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A Delhi High Court ruling has paved the way for clearing avoidance applications worth 200,000 crore that are stuck before the National Company Law Tribunals (NCLT). A division bench of the high court said avoidance applications can be continued even after a company’s corporate insolvency resolution process (CIRP) is over.

When an entity becomes insolvent, the Insolvency and Bankruptcy Code (IBC) stipulates that certain transactions must be avoided to prevent it from affecting the financial position of the entity, which is known as avoidance or vulnerable transactions.

According to the code, resolution professionals are authorized to reverse a transaction of a corporate debtor before the IBC is invoked if the professional believes the transaction intended to divert funds, provided the NCLT approves the move.

The bench led by Chief Justice Satish Chandra Sharma and comprising Justice Subramonium Prasad said CIRP and avoidance applications are by their very nature, separate proceedings. As an objective procedure CIRP is time-bound whereas the latter requires the adjudicating authority to discover suspect transactions that should be avoided.

The IBC reinforces this difference. Accordingly, adjudication of an avoidance application is independent of the resolution of corporate debtor and can survive CIRP.

Companies facing avoidance transactions include Tata Steel BSL Ltd, Dewan Housing Finance Corp., JP Infra, Srei, and Educomp, experts said.

“Country-wide course correction is brought about by the judgement. People are entitled to continue their action irrespective of any resolution taking place," said senior counsel involved in the matter seeking anonymity. “All these petitions were kept on hold in NCLT for long and can be revived."

“Since this judgment distinguished the scope of CIRP and avoidance transactions as separate proceedings and observing the RP is authorized to lead pending applications before the adjudicating authority, a more definite course of proceedings can be held for cases pending before NCLT, paving the way for quicker disposals," said Sandeep Bajaj, managing partner, PSL Advocates and Solicitors.

The bench was hearing arguments on whether avoidance applications can be pursued even after the resolution process was over.

In the matter of Tata Steel BSL versus Venus Recruiter, the respondent had filed a writ petition before the high court seeking a declaration of avoidance applications as void as the CIRP was concluded.A single bench of in November 2022, held that an application under Section 43 of IBC cannot survive beyond the conclusion of CIRP. The judgement is overturned by the division bench.

“In addition to the above, by clarifying that the benefit of such transactions shall only be received by the members of the COC, this judgment shall help ease any uncertainties which may weigh heavily in the minds of the members of the COC while considering a plan in light of the treatment provided for dealing with avoidance transactions thereunder.", Bajaj added.

ABOUT THE AUTHOR

Priyanka Gawande

Priyanka Gawande is a senior legal correspondent at Mint. She has worked as legal reporter for four years with both television and digital mediums. Based in Mumbai, she reports on disputes across sectors including banking, corporates and finance. This also includes insolvency and bankruptcy cases and intellectual property rights (IPR) litigation. Her focus also comprises tracking capital markets and disputes relating to securities law. Previously, Priyanka worked with Informist Media for 2.5 years covering major insolvency and bankruptcy cases and corporate developments. She started her career in journalism with Business Television India (BTVi) where she reported on primary markets, banking, finance and insurance companies.
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