Introduction; Duties of Resolution professional in the conduct of CIRP have been specified in section 25 of the Code, which read with section 18(1)(a) inter alia provides that RP will file application for avoidance of transactions in accordance with chapter III, of the Code. Hon’ble Supreme Court in its landmark judgement dated 26.02.2020 in Anuj Jain IRP for Jaypee Infratech Limited Vs Axis Bank Limited Etc. (Civil Appeal Nos. 8512-8527 of 2019) had defined the role of RP in determining the avoidance transactions.
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# 28.1. Looking to the legal fictions created by Section 43 and looking to the duties and responsibilities per Section 25, in our view, for the purpose of application of Section 43 of the Code in any insolvency resolution process, what a resolution professional is ordinarily required to do could be illustrated as follows:
1. In the first place, the resolution professional shall have to take two major but distinct steps. One shall be of sifting through the entire cargo of transactions relating to the property or an interest thereof of the corporate debtor backwards from the date of commencement of insolvency and up to the preceding two years. The other distinct step shall be of identifying the persons involved in such transactions and of putting them in two categories; one being of the persons who fall within the definition of ‘related party’ in terms of Section 5(24) of the Code and another of the remaining persons.
2. In the next step, the resolution professional ought to identify as to in which of the said transactions of preceding two years, the beneficiary is a related party of the corporate debtor and in which the beneficiary is not a related party. It would lead to bifurcation of the identified transactions into two subsets: One concerning related party/parties and other concerning unrelated party/parties with each subset requiring different analysis. The sub-set concerning unrelated party/parties shall further be trimmed to include only the transactions of preceding one year from the date of commencement of insolvency.
3. Having thus obtained two subsets of transactions to scan, the steps thereafter would be to examine every transaction in each of these subsets to find: (i) as to whether the transaction is of transfer of property or an interest thereof of the corporate debtor; and (ii) as to whether the beneficiary involved in the transaction stands in the capacity of creditor or surety or guarantor qua the corporate debtor. These steps shall lead to shortlisting of such transactions which carry the potential of being preferential.
4. In the next step, the said shortlisted transactions would be scrutinised to find if the transfer in question is made for or on account of an antecedent financial debt or operational debt or other liability owed by the corporate debtor. The transactions which are so found would be answering to clause (a) of sub-section (2) of Section 43.
5. In yet further step, such of the scanned and scrutinised transactions that are found covered by clause (a) of sub-section (2) of Section 43 shall have to be examined on another touchstone as to whether the transfer in question has the effect of putting such creditor or surety or guarantor in a beneficial position than it would have been in the event of distribution of assets per Section 53 of the Code. If answer to this question is in the affirmative, the transaction under examination shall be deemed to be of preference within a relevant time, provided it does not fall within the exclusion provided by sub-section (3) of Section 43.
6. In the next and equally necessary step, the transaction which otherwise is to be of deemed preference, will have to pass through another filtration to find if it does not answer to either of the clauses (a) and (b) of sub-section (3) of Section 43.
7. After the resolution professional has carried out the aforesaid volumetric as also gravimetric analysis of the transactions on the defined coordinates, he shall be required to apply to the Adjudicating Authority for necessary order/s in relation to the transaction/s that had passed through all the positive tests of sub-section (4) and sub-section (2) as also negative test of sub-section (3).
# 28.2. On a motion made by the resolution professional after and in terms of the exercise aforesaid, the Adjudicating Authority, in its turn, shall have to examine if the referred transaction answers to all the descriptions noted above and shall then decide as to what order is required to be passed, for avoidance of the impugned transaction or otherwise. Unquote
2. Let’s look into the provisions of the Code & regulations in respect of determination of avoidance transactions.
Insolvency & Bankruptcy Code, 2016.
Section 25. Duties of resolution professional. -
(1) It shall be the duty of the resolution professional to preserve and protect the assets of the corporate debtor, including the continued business operations of the corporate debtor.
