Resolution Professional Becomes Functus Officio After Approval Of Plan, Ceases To Have Authority To File Fresh Application Under IBC: NCLT Mumbai

The National Company Law Tribunal (NCLT), Mumbai Bench, comprising Justice (Retd) Mr. Virendrasingh Gyansingh Bisht (Judicial Member) and Mr. Prabhat Kumar (Technical Member), observed that Resolution Professional (RP) is not empowered to file an application after the approval of resolution plan. The Tribunal further held that Insolvency and Bankruptcy Board of India (IBBI) should investigate into the conduct of both the RP and respondent 1 to 3 based on the findings of the forensic auditor.

Brief Facts

M/s Chagganlal & Co (operational creditor) filed a petition under section 9 of the Insolvency and Bankruptcy Code (IBC) against Say India Jewellers Pvt. Ltd. (corporate debtor). This petition was admitted by the NCLT on August 1, 2017. Thereafter, a resolution plan was also submitted by Mr. Babulal Motawat and Mr Rohit Motawat. This plan was approved and confirmed by the NCLT on January 29, 2019 and February 7, 2019 respectively. The financial creditors were entitled to all recoveries as per the resolution plan.

Thereafter, an interlocutory application was filed by the RP under section 43, 66,70,71 and 72 of the IBC. in which recovery of amounts which was transferred through preferential transactions including bogus sales, inflated salaries and transactions to related parties, was sought.

Contentions

The respondent contended that the application was not maintainable as it had been filed after 135 days, time period prescribed under Regulation 35A of the CIRP Regulations, 2016 for filing an avoidance application. It was further submitted that the RP had no authority to file such an application after the approval of resolution plan on February 7, 2019. It was further argued that since the RP ceased to have authority, the application was not maintainable.

Per Contra, it was argued by the applicant resolution professional that the application was filed in accordance with the provisions of the IBC and should be heard. It was further contended that forensic audit disclosed fraudulent transactions which justified recovery of funds and penal actions against management of the corporate debtor. It was further submitted that the delay was caused in filing the application by cooperation of erstwhile management of the corporate debtor and in gathering forensic audit reports.

Issue Before NCLT

Whether Resolution Professional can file avoidance application after the approval of resolution plan.

NCLT's Analysis

The NCLT rejected the argument of the respondent and observed that the timeline provided under Regulation 35A of the CIRP Regulations is directory and not mandatory therefore it cannot be said that delay in filing the application will lead to its dismissal. The tribunal referred to the Supreme Court judgment in Essar Steel India Ltd. Committee of Creditors v. Satish Kumar Gupta, [2019] ibclaw.in 07 SC wherein it was held that the timeline under regulation 35A is directory. It was observed as under:

“The Respondent No. 2 and 3 have raised the ground of limitation stating that the application has been filed beyond 135 days from commencement of CIRP. However, the time lines under IBC have been held to be directory in nature in Essar Steel India Ltd. Committee of Creditors v. Satish Kumar Gupta, [2019] ibclaw.in 07 SC. The division Bench of Hon'ble Delhi High Court in the case of Tata Steel BSL Ltd. Vs. Venus Recruiter Pvt. Ltd. & Ors. (2023) ibclaw.in 09 HC have held that “However, it is our understanding that the timelines under Regulation 35A are directory and not mandatory in nature.” hence we do not find any merit in this ground”.

The NCLT further observed that the authority of the RP ceased on February 7, 2019 when the resolution plan was approved and the present application was filed on April 18, 2019 by the resolution professional. It was held that the application was not maintainable because the RP lacked authority to file the application after the resolution plan was approved. It was observed as under:

“On perusal of the application and documents annexed thereto, we find this Application has been signed on 18.4.2019 by the Applicant in his capacity as Resolution Professional, whereas the applicant ceases to be Resolution professional on 7.2.2019 and the office of Resolution Professional is rendered functus officio”.

The NCLT further noted that the forensic audit report was undated and no explanation was provided as to why the report was not placed before committed of creditors (CoC) earlier or when the resolution plan was being approved.

The NCLT referred to the judgment of the Delhi High Court in Tata Steel BSL Ltd. v. Venus Recruiter Pvt. Ltd. & Ors. wherein it was held that resolution professional could prosecute the avoidance application filed before the approval of resolution plan. However, in the present case, the application was filed after the approval of resolution plan therefore the RP could not be allowed to proceed with the application.It was held as under:

“Section 25(2)(j) of the Code mandates the Resolution professional to file application for avoidance of transactions in accordance with Chapter III, if any. The Resolution Professional becomes functus officio after the approval of plan and he ceases to have authority to file any fresh application under the Code, except to prosecute the applications already pending before this Tribunal prior to approval of the Resolution Plan or before appellate authorities in relation to such pending application before this Tribunal or pending thereat at the time of approval of Resolution Plan”.

The NCLT dismissed the application and directed the IBBI to look into the serious allegations made in the forensic audit report against respondent No. 1 to 3 related to fraudulent transactions. The tribunal also directed to take appropriate action against the RP due to failure in filing the application before the approval of resolution plan.

Conclusion

The NCLT concluded that the resolution professional had become functus officio after the approval of resolution plan therefore the present application could not be filed. The Tribunal further referred the case for further investigation to the IBBI with respect to the fraudulent transactions and conduct of the resolution professional. Accordingly, the present was application dismissed.

Case Title: Mr. Ram Ratan Kanoongo v. Mr. Pramod Goenka and Ors.

Court: National Company Law Tribunal, Mumbai

Case Reference: M.A. 1548 of 2019 in T.P. (IB) 600/MB/2017

Judgment Date: 03/09/2024

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