CIRP And Avoidance Application Separate Set Of Proceedings, Adjudication Of Avoidance Application Can Survive CIRP: NCLAT Delhi
The National Company Law Appellate Tribunal (“NCLAT”), New Delhi Bench, comprising of Justice Ashok Bhushan (Chairperson), Shri Barun Mitra (Technical Member) and Shri Arun Baroka (Technical Member), has held that Corporate Insolvency Resolution Process (“CIRP”) and proceedings for avoidance of transactions are separate set of proceedings. If an avoidance application filed...
The National Company Law Appellate Tribunal (“NCLAT”), New Delhi Bench, comprising of Justice Ashok Bhushan (Chairperson), Shri Barun Mitra (Technical Member) and Shri Arun Baroka (Technical Member), has held that Corporate Insolvency Resolution Process (“CIRP”) and proceedings for avoidance of transactions are separate set of proceedings. If an avoidance application filed by Resolution Professional is pending adjudication, then the same would not stall the approval of resolution plan by NCLT. Similarly, an avoidance application can survive CIRP.
“CIRP and avoidance applications are, thus by their very nature, a separate set of proceedings. The former is time bound whereas the latter requires a proper discovery of suspect transactions that are time consuming. The scheme of the IBC reinforces this difference and thus adjudication of an avoidance application is independent of the resolution of the corporate debtor and can survive CIRP.”
Background Facts
E & G Global Estates Ltd. (“Corporate Debtor”) is engaged in the business of real estate development and has developed a project named 'Holiday Homes'.
On 24.06.2020, the Corporate Debtor was admitted into Corporate Insolvency Resolution Process (“CIRP”) by the NCLT.
The Resolution Professional constituted the Committee of Creditors (CoC) with SIDBI having 20.40% vote share and Home Buyers as class of creditors with 79.60% vote share.
On 14.01.2021, the Forensic Auditor so appointed submitted a Forensic Audit Report (“FAR”). On the basis of FAR, the Resolution Professional filed an application (IA 107 of 2021) under Section 66 of IBC, alleging that fraudulent transactions were undertaken by certain allegedly illegitimate home buyers of Holiday Homes Project with suspended directors of Corporate Debtor. The Resolution Professional prayed for cancellation of voting rights of such homebuyers for filing fraudulent claims. Relief was also sought against the suspended directors for returning money back to the Corporate Debtor which had been siphoned off through circular transactions.
G S Constructions and Asha Sanap (“Successful Resolution Applicant/SRA”) submitted resolution plans for the Corporate Debtor. On 20.04.2021, the CoC in its 8th CoC meeting approved the resolution plan of SRA with 79.60% vote share.
While the IA 107/2021 was pending before NCLT, the Homebuyers (“Appellants”) filed IA No. 1777 of 2021, seeking removal of alleged illegitimate home buyers from CoC and disregard their votes casted in 8th CoC meeting; reconstitution of CoC and other reliefs.
On 17.11.2021, the NCLT in IA 107/2021 directed removal of fraudulent home buyers from CoC and reconstitution of CoC. The order was challenged before NCLAT and the matter was remanded to NCLT for re-consideration. The IA 107/2021 remained pending adjudication thereafter.
G S Constructions, the unsuccessful resolution applicant, filed IA No. 1609 of 2021 praying for removal of alleged illegitimate home owners from the CoC; reconstitute the CoC and call for fresh voting besides rejection of resolution plan by SRA.
The NCLT vide order dated 11.08.2023 approved the plan of SRA and dismissed the IA No. 1777 of 2021, while avoidance application of Resolution Professional was pending adjudication.
The Appellant Homebuyers, who constituted 16.53% vote share, filed an appeal before NCLAT against order dated 11.08.2023.
The Appellants contended that if the votes of illegitimate home buyers are excluded, then the result of the voting on the resolution plan of SRA would have been different. While the question of reconstitution of CoC was still pending in IA 107 of 2021, the approval of the resolution plan of the SRA by NCLT was against IBC.
G S Constructions also filed an appeal against order dated 11.08.2023 contending that resolution plan could not have been approved during pendency of avoidance application of Resolution Professional.
NCLAT Verdict
The issue before the Bench was whether the resolution plan could have been approved by NCLT during the pendency of avoidance applications under Sections 43, 44 and 66 of IBC.
The Bench took the view that avoidance applications are not statutorily bound by time. The Section 26 of IBC provides that application for avoidance of transaction is not to affect CIRP. Thus, avoidance applications can continue even post completion of CIRP.
“The IBC stipulates the conclusion of CIRP in 330 days. Within this prescribed timeline, often the RP is unable to identify avoidable transactions and apply to the Adjudicating Authority to reverse them. We also notice that the avoidance applications are not statutorily bound by time as is the resolution process. Section 26 of IBC further provides that application for avoidance of transactions is not to affect CIRP proceedings and therefore such applications can continue even after completion of the CIRP. Section 26 of the IBC clearly stipulates that the pendency of any avoidance application shall not come in the way of the approval of the resolution plan. CIRP and avoidance applications are, thus by their very nature, a separate set of proceedings. The former is time bound whereas the latter requires a proper discovery of suspect transactions that are time consuming. The scheme of the IBC reinforces this difference and thus adjudication of an avoidance application is independent of the resolution of the corporate debtor and can survive CIRP.
Reliance was placed on Delhi High Court judgment in Tata Steel BSL Ltd v. Venus Recruiter Pvt. Ltd. and Ors, (2023) SCC OnLine Del 155, wherein it was held that avoidance applications which are initiated by the RP shall continue irrespective of the finalisation of the Resolution Plan and the conclusion of the CIRP.
The Bench held that approval of resolution plan by the NCLT cannot be put on hold merely because avoidance applications are pending adjudication.
“In view of the above reasons, we are of the considered opinion that simply because the Appellants have raised the issue of avoidance application, it does not stand to reason that the approval of the resolution plan needs to be put on hold or kept in abeyance. We also find that the present resolution plan also provides that recovery under Section 43, 45, 50 and 66 of the IBC would be the exclusive rights of the CoC of the Corporate Debtor. We therefore affirm the approval of the resolution plan by the Adjudicating Authority.”
The appeal has been dismissed and the approval of SRA's resolution plan has been upheld.
Case title: G.S. Constructions v E & G Global Estates Ltd. & Ors.
Case No.: Company Appeal (AT)(Insolvency) No. 1217 & 1218 of 2023
Counsel For Appellant: Mr. Abhijeet Sinha, Mr. Abhirup Dasgupta, Ms. Jayashree Shukla, Mr. Ishaan Duggal and Ms. Mukta Halbe, Advocates.
Counsel For Respondent: Mr. Sumesh Dhawan, Mr. Saurya Shyam, Mr. Sagar Thakkar and Mr. Raghav Dembia, Advocates for SRA. Mr. Gaurav Mitra, Mr. Aman Varma, Ms. Riya S. Wasade, Advocates Mr. Parvindra Nutiyal, Advocate.