The Division Bench of the Delhi High Court comprising Chief Justice Satish Chandra Sharma and Justice Subramonium Prasad was hearing LPA and held that the Adjudicating Authority should continue to hear avoidance applications even after the conclusion of the CIRP if the resolution plan did not account for such applications, and the recovered amount from avoided transactions should be distributed to the creditors of the erstwhile corporate debtor.
In the present case, the High Court observed that the phrase "arising out of" or "in relation to" under Section 60(5)(c) of the IBC is broad in scope. Therefore, applications related to such matters should be heard and decided by the Adjudicating Authority (NCLT or NCLAT) even after the conclusion of the Corporate Insolvency Resolution Process (CIRP) and the entry of a resolution applicant.
CIRP and avoidance applications are separate proceedings. CIRP is time-bound and objective, while avoidance applications require a thorough examination of suspect transactions. The IBC emphasizes this distinction, and the adjudication of avoidance applications can continue independently of the resolution of the corporate debtor, the HC Bench noted.
The High Court noted that the IBC aims to ensure time-efficient processes within the insolvency framework. While a resolution plan must address avoidance applications if they are pending during their submission, it is unacceptable for avoidance applications to become ineffective due to delays beyond the plan submission caused by unavoidable circumstances. This interpretation would render the provisions regarding suspect transactions meaningless and allow the beneficiaries of such transactions to escape liability. Therefore, in cases where transactions couldn't be accounted for in the resolution plan, the Adjudicating Authority should continue to hear the application. However, if the resolution plan already accounted for avoidance applications and the applicant was aware of pending applications but didn't address them, the benefit of continuing the application won't be granted. Consequently, the Resolution Professional (RP) is not functus officio regarding the adjudication of avoidance applications in the described situation. As there is a clear distinction between the scope and nature of CIRP and avoidance applications within the IBC, the RP can pursue such applications. The method and manner of the RP's remuneration should be determined by the Adjudicating Authority.
The HC Bench noted that the provisions concerning suspect transactions exist to benefit the creditors of the corporate debtor by increasing the asset pool available for resolution. The IBC aims to enhance credit availability in the country. Therefore, any benefits obtained from the adjudication of avoidance applications, when such treatment couldn't be accounted for in the plan, should be given to the creditors of the former corporate debtor, particularly considering the significant haircut they took towards the resolution.
The High Court noted that the amount recovered from avoided transactions should not go to the resolution applicant. The benefit derived from the adjudication of avoidance applications is not for the corporate debtor in its new form since it is no longer a debtor and has undergone the resolution process. Instead, this amount should be made available to the primarily financial institution creditors who accepted reduced amounts as part of the resolution.
The Delhi High Court set aside the impugned order and directed the NCLT to proceed with the hearing of avoidance applications. It further directed that the recovered amount should be distributed among the secured creditors in accordance with the law determined by the NCLT.
The appeals were disposed of.
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