SRA Can Pursue Avoidance Application Post Completion Of CIRP, If Plan Contains A Clause To That Effect: NCLAT Delhi

The National Company Law Appellate Tribunal (“NCLAT”), New Delhi Bench, comprising of Justice Ashok Bhushan (Chairperson) and Shri Barun Mitra (Technical Member), while adjudicating an appeal filed in Kapil Wadhawan v Piramal Capital & Housing Finance Ltd. & Ors., has held that avoidance application(s) can be pursued by the Successful Resolution Applicant (“SRA”) post completion of CIRP, if the approved Resolution Plan contains a specific clause for pursuing such applications by the SRA.

Further, when a Resolution Plan specifically empowers the SRA to pursue the avoidance applications, then said provisions of the Plan shall bind everyone including the erstwhile Administrator/Resolution Professional.

BACKGROUND FACTS

The Reserve Bank of India (“RBI”) had superseded the Board of Directors of Dewan Housing Finance Corporation Limited (“DHFL/Corporate Debtor”) and appointed an Administrator for the same.

Thereafter, the RBI filed a petition before the NCLT, seeking initiation of Corporate Insolvency Resolution Process (“CIRP”) against DHFL under the Insolvency and Bankruptcy Code, 2016 (“IBC”) and Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019.

The NCLT admitted the petition and initiated CIRP against DHFL. The Administrator was to perform all functions of the Resolution Professional under IBC in the CIRP of DHFL.

During the CIRP, the Administrator filed various applications under Sections 25(2)(j), 43, 44 and 66 of IBC, praying for avoidance of certain transactions undertaken by DHFL.

In the meanwhile, Piramal Capital & Housing Finance Ltd. (“Successful Resolution Applicant/SRA”) submitted a Resolution Plan for the Corporate Debtor, which was approved by the Committee of Creditors (“CoC”) on 15.01.2021.

The Resolution Plan contained a Clause which stated that the SRA will pursue avoidance applications filed by the Administrator. Accordingly, the SRA filed applications seeking its impleadment/substitution in place of the erstwhile Administrator, in the pending avoidance applications. On 09.02.2023, the NCLT substituted the name of SRA in place of erstwhile Administrator in the avoidance applications.

Mr. Kapil Wadhawan (“Appellant”), being the Ex-Promoter of the Corporate Debtor, filed an appeal before the NCLAT challenging the order dated 09.02.2023.

The Appellant argued that avoidance applications which are not decided before completion of CIRP, becomes infructuous post completion of CIRP and approval of Resolution Plan. Further, a Successful Resolution Applicant cannot continue prosecution of the avoidance applications since the Resolution Professional is ‘persona designate’ under IBC, whose power and duties cannot be delegated. Further, the SRA has different legal interests from the Administrator and thus substitution would facilitate the SRA to act in its own interest in place of being impartial.

NCLAT VERDICT

Successful Resolution Applicant can pursue avoidance applications post completion of CIRP

The Bench observed that the SRA’s Resolution Plan provides for pursuing avoidance applications by the SRA. Since the SRA is not exercising any delegated powers of Resolution Professional, the argument that Resolution Professional is the ‘persona designate’ has no relevance. The NCLT substituted the SRA relying on provisions of the Resolution Plan.

Reliance was placed on the order passed by the Delhi High Court on 13.01.2023 in TATA Steel BSL Ltd. v Venus Recruiter Pvt. Ltd. & Ors., (2023) SCC OnLine Del 155, wherein it has been held:

“While the law mandates a resolution plan to necessarily provide for the treatment of avoidance applications if the same are pending at the time of submission of resolution plans, it cannot be accepted that avoidance applications will be rendered infructuous in situations wherein the resolution plan could not have accounted for avoidance applications due to exigencies that delayed initiation of action in respect of avoidable transactions beyond the submission of a resolution plan before the adjudicating authority. This is because such an interpretation will render the provisions pertaining to suspect transactions otiose and let the beneficiaries of such transactions walk away, scot-free. Money borrowed from creditors is essentially public money and the same cannot be appropriated by private parties by way of suspect arrangements. Therefore, in cases such as the present one, wherein such transactions could not be accounted, the Adjudicating Authority will continue to hear the application. Such benefit cannot be given in cases where the RP had already applied for prosecution of avoidance applications and the applicant ought to have been cognizant of pending avoidance applications but did not account for the same in its resolution plan.”

The Regulation 38(2)(d) of CIRP Regulations was inserted vide Notification dated 14.06.2022 and it contains ‘mandatory contents of the resolution plan’. Regulation 38(2)(d) envisages that proceedings in respect of avoidance transactions will be pursued after the approval of the resolution plan and the manner in which the proceeds shall be distributed. However, the regulation would be inapplicable to a resolution plan submitted after 14.06.2022 to the NCLT for approval.

The Bench observed that since the SRA’s Resolution Plan was approved prior to 14.06.2022 and contains specific provision for continuance of avoidance applications by the SRA. Therefore, such provision in the Plan is not contrary to IBC.

“Regulation 38(2)(d), which is not specifically attracted with regard to Resolution Plan in question, however, legislative intendment, which has been brought in the Regulation, clarifies the law. The Resolution Plan has been approved by the Adjudicating Authority and by virtue of Section 30 and 31, the Resolution Plan approved by the Adjudicating Authority is binding on Corporate Debtor, its employees, Members, creditors, including Central and the State Government or any legal Authority, guarantors and other stake holders involved in the Resolution Plan”, the Bench held.

It has been observed that when Resolution Plan specifically empowers the SRA to pursue the avoidance applications, then said provisions of the Plan shall bind everyone including the erstwhile Administrator. The contention of Appellant that it is only the erstwhile Administrator/Resolution Professional who could pursue the avoidance application has been rejected by the Bench. “This argument has to be rejected in view of the specific clause, permitting the Successful Resolution Applicant to pursue the application.”

The Bench held that the NCLT has rightly permitted the SRA to pursue the avoidance applications, which were filed by the erstwhile Administrator and were pending before the NCLT. The appeals have been dismissed.

Case Title: Kapil Wadhawan v Piramal Capital & Housing Finance Ltd. & Ors.

Case No.: Company Appeal (AT) (Insolvency) No. 437 of 2023

Counsel For Appellant: Mr. Nikhil Nayyar, Sr. Advocate with Mr. Shivam Shukla, Mr. Vihesh Malviya, and Mr. Tejas Popat, Advocates.

Counsel For Respondents: Mr. Arun Kathpalia, Sr. Advocate with Ms. Chitra Rentala, Ms. Shatakshi Tripathi and Mr. Aditya Dhupar, Advocates for R-1.

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