Insolvency Law: Delhi High Court Clears The Air Around Dubious Transactions

A division bench of the Delhi High Court has fixed an insolvency law upset created by the single bench. Avoidance applications can survive bankruptcy proceedings and any amount recovered will flow to the creditors’ committee, a bench of Justices Satish Chandra Sharma and Subramonium Prasad have said.  

Under the Insolvency and Bankruptcy Code, an avoidance application can be filed by the resolution professional if it is found that the business of the company was being carried with an intent to defraud the creditors or for any fraudulent purpose. Any such transactions can be unwound and amount recovered from the beneficiaries.

In 2020, in the context of Tata Steel Ltd.’s acquisition of Bhushan Steel Ltd., a single bench of the Delhi High Court held that once the insolvency process is over, applications for objectionable transactions cannot be entertained by the National Company Law Tribunals, unless a specific provision is made in the resolution plan. And that such applications must be decided upon by bankruptcy courts before a resolution plan is approved.  

At the time, experts had highlighted difficulties that this interpretation could lead to. For instance, it could delay the approval of the resolution plan itself.  

Avoidance applications can be complex, and it can take a long time to detect and decipher them, and even to be ultimately decided by the NCLT, Sumant Batra, managing partner at Kesar Dass B. & Associate, had told BQ Prime. “Even if applications are decided before the resolution plan is approved, the aggrieved parties can file an appeal. All this may take a lot of time and will put on hold the approval of the plan itself,” he said.  

Acknowledging this challenge, the division bench has overturned the single judge’s ruling and said that there is no time limit prescribed for the NCLT to decide avoidance applications. An avoidance application will survive insolvency proceedings if the resolution plan accounts for all suspect transactions and applications filed for them.  

Even in situations where a resolution plan makes no mention of avoidance transactions, the benefit can still flow to the creditors, the division bench has pointed out. It implies that if an avoidance application hasn’t been filed for lack of information, it can be pursued even after a resolution plan has been approved.

Any other interpretation, the court highlighted, will not be practical and allow those who benefited from such transactions to “walk away, scot-free”.