(2) For the purposes of sub-section (1), the resolution professional shall undertake the following actions, namely: -
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(j) file application for avoidance of transactions in accordance with Chapter III, if any; and
CIRP Regulations,
# Regulation 35A. Preferential and other transactions.
(1) On or before the seventy-fifth day of the insolvency commencement date, the resolution professional shall form an opinion whether the corporate debtor has been subjected to any transaction covered under sections 43, 45, 50 or 66.
(2) Where the resolution profesional is of the opinion that the corporate debtor has been subjected to any transactions covered under sections 43, 45, 50 or 66, he shall make a determination on or before the one hundred and fifteenth day of the insolvency commencement date, under intimation to the Board.
(3) Where the resolution profesional makes a determination under sub-regulation (2), he shall apply to the Adjudicating Authority for appropriate relief on or before the one hundred and thirty-fifth day of the insolvency commencement date.]
# Regulation 39. Approval of resolution plan.
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(2) The resolution professional shall submit to the committee all resolution plans which comply with the requirements of the Code and regulations made thereunder along with the details of following transactions, if any, observed, found or determined by him: -
(a) preferential transactions under section 43;
(b) undervalued transactions under section 45;
(c) extortionate credit transactions under section 50; and
(d) fraudulent transactions under section 66,
and the orders, if any, of the adjudicating authority in respect of such transactions.
3. From the above it is quite clear that, no role of CoC has been envisaged in respect of determination of avoidance transactions by the RP, and filing of appropriate application with the Adjudicating Authority for suitable orders. Regulations specifically provide the timeline for the said process and the stage at which the CoC has to be appraised about the details of the avoidance transactions, which is at time of submission of resolution plans for the consideration of the CoC. Board in its facilitation paper for the guidance of the Resolution Professionals (Facilitation/003/2020 dated 7th August, 2020) has also not envisaged any role of CoC, prior to the filing of appropriate application by RP with Adjudicating Authority.
Flow chart as per annexure of the said facilitation paper of the Board is given below;
4. Its quite noteworthy that RP is required to identify, form an opinion & determine the avoidance transactions. He is in no situation can sit on judgement over the said avoidance transactions.
5. I have come across a document titled as STATEMENT OF BEST PRACTICES:
"ROLE OF INSOLVENCY PROFESSIONALS (IPs) IN AVOIDANCE PROCEEDINGS" issued jointly by ICSI IIP, IPA ICAI & IIIPI, of which relevant paras reads as under;
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Sections 25 and Section 35 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred as ‘IBC/Code’) enumerate the duties of Resolution Professional (hereinafter referred as ‘RP’) and Liquidator, respectively. These duties include certain actions in respect of avoidance transactions and questionable conduct (wrongful trading and fraudulent trading). The avoidance transactions are divided into three categories: preferential transactions, undervalued transactions and extortionate credit transactions. However, references to avoidance transactions in this Statement include, unless excluded by context or otherwise, references to questionable conduct too.
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(c) What process to be followed to form an opinion if a CD has been subjected to any avoidance transaction, and make a determination of the same and then file an application?
The following procedure may be followed:
I. Collate records/information–
- (i) Seeking information would be the first step – IP may invoke section 19 of the Code. The IP may also take assistance from the creditors because in many cases the financial creditors conduct forensic audit of the CD before filing application with AA. The findings of the forensic audit will serve great help to the IP. If required, IP can take information or discuss with statutory and internal auditors of the CD. Discussions with independent directors and audit committee members may also be of help.
- (ii) Generally speaking, the IP may consolidate his findings about all the avoidance transactions so as to make a consolidated, single application, but where there are reasons for taking urgent action about some transaction and “stop losses” caused thereby, the IP may move for a particular transaction separately. Separate applications may also be done where further avoidance transactions come to light after filing application.
- (iii) Going by general prudence, transactions in (ii) may require immediate interim relief to be prayed before the AA.
II. Assessment- as stated above in point (a)
III. ‘Sifting’ – this would involve studying various records, as above
IV. Forming prima facie view – sensing the depth
V. Short listing potentially vulnerable transactions
VI. Classification of transactions
VII. If required, seek professional expertise and arrange for transaction audit for the aforesaid process. See later about the transaction audit and the approval of the costs by the CoC.
