Avoidance Application(S) Can Continue Post Completion Of CIRP: 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 continue even after completion of CIRP.

The Bench placed reliance on Section 26 of IBC to interpret that proceedings of avoidance application are a different stream and do not affect the CIRP. Similarly, Section 36(3)(f) of IBC indicates that post completion of CIRP, the statute envisages recoveries through proceedings for avoidance transactions. Further, Regulation 38(2)(d) of CIRP Regulations shows the legislative intent that Resolution Plan must provide for the manner in which avoidance transactions would be pursued after approval of Plan.

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The Reserve Bank of India (“RBI”) had superseded the Board of Directors of Dewan Housing Finance Corporation Limited (“DHFL/Corporate Debtor”) and appointed an Administrator for the same.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

Avoidance application can continue post completion of CIRP

The Section 26 of IBC states that when an avoidance application is filed under Section 25(2)(j) of IBC by the Resolution Professional, then such application shall not affect the CIRP.

While placing reliance on Section 26 of IBC, the Bench opined that avoidance applications do not affect the proceeding of the CIRP and can continue post completion of CIRP.

“The avoidance application has been treated to be in different stream than the proceedings of the CIRP, Section 26 itself indicates that avoidance application shall not affect the proceedings of CIRP and it can continue even after completion of the CIRP.”

The Bench further relied on Section 36(3)(f) of IBC which states that the liquidation estate shall include any assets or their value recovered through proceedings for avoidance of transactions. It was opined that Section 36(3)(f) also indicates the statutory scheme that post completion of CIRP, the statute envisages recoveries through proceedings for avoidance transactions.

“The first submission raised by the learned Counsel for the Appellant is that after completion of the CIRP, avoidance applications, which are not decided by that time, becomes infructuous and cannot be proceeded any further. The above submission of the learned Counsel for the Appellant is not acceptable on account of the statutory scheme delineated by the Code and the Regulations. As noted above, Section 26 itself gives clear legislative intent that avoidance applications are different stream than the stream of insolvency resolution process. We may also notice provision of Section 36, sub-section (3) (f), which also gives clear indication of the statutory scheme that even after completion of the CIRP, the statute envisages recoveries through proceedings for avoidance transactions.”

Regulation 38(2)(d) clarifies the legislative intent that Resolution Plan must provide the manner for pursuing avoidance transactions after approval of Resolution Plan

Moreover, 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) states 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. Since the resolution plan of SRA stood approved by NCLT on 07.06.2021, Regulation 38(2)(d) is applicable to the case.

The Bench observed that the insertion of Regulation 38(2)(d) clarifies the legislative intent that Resolution Plan shall provide manner in which proceedings in respect of avoidance transactions will be pursued after approval of Resolution Plan.

Further 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. In the said order, the Delhi High Court has held that avoidance application can be heard after conclusion of CIRP. In view of the same, the NCLT held that:

“The Division Bench has clearly held that avoidance application is independent of the resolution of the Corporate Debtor and can survive the CIRP. We, thus, are of the view that argument of the Appellant that after conclusion of the CIRP by approval of the Resolution Plan, avoidance application becomes infructuous, cannot be accepted.”

The Bench held that avoidance applications can be continued post completion of CIRP and approval of Resolution Plan. Further, 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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