RP Cannot Pursue An Avoidance Application After Approval Of Resolution Plan By The AA: NCLT Mumbai

Background Facts

The State Bank of India ("Financial Creditor") had filed a petition under Section 7 of Insolvency and Bankruptcy Code, 2016 ("IBC"), seeking to initiate Corporate Insolvency Resolution Process (CIRP) against Ushdev International Limited ("Corporate Debtor"). The CIRP commenced on 14.05.2018. Mr. Subodh Kumar Agarwal ("Applicant") was appointed as the Interim Resolution Professional and later was confirmed as Resolution Professional. The Resolution Professional had received the Forensic Audit Report of the Corporate Debtor from the forensic auditor on 15.10.2018. The same was placed before the Committee of Creditors ("CoC") for discussion. Thereafter, two supplementary reports dated 04.12.2018 and 03.01.2019 were submitted by the Forensic Auditor.

In 2019, the Resolution Professional filed an application before Adjudicating Authority seeking the avoidance of preferential and undervalued transactions entered into by the Corporate Debtor during the period from April 1, 2013 to May 13, 2018.

The Resolution Professional contended that the payments were made to the suppliers, related parties owing to which the receivables are stuck which led to liquidity crunch and hence the Corporate Debtor was unable to discharge its obligations. Further, the Corporate Debtor failed to adopt standard procedure and the said transactions were not conducted in usual course of business.

Relevant Law

Regulation 35A of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 ("CIRP Regulations")

35A. Preferential and other transactions.

(1) On or before the seventy-fifth day of the insolvency commencement date, the resolution professional shall form an opinion whether the corporate debtor has been subjected to any transaction covered under sections 43, 45, 50 or 66.

(2) Where the resolution professional is of the opinion that the corporate debtor has been subjected to any transactions covered under sections 43, 45, 50 or 66, he shall make a determination on or before the one hundred and fifteenth day of the insolvency commencement date.

(3)Where the resolution professional makes a determination under sub-regulation (2), he shall apply to the Adjudicating Authority for appropriate relief on or before the one hundred and thirtieth day of the insolvency commencement date.

Decision Of NCLT

The Bench observed that the Resolution Professional had filed the Application for avoidance on 16.01.2019 i.e. after 246 days of the insolvency commencement date. Hence the most vital essence of Regulation 35A(3) of CIRP Regulations was missing in the case. Further, the avoidance Application does not disclose any formation of opinion or any determination as mandated by the said Regulation. Hence, there is non-compliance of the timelines as set out and mandated under the Regulation.

The Bench further observed that the Resolution Plan of the Corporate Debtor was approved by the Bench on 03.02.2022. Once the Resolution Plan is approved, the Corporate Debtor is managed by a new management and the Resolution Professional becomes functus officio. An Application for avoidance of preferential transaction cannot be carried on by the Resolution Professional on behalf of the Corporate Debtor.

The Resolution Professional cannot carry the hat of the "Former Resolution Professional" and pursue an avoidance Application in respect of preferential transaction after the change of hands in the management of the Corporate Debtor.

Further, the Supplementary Forensic Report gave a complete clean chit with respect to the transactions entered into by the Corporate Debtor and the same were prima facie in normal business operations.

The Bench rejected the application.

Case Title: State Bank of India v Ushdev International Limited

Case No.: C.P (IB) No. 1790/MB/C-II/2017

Counsel For the Applicant: Mr. Subodh Kumar Agrawal (Erstwhile RP)

Counsel For the Financial Creditor: Mr. Nausher Kohli a/w Mr. Akhil Nene

Counsel For the Corporate Debtor: Mr. Aditya Pimple

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