An interesting question has arisen under the Insolvency and Bankruptcy Code 2016 (IBC) as to whether avoidance applications filed by a resolution professional to avoid vulnerable transactions can survive after the successful conclusion of the resolution process. This controversy has sparked widespread debate among legal practitioners and academics after the Supreme Court held in Delhi High Court, in Venus Recruiters Private Limited v Union of India and Ors that the National Company Law Tribunal (NCLT) would have no jurisdiction to consider and decide avoidance applications after the approval of the resolution plan, unless a provision was made to the contrary in such a plan.
The Court arrived at the above conclusion based on its reading of section 60 of the IBC, which deals with the jurisdiction of the NCLT as the adjudicating authority under the IBC. The Court held that the NCLT could not accept any application after the approval of the resolution plan, except those that related to the resolution plan.
This decision has had several repercussions, which have led to various legal and practical challenges. Conceptually, the Court’s reliance on section 60 may not be correct, as avoidance applications are filed under specific provisions contained in chapters III and VI of the IBC, and there is no reason to rely on section 60 to decide the maintainability of the avoidance applications. Further, section 60 has a wider significance and includes “all proceedings in relation to the insolvency resolution process or liquidation of the corporate debtor” and not just the proceedings in relation to the resolution plan.
This interpretation is supported by the Supreme Court’s ruling in Gujarat Urja Vikas Nigam Limited v Amit Gupta.
The Venus Recruiters case jeopardises the fate of pending avoidance applications in cases where the resolution plan came to be approved. Perhaps the logical corollary of this decision would be to dismiss all pending avoidance applications for want of jurisdiction. Such a dismissal would be regardless of whether delay in adjudication of such applications might have occurred for reasons beyond the parties’ control. This certainly amounts to causing the litigant to suffer due to delay in the judicial process. There is also a risk that the reasoning used in this decision could be applied to applications other than avoidance transactions.
In practice, the Venus Recruiters case may even force the NCLT to prioritise avoidance applications over the plan approval applications. This could have a significant impact on the timelines for resolution under the IBC, since the adjudication of avoidance application is typically time-consuming because of its inherent complexities.
It may also encourage the respondents in avoidance applications to delay the adjudication process until the approval of the resolution plan, so that they can subsequently challenge the maintainability of such applications. There have been cases of parties trying to evade the avoidance applications because the resolution plan was approved during the pending periods.
Instead, it impedes the right of the corporate debtor or creditor to pursue avoidance applications after the approval of the resolution plan, even though the IBC and related regulations do not prescribe any timeline for adjudication of such proceedings. A recent public notice issued by the Ministry of Corporate Affairs indicates that avoidance applications can survive after the approval of the resolution plan.
There have been instances where the resolution plan stipulates the manner of continuation of avoidance applications and treatment of proceeds expected from there. Such commercial arrangements are not barred under the IBC and should be encouraged for value maximisation.
However, the Venus Recruiters case is likely to raise challenges to the legality of said provisions, which may also affect the NCLT’s ability to adjudicate upon the avoidance applications. Such challenges may not align with the IBC’s objectives, and the NCLT must not be precluded from adjudicating the avoidance applications based on a technical view propounded in Venus Recruiters.
As an appeal against Venus Recruiters is currently pending before a division bench of the Delhi High Court, it is hoped that the Court soon considers these concerns and fixes them.
This article was originally published in Lexology on 1 April 2022 Co-written by: Misha, Partner; Charu Bansal, Senior Associate. Click here for original article
Contributed by: Misha, Partner; Charu Bansal, Senior Associate
This is intended for general information purposes only. The views and opinions expressed in this article are those of the author/authors and does not necessarily reflect the views of the firm.
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