Survival of Avoidance Applications Post-CIRP under IBC: Delhi High Court Sets New Precedent

Introduction

The case Union of India v. Venus Recruiter Private Limited & Ors. (2023 DHC 257) adjudicated by the Delhi High Court on January 13, 2023, has set a significant precedent concerning the treatment of avoidance applications under the Insolvency and Bankruptcy Code, 2016 (IBC). The appellants, comprising Tata Steel BSL Ltd. (TSBL) and the Union of India (UoI), challenged the judgment of a single judge, which held that avoidance applications filed under Section 43 of the IBC could not be adjudicated post the conclusion of the Corporate Insolvency Resolution Process (CIRP). This commentary delves into the intricacies of the case, judicial reasoning, cited precedents, and the broader impact of the judgment on insolvency law in India.

Summary of the Judgment

The Delhi High Court, in setting aside the impugned judgment, concluded that avoidance applications under Section 43(2)(j) of the IBC can indeed survive the conclusion of the CIRP. The court emphasized the distinct nature of avoidance proceedings from the CIRP, highlighting that the resolution professional (RP) is not rendered functus officio concerning these applications. Consequently, the NCLT retains jurisdiction to adjudicate pending avoidance applications even after the approval of a resolution plan, ensuring that creditors' interests are safeguarded against preferential transactions.

Analysis

Precedents Cited

The judgment extensively referenced landmark Supreme Court cases that elucidate the framework and objectives of the IBC:

• Innoventive Industries Ltd. v. ICICI Bank & Anr. (2018) 1 SCC 407: Highlighted the IBC as a comprehensive code aiming for time-bound insolvency resolution.
• Swiss Ribbons (P) Ltd. v. Union of India (2019) 4 SCC 17: Reinforced the notion of the IBC as an exhaustive statute with NCLT as the sole adjudicating authority.
• Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta (2021) 7 SCC 209: Emphasized the expansive interpretation of jurisdiction under Section 60(5)(c) of the IBC.
• G. Veerappa Pillai v. Raman & Raman Ltd. (Supra): Discussed the circumscribed jurisdiction of NCLT, ensuring it doesn't overstep into other judicial domains.
• Additional references include interpretations from the Bankruptcy Law Reforms Committee (BLRC) and reports by the Insolvency and Bankruptcy Board of India (IBBI).

Legal Reasoning

The court's legal reasoning centered around the distinct separation between CIRP and avoidance applications under the IBC. Key points include:

• Jurisdiction Under Section 60(5)(c): The phrase "arising out of or in relation to the insolvency resolution process" was interpreted broadly, enabling NCLT to adjudicate avoidance applications even after CIRP concludes.
• Section 26 Interpretation: Emphasized that an avoidance application does not impede the CIRP proceedings, thereby allowing such applications to proceed independently.
• Functus Officio Doctrine: The judgment clarified that while RPs become functus officio concerning CIRP post-resolution, their role isn't halted regarding avoidance applications, which are ancillary yet separate proceedings.
• Regulation 35A of CIRP Regulations, 2016: Recognized that the timelines under Regulation 35A are directory rather than mandatory, allowing flexibility in adjudicating avoidance applications post-CIRP.
• IBBI Amendments: Noted that amendments to the CIRP Regulations aimed to ensure that resolution plans account for ongoing avoidance applications, thereby reinforcing their survival post-CIRP.

Impact

This judgment has profound implications for insolvency proceedings in India:

• Creditor Protection: Ensures that creditors are not deprived of potential recoveries from avoidance applications due to procedural timelines of CIRP.
• RP's Role Defined: Clarifies that RPs retain responsibilities concerning avoidance applications even after finalizing a resolution plan.
• Judicial Efficiency: Prevents delays in insolvency resolutions by allowing ancillary proceedings to continue independently, aligning with the IBC's objective of timely resolutions.
• Legal Certainty: Establishes a clear precedent that segregation of CIRP and avoidance applications under the IBC is valid, promoting uniformity in judicial interpretations.

Complex Concepts Simplified

Conclusion

The Delhi High Court's decision in Union of India v. Venus Recruiter Private Limited & Ors. solidifies the survivability of avoidance applications beyond the closure of CIRP, thereby reinforcing the IBC's comprehensive insolvency framework. By affirming that RPs can continue to pursue such applications and that the NCLT holds jurisdiction irrespective of the resolution plan's status, the judgment ensures that the interests of all creditors are adequately protected. This not only upholds the IBC's objectives of streamlining insolvency proceedings but also fortifies creditor confidence in the insolvency resolution system, promoting a more robust and equitable financial ecosystem in India.

The ruling underscores the necessity for judicial interpretations to remain aligned with legislative intent, especially in specialized statutes like the IBC. As insolvency cases evolve, this precedent will guide future disputes, ensuring that the IBC's mechanisms function efficiently and effectively to serve their intended purpose.