Facts

State Bank of India (SBI) filed a petition under Section 7 of the Insolvency and Bankruptcy Code (IBC) before the National Company Law Tribunal (NCLT) seeking the initiation of Corporate Insolvency Resolution Process (CIRP) against Bhushan Steel Limited due to default in repayment of credit facilities. On July 26, 2017, the NCLT, New Delhi, admitted Bhushan Steel Limited into CIRP, appointing Mr. Vijay Kumar Iyer as the Interim Resolution Professional (IRP). Following the IBC procedure, a public announcement was made inviting claims from prospective resolution applicants, and the Committee of Creditors (CoC) was constituted.

On August 24, 2017, the CoC convened for the first time and confirmed the appointment of Mr. Vijay Kumar Iyer as the Resolution Professional (RP) for Bhushan Steel Limited. On March 20, 2018, the CoC approved the resolution plan proposed by Tata Steel Ltd. Subsequently, on March 28, 2018, the RP submitted the resolution plan to the NCLT for approval under Section 31 of the IBC.

On April 3, 2018, before the approval of the resolution plan, the forensic auditor, Deloitte, submitted a Forensic Audit Report to the RP, revealing several suspect transactions, including:

1. Potential excess payment of lease rent to Vistrat Real Estate Pvt. Ltd.
2. Preferential credit to various international customers and long outstanding receivables to entities like Shree Steel Djibouti FZCO and Shree Global Steel FZE.
3. Excess payments to manpower companies/contractors.
4. Uncontracted payment of interest on advance to Peak Minerals and Mining Private Ltd. for canceled sale-and-leaseback transactions.

One of the transactions involved Venus Recruiters Pvt. Ltd. On October 3, 2009, Bhushan Steel Limited (now Tata Steel BSL Ltd.) entered into a manpower supply agreement with Venus Recruiters Pvt. Ltd., which included a clause for a 10% service charge payment. It was alleged that this 10% service charge could have been preferential in nature.

On April 9, 2018, the RP filed an application before the NCLT under Section 25(2)(j), Sections 43 to 51, and Section 66 of the IBC, enumerating various transactions as ‘suspect transactions’ (avoidance application). On May 15, 2018, the NCLT approved Tata Steel’s resolution plan filed on March 28, 2018. The resolution plan was fully implemented on May 18, 2018, with Tata Steel BSL Ltd. assuming control of Bhushan Steel Limited.

The NCLT, upon receiving the avoidance application filed by the RP on April 9, 2018, issued notices to the respondent companies. Parallelly, on August 10, 2018, the National Company Law Appellate Tribunal (NCLAT) upheld the NCLT’s May 15, 2018 order approving Tata Steel’s resolution plan.

Aggrieved by the NCLT’s order issuing notice in the avoidance application, the respondent filed W.P.(C) 8705 of 2019 before the Learned Single Judge, seeking a writ to declare the proceedings from the avoidance application as void and non-est, since CIRP had concluded and Tata Steel had assumed control of Bhushan Steel Limited as per the IBC.

Issues

After considering the arguments, the Learned Single Judge identified the following key issues for determination:

1. The availability of an alternate efficacious remedy before the NCLAT.
2. Whether the RP became functus officio after the conclusion of CIRP.
3. The adjudication of avoidance applications post-CIRP.
4. The beneficiaries of avoidance applications.

Judgment

The Delhi High Court, in its judgment in the Letters Patent Appeal (LPA), set aside the impugned judgment. The NCLT was directed to proceed with the hearing of the avoidance application, and any amounts recovered could be distributed among the secured creditors. Key points held by the court include:

1. Avoidance applications should be heard and adjudicated by the NCLT or the NCLAT.
2. CIRP and avoidance applications are inherently separate proceedings. CIRP is time-bound and objective, while avoidance applications require thorough investigation of suspect transactions by the adjudicating authority, independent of the corporate debtor’s resolution.
3. The adjudicating authority will continue to hear avoidance applications even if certain transactions could not be accounted for.
4. The RP does not become functus officio regarding the adjudication of avoidance applications post-CIRP.
5. The provisions concerning suspect transactions are designed to benefit the creditors by enhancing the asset pool available for the corporate debtor’s resolution.

The benefit from adjudicating avoidance applications should not accrue to the corporate debtor in its new form. Instead, it should be available to the creditors, primarily financial institutions, who have accepted a lesser amount than what was due to them.

Siddhant Jain

Meet Siddhant Jain, a lawyer who thrives in the wild world of Business and Commercial Law—where boardrooms are battlefields, mergers are puzzles, and corporate jargon is his second language. Whether it’s navigating the maze of company law, tackling securities regulations, or guiding businesses through the stormy seas of bankruptcy and insolvency, Siddhant has done it all.

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