While the preliminary study and examination may be done by the RP, where the RP is of the view that a transaction audit is warranted to identify further related transactions that may have been entered into, the RP may seek necessary professional assistance.
VIII. Audit findings - The RP/Liquidator should carefully see the observations of the professional (having experience in related domain and regulated by professional body) and juxtapose the same with his independent assessment, so as to frame the final view.
IX. Discussion with CoC/creditors/statutory auditors/directors- The findings of a transaction audit report may be discussed with the COC for their views/ comments/ opinions before filing the application with the NCLT, but the filing should not be dependent on the views of COC. RP should not be bound by the views of the COC, as it is the primary statutory duty of the RP to file the application for avoidance of vulnerable transactions.
It must be noted that the Regulation 39 (2) of the CIRP Regulations require the RP to submit the details of avoidance transactions identified. While Reg. 39 (2) requires the RP to submit such details, there is no bar in the Code and/ or regulations that restricts the RP from discussing a certain aspect of the resolution proceedings with the CoC. Nevertheless, so as to maintain confidentiality of the details, the CoC may be made to make an undertaking of confidentiality.
X. Communicate the findings with the person in default and given an opportunity of being heard: the idea is to make the counterparty to the proceedings have his/their side of the story as well. The IP may be able to gather further facts during such interactions.
XI. Decision on application – Respondents to the application to be decided appropriately.
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(i) Is it necessary to share and consult the CoC or promoters of the CD to order an audit or for taking follow up action on audit findings?
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In Liquidation, there is no concept of a CoC during liquidation. As we are aware, the law ‘shifts’ the control from creditors to the Tribunal, under whose supervision, the Liquidator works.
Section 35 entails ‘powers and duties’ of the liquidator to appoint professionals, look for avoidance transactions, etc. Hence, the role of creditors is limited and advisory in nature. However, as a matter of good practice, the liquidator should keep the creditors informed.
Moreover, as per IBBI facilitation letter dated 1st March, 2019 regarding “Charter of Responsibilities of IRP/RP and CoC in a CIRP” it was clearly mentioned that (i) determination of transactions of the nature of preferential, undervalued, extortionate, fraudulent trading or wrongful trading; (ii) intimation to the IBBI; and (iii) applying to the AA for appropriate relief are the responsibilities of IRP/RP and CoC has no role into it.
The findings of the transaction audit may be discussed in the CoC meeting, but the same should not be a voting agenda. If some/all members of the CoC have any say in the matter, the RP shall record everything and go ahead with the filing, in case the RP is of the opinion that the application should be made. The CoC cannot direct the RP with respect to filings against avoidance transactions. CoC can contribute their views/opinions, but the final decision is to be taken by the resolution professional. Unquote
6. It is my apprehension that in absence of provisions of sharing the details of avoidance transactions with the persons in default (some of them may be the participants of CoC, i.e. erstwhile directors of CD), prior to submission of details of avoidance transaction with Adjudicating Authority, may not be construed by the persons in default, as an attempt to blackmail them.
Conclusion; The above guidelines issued jointly by ICSI IIP, IPA ICAI & IIIPI, under “STATEMENT OF BEST PRACTICES: "ROLE OF INSOLVENCY PROFESSIONALS (IPs) IN AVOIDANCE PROCEEDINGS", on the aspect of sharing of details of avoidance transactions with CoC and promoters of CD prior to the filing of application by RP with Adjudicating Authority are contrary to the intent & provisions of the Code and the law laid down by the Hon’ble Supreme Court of India in Anuj Jain IRP for Jaypee Infratech Limited Vs Axis Bank Limited Etc. (Civil Appeal Nos. 8512-8527 of 2019). It will be in the fitness of the things for IPA’s to revisit & suitably amend the STATEMENT OF BEST PRACTICES: "ROLE OF INSOLVENCY PROFESSIONALS (IPs) IN AVOIDANCE PROCEEDINGS"
Attempt to blackmail or even change the documents or alter contents of documents.
ReplyDeleteSharing of documents is only a process of natural justice and needs to done with care and after considering all angles