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JC - Article - Proceeds from avoidance transactions must enure to the benefit of company’s creditors: NCLAT

Article

29 Jan 2022

Proceeds from avoidance transactions must enure to the benefit of company’s creditors: NCLAT

The outcome of the avoidance transactions under Section 66 of the I&B Code, 2016 (“Code”) cannot be given to the successful resolution applicant (“SRA”) and it must go to the company's creditors as per the prevailing practice in other countries such as US, UK. In other words, there should not be any unjust enrichment at the cost of lakhs of creditors of the company whose money has been defrauded by the Corporate Debtor's promoters.

This has been ruled by the NCLAT, New Delhi vide its judgment dated 27th January 2022 in the matter of Roopjyot Engineering Pvt. Ltd. & Ors. vs. The Administrator of DHFL & Ors. and other connected matters.

It was further noted that the phrase "in relation to a person who is a creditor of the Corporate Debtor" and the other expression "shall rank in the order of priority of payment under Section 53" occurring in Section 67(2) of the Code indicate that recoveries from avoidance transaction should be distributed among the creditors in order of priority given under Section 53 of the Code. The Committee of Creditors (“CoC”) cannot exercise its discretion to negotiate the terms against the statutory provision of the Code.

On the aspect of the Adjudicating Authority’s judicial review power, it was observed that the Tribunal is under a legal and statutory duty to enquire whether a Resolution Plan suffers from any illegality or otherwise contains unlawful terms. The said duty is not eclipsed by the manner of voting by a particular creditor or a class of creditors. Even in the absence of any person pointing out any illegality in a resolution plan, the Tribunal is expected to exercise its powers to enquire whether the requirements of Section 30(2) of the Code have been met. In view thereof, the Adjudicating Authority ought to have decided whether the recoveries vested with the Corporate Debtor should be applied for the benefit of its creditors, the SRA or other stakeholders by taking note of the facts and circumstances of the case and other factors.

Thus, the Appellate Tribunal set aside the term in the Resolution Plan which permits the SRA to appropriate recoveries from avoidance applications and remitted the matter back to the CoC for reconsideration on this aspect.

Juris Corp represented NCD Holders, being the Appellants, in the appeal filed before the NCLAT.

https://tinyurl.com/4hy4u8w4

For any further information, please contact Mr. Shubhabrata Chakraborti (shubhabrata.chakraborti@jclex.com) or Mr. Dhruv Malik (dhruv.malik@jclex.com).