New Delhi, December 2: Once the insolvency process is over, applications for objectionable transactions cannot be entertained by National Company Law Tribunals unless a provision is made in the resolution plan, the Delhi High Court has ruled. Further, such applications must be decided by the NCLT before a resolution plan is approved, the high court has said.

In saying so, the Delhi High Court set aside an avoidance application filed by the erstwhile resolution professional of Bhushan Steel Ltd., which was acquired by Tata Steel Ltd. in June this year, BloombergQuint reported. Experts disagreed with the high court order saying if resolution plans have to await the conclusion of avoidance applications, it’ll frustrate the timelines laid down under the Insolvency and Bankruptcy Code.

Transactions that give unfair preference to one creditor over others can be unwound under the IBC. For instance, those involving transfer of interest in a property for the benefit of a guarantor, creditor or surety of the corporate debtor.

Such transactions can be set aside by insolvency tribunals if they have been executed during the preceding two years in case of a related party and one year for any other person—before the commencement of insolvency resolution process.

The Delhi High Court has now laid down a time limit within which such orders must be passed by NCLTs. Any order for objectionable transactions will have to be passed prior to the approval of the resolution plan, a single judge bench of Justice Pratibha Singh has held.

In March 2018, the Bhushan Steel’s resolution professional filed an avoidance application involving excess payments to suppliers and vendors of the company, including Venus Recruiters Pvt. Ltd. The tribunal impleaded various parties to the application in October 2018—five months after Tata Steel completed the acquisition.

Venus Recruiters Pvt. Ltd. contested this saying the resolution professional has no role to play after the closure of the insolvency process, and that the NCLT’s jurisdiction to pass such an order cannot extend after the approval of resolution plan.

This was countered by Tata Steel, the resolution professional as well as the standing counsel for the Union of India. They argued that the resolution professional’s power to file an avoidance application is independent of the insolvency process.

The Delhi High Court disagreed, and said that avoidance applications are meant to give some benefit to the creditors of and not the “corporate debtor in its new avatar” post-approval of the resolution plan. It held:

  • Jurisdiction of the NCLT is limited to insolvency resolution and liquidation. As such, no proceedings remain before the NCLT after the new management takes over post the resolution. 
  • Assessment of objectionable transactions cannot be an unending process. 
  • Avoidance transactions are meant to benefit creditors of the corporate debtor. However, as CoC ceases to exist after the insolvency process, no benefit would arise to them. 
  • RP cannot wear the hat of the ‘former RP’ and pursue an avoidance application in respect of preferential transactions.

Insolvency experts agreed with the court’s findings on powers of the resolution professional but disagreed with the part that curtails NCLTs’ jurisdiction.

https://www.bloombergquint.com/law-and-policy/insolvency-law-delhi-high-court-curtails-powers-of-nclts

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