Can Avoidance Application Recoveries Be Shared Between Creditors and Successful Resolution Applicant?

In the complex world of India's Insolvency and Bankruptcy Code (IBC), 2016, one pressing question often arises for stakeholders: can the recovery made in pursuance to avoidance application be distributed between the creditors and successful resolution applicant (SRA)? This issue touches on creditor rights, resolution plan finality, and the Adjudicating Authority's (AA) discretion, especially post-Corporate Insolvency Resolution Process (CIRP). Understanding this is crucial for financial creditors, operational creditors, resolution professionals (RPs), and prospective SRAs navigating insolvency proceedings. 2023 0 Supreme(Del) 1945

This blog post breaks down the legal framework, key judicial insights, and practical implications, drawing from authoritative sources. Note: This is general information based on precedents and not specific legal advice—consult a qualified professional for your case.

Main Legal Finding: Primacy to Creditors

Recovery proceeds from avoidance applications—targeting preferential, undervalued, or extortionate transactions under Sections 43, 45, and 50 of the IBC—primarily benefit the creditors of the corporate debtor, not the SRA or the revived corporate debtor. The AA holds discretion to decide distribution based on facts, typically directing proceeds to creditors following the Section 53(1) waterfall priorities, unless circumstances justify otherwise. 2023 0 Supreme(Del) 1945

Avoidance applications survive CIRP conclusion, with the RP pursuing them even post-resolution plan approval, as these are distinct proceedings. The RP's role under Section 25(2)(j) persists, distinguishing it from being functus officio solely in CIRP matters. The RP, before passing of the approval order, filed an application for avoidance of certain transactions, discharging the statutory burden laid out under Section 25(2)(j) of the IBC. 2023 0 Supreme(Del) 1945

This aligns with IBC objectives: preventing unjust enrichment and ensuring credit availability by clawing back value for creditors. A situation where a beneficiary of suspect transaction is absolved on account of the avoidance application becoming infructuous after conclusion of CIRP, is undesirable. 2023 0 Supreme(Del) 1945

Survival and Pursuit of Avoidance Applications Post-CIRP

Why Avoidance Proceedings Continue

Unlike core CIRP functions, avoidance applications are standalone. The RP files and prosecutes them independently, even after the resolution plan is approved under Section 31. Reliance on CIRP-specific sections doesn't limit this duty. This addresses gaps noted in the Insolvency Law Committee (ILC) Report (May 2022) and IBBI Discussion Paper (27.03.2019), ensuring suspect transaction beneficiaries don't escape liability. 2023 0 Supreme(Del) 1945

RP's Ongoing Role

Post-CIRP, the RP remains responsible: RP remains responsible for pursuing pending avoidance applications post-CIRP, as RP is functus officio only regarding CIRP, not avoidance proceedings. 2023 0 Supreme(Del) 1945 Courts reject arguments that RP powers end entirely, emphasizing statutory continuity.

Beneficiaries: Creditors Take Precedence

Provisions target creditor benefit, not the corporate debtor's new avatar under the SRA. The provisions pertaining to avoidable transactions is to primarily benefit creditors. While the Corporate Debtor ceases to exist in its erstwhile avatar... the creditors of the corporate debtor can still be the beneficiaries of the sum or properties that may be recovered. 2023 0 Supreme(Del) 1945

Single Judge views suggesting benefits to the SRA have been critiqued for enabling unjust enrichment. Section 36(3)(f) bolsters this by including avoidance recoveries in the liquidation estate, prioritizing creditors. 2023 0 Supreme(Del) 1945 2022 0 Supreme(Mad) 921

Related precedents reinforce creditor focus in distributions. In liquidation contexts, sale proceeds are distributed per creditor priorities, not assets directly: In liquidation, assets shall be sold and sale proceeds will be distributed to the creditors / members. The assets itself are not required to be distributed amongst creditors / members. 2005 0 Supreme(Guj) 369

ANKIL MEMBERS ASSOCIATION vs VIJAYSINH JADEJA, (LIQUIDATOR)

Distribution Mechanism: AA's Discretion and Section 53

The AA decides if recoveries go to creditors, SRA, or others, guided by facts: The Adjudicating Authority should decide whether the recoveries from actions filed against improper trading or to avoid transactions should be applied for the benefit of the creditors of the corporate debtor, the successful resolution applicant or other stakeholders... they should usually be distributed per the order of priorities provided in Section 53(1) of the Code, unless the Adjudicating Authority deems an alternate manner of distribution appropriate. 2023 0 Supreme(Del) 1945

This mirrors IBBI and ILC guidance. In resolution plans, even where SRA payments fall short, analogous CIRP profits distribute pro-rata to creditors: If any amount is found to have been generated as profit during the ‘Corporate Insolvency Resolution Process’... it should be distributed amongst all the ‘Financial Creditors’ and the ‘Operational Creditors’ on pro-rata basis of their claims subject to the fact that it should not exceed the admitted claim. 2019 0 Supreme(NCLAT) 889

Resolution plan silence on pending avoidances (due to lack of info) doesn't extinguish creditor claims. CoC commercial wisdom is key in plan approvals, but AA verifies compliance, prioritizing stakeholders without post-approval external claims. 2023 Supreme(Online)(NCLT) 1794Barclays Bank PLC VS Piramal Capital and Housing Finance Ltd. - National Company Law Tribunal) 1794 2023 Supreme(Online)(NCLT) 1795Barclays Bank PLC VS Piramal Capital and Housing Finance Ltd. - National Company Law Tribunal) 1795

Exceptions, Limitations, and Practical Insights

• AA Discretion: Deviation from Section 53(1) possible if facts warrant alternate distribution, but creditor primacy holds. 2023 0 Supreme(Del) 1945
• Plan Integration: If plans address avoidances or no pendency exists, proceeds may differ; no automatic SRA right. 2023 0 Supreme(Del) 1945
• Liquidation Parallels: Secured creditors' priorities under Section 529A (Companies Act) echo IBC, with tribunals handling distributions post-sale. 2005 0 Supreme(Guj) 151

In revival scenarios, undistributed assets allow creditor resolutions without dissolution, underscoring procedural protections. 2005 0 Supreme(Guj) 369

Recommendations for Stakeholders

• RPs: Pursue post-CIRP, seek AA directions on distribution.
• Creditors: Post-adjudication, invoke Section 53(1) via AA.
• SRAs/CoC: Explicitly address pendings in plans; conduct due diligence. 2019 0 Supreme(SC) 1271
• Litigants: Cite IBBI/ILC for creditor-favoring decisions.

Key Takeaways

Avoidance recoveries generally prioritize creditors via Section 53(1), with AA discretion as the pivot. Post-CIRP survival ensures value maximization, preventing enrichment loopholes. While SRAs drive revival, creditor safeguards remain robust. Stay updated on evolving jurisprudence, as IBC balances resolution and recovery. 2023 0 Supreme(Del) 1945

For tailored guidance, engage insolvency experts. This analysis draws from core precedents to demystify a vital IBC facet.