2)(j), 43 to 51, and 66 of the IBC, listing various transactions as suspect and seeking appropriate relief.
The NCLT approved Tata Steel’s resolution plan on 15th May 2018. Three days later, the resolution plan was implemented, and Tata Steel BSL Ltd. assumed control of Bhushan Steel Limited.
Although the resolution plan was approved, the NCLT continued proceedings on the avoidance application filed by the RP before the plan’s approval.
The NCLT issued notices to the respondent companies involved in the suspect transactions, including Venus Recruiters.
Aggrieved by the continuation of the avoidance application post-CIRP, Venus Recruiters filed a writ petition before the Delhi High Court.
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They argued that the avoidance application should be declared void and non-est (invalid) since the CIRP had already concluded, and the new management ( Tata Steel BSL Ltd. ) had taken control.
The Single Judge of the Delhi High Court held that the RP becomes functus officio (his role ends) after the approval of the resolution plan. Therefore, the avoidance application filed before the approval of the resolution plan could not be adjudicated upon post-CIRP.
The judge stressed that the resolution process has a clear start and end, and once a plan is approved, the RP has no authority to continue pursuing avoidance applications.
Aggrieved by this, Tata Steel BSL Ltd. appealed before Delhi High Court against the single judge’s decision.
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The main question put forward by the present appeal was whether such applications, filed under Sections 43 to 51 and 66 of the IBC, could survive beyond the CIRP’s conclusion.
Section 26 of the IBC clarifies that filing an avoidance application should not affect the CIRP, but there was a need for judicial interpretation on the survival of these applications post-CIRP.
After examining the facts of the appeal, the bench of Justice Subramonium Prasad and Justice Satish Chandra Sharma observed that the impugned judgment of the single judge held that avoidance applications, in facts of the present case, were infructuous because they have not been filed as per the prescribed timelines.
However, the bench noted that the timelines under Regulation 35A are directory and not mandatory in nature.
This is because Regulation 35A pertains merely to the Resolution Professional (RP) discharging his statutory burden of filing an avoidance application within an outer limit of 135 days from the commencement of the CIRP.
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The court highlighted that timeline takes the date of commencement of CIRP as the reference point.
However, the CIRP process itself is not strictly or mandatorily bound by its own timelines. The same had been held by the Apex Court in Essar Steel India Ltd. Committee of Creditors v. Satish Kumar Gupta.
The bench further observed that the direct implication of the impugned judgment is that in cases such as the present one, wherein the Resolution Plan is unable to account for pending avoidance applications, the beneficiaries of avoidable transactions are allowed to walk scot-free, thereby causing unjust enrichment in favor of such beneficiaries.
This view is also resonated in the ILC Report of May 2022, wherein the Committee has opined that a situation where a beneficiary of suspect transaction is absolved on account of the avoidance application becoming infructuous after conclusion of CIRP, is undesirable.
Thus, it was held by the Court that avoidance applications can survive CIRP.
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