14 September 2020

Avoidance Proceedings during Liquidation Process

 Query ; If avoidance proceedings are pending with the Adjudicating Authority, can the liquidator submit the final (closure) report to NCLT.

Let’s see, what are the provisions of the Code & Regulations ;

 

Section 25 of the Code requires Resolution Professional (RP) to file application for avoidance of transactions in accordance with Chapter III, if any.

 

Section 26  of the Code provide that the filing of an avoidance application under clause (j) of sub-section (2) of section 25 by the resolution professional shall not affect the proceedings of the corporate insolvency resolution process.

 

Regulation 35A of the CIRP Regulations provide that;

  • Within 75 days of the commencement of CIRP, RP to form an opinion on preferential and other transactions.

  • Within 115 days of commencement of CIRP, RP to make a determination on preferential and other transactions.

  • Within 135 days of commencement of CIRP, RP to file applications to AA for appropriate relief.

 

Regulation 39 (2) of the CIRP Regulations require and IP to submit to the CoC, all resolution plans which comply with the requirements of the Code and regulations made thereunder, along with the details of avoidance of transactions, if any, observed, found or determined by him.

 

Section 35 of the Code empowers Liquidator to investigate the financial affairs of the corporate debtor to determine undervalued or preferential transactions.

 

Sections 43 to 51 provide for the definitions & details of avoidance transactions and actions required from RP / Liquidator.

 

Section 66 of the Code [Fraudulent trading or wrongful trading] provides RP or Liquidator to form opinion and apply to AA for order –

  • If during the CIRP or a liquidation process, it is found that any business of the CD has been carried on with intent to defraud creditors of the CD or for any fraudulent purpose, the AA may on the application of the RP pass an order that any persons who were knowingly parties to the carrying on of the business in such manner shall be liable to make such contributions to the assets of the CD as it may deem fit.

  • AA may by an order direct that a director or partner of the CD, to make such contribution to the assets of the CD as it may deem fit, if

(a) before the insolvency commencement date, such director or partner knew or ought to have known that the there was no reasonable prospect of avoiding the commencement of a CIRP in respect of such CD; and

(b) such director or partner did not exercise due diligence in minimising the potential loss to the creditors of the CD.

 

Regulation 44(1) of Liquidation Regulations provide that the liquidator shall liquidate the corporate debtor within a period of one year from the liquidation commencement date, notwithstanding pendency of any application for avoidance of transactions under Chapter III of Part II of the Code, before the Adjudicating Authority or any action thereof.


Regulation 45 of the Liquidation Regulations provide for submission of final report prior to dissolution of the CD, with following details;

  • (1) When the corporate debtor is liquidated, the liquidator shall make an account of the liquidation, showing how it has been conducted and how the corporate debtor’s assets have been liquidated.

  • (2) If the liquidation cost exceeds the estimated liquidation cost provided in the Preliminary Report, the liquidator shall explain the reasons for the same.

  • (3) The liquidator shall submit an application along with the final report and the compliance certificate in form H to the Adjudicating Authority for –

- (a) closure of the liquidation process of the corporate debtor where the corporate debtor is sold as a going concern; or

- (b) for the dissolution of the corporate debtor, in cases not covered under clause (a).


Item no. 8 of the Form H, (“COMPLIANCE CERTIFICATE”) under Liquidation Regulations;


S.No.

Type of Transaction

Date of Filing

With AA

Date of the order of AA

Brief of the order

(1)

(2)

(3)

(4)

(5)

1

Preferential transactions under section 43




2

Undervalued transactions under section 45




3

Extortionate credit transactions under section 50




4

Fraudulent transactions under section 66





Now, post dissolution of CD following issues can be identified in pending  avoidance proceedings before AA.

1. Who will pursue the case in NCLT.

2. Who will bear the expenses (Advocate’s fee etc.) of proceedings post dissolution.

3. Who will  share the benefit from the favourable Judgement in avoidance proceedings or the entire amount will go to Corporate Liquidation Account, or the Liquidator will be obliged to distribute as per waterfall in section 53.


The code is silent on the role and responsibilities of Liquidator post-dissolution of CD.  However the AA has the authority under the Liquidation process and Liquidator acts under his directions. Completion of the liquidation process is only with the approval of the Adjudicating Authority. The AA may decide on the above issues on Liquidator seeking his guidance. 


Adjudicating Authority may order;

a). Pending avoidance proceedings the liquidation proceedings are continued.

OR

b). Order for closure of the liquidation process or for the dissolution of the CD, as the case may be, and appoint the Liquidator as “Amicus Curiae” to handle the pending avoidance proceedings.


Important judgement in the matter;

1. NCLT Mumbai (2019.05.07) in  Mr. Ram Ratan Kanoongo Vs. Mr. Sunil Kathuria & Others. [MA 436/2018 in CP No.172/IBC/NCLT/MB/MAH/2017] ruled that if there is a syphoning off funds of the CD, it is important that the same be brought back for the completion of liquidation proceedings.

  • “# 2 ……………..Now keeping in view the fact that if there is a syphoning off of funds of the Corporate debtor, it is important that the money be brought back for the completion of liquidation proceedings. Section 43 & 45 start with the phrase “Where the liquidator or the resolution professional…….”, hence it can be understood that the avoidance or preferential or undervalued transactions can be handled even at the stage of Liquidation. Therefore, the Code leaves no iota of doubt with respect to the idea that the defaulters should not go scot free, if the funds have been syphoned away.


Disclaimer: The sole purpose of this blog is to create awareness on the subject and must not be used as a guide for taking or recommending any action or decision. A reader must do his own research and seek professional advice if he intends to take any action or decision in the matters covered in this blog.

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