Imp. Rulings - Avoidance & Fraudulent Transactions in IBC

Imp. Rulings - Avoidance & Fraudulent Transactions in IBC

Index;

1. NCLAT (24.04.2023) In GVR Consulting Services Pvt. Ltd. & Ors. Vs. Pooja Bahry & Ors.. [Company Appeal (AT) (Insolvency) No. 369, 405 & 412 of 2022] [Repayment of Loan to related & other parties]

2. NCLAT (10.10.2022) in Mrs. Renuka Devi Rangaswamy, RP of M/s. Regen Infrastructure and Services Pvt. Ltd. Vs. M/s. Regen Powertech Pvt. Ltd. [Comp. (AT) (CH) (Ins) No. 357 / 2022 & IA/814/2022] [Fraudulent business]

3. NCLT Chennai-II (01.07.2022) in M/s. Regen Powertech Pvt. Ltd. Represented by RP Ebenezar Inbaraj  Vs. Veeral Controls Pvt. Ltd. [IA(IBC)/491(CHE)/2021 in IBA/1099/2019 ] [Survival of Avoidance Application]

4. NCLT Kolkata (30.05.2022) in Shri Kuldeep Verma, RP  v. Induslnd Media and Communications Limited (IMCL) & Ors. [I.A. (IB) No. 841/KB/2020 And I.A. (IB) No. 1288/KB/2020 In C.P. (IB) No. 1510/KB/2018 ] [Satisfaction & Determination by RP] 

5. NCLT Kolkata (06.05.2022) in Jitendra Lohia Vs. Nikhil Chowdhury and 13 others [I.A.(IB) No. 208 /KB/2021 in C.P (IB) No.204/KB/2019 ] [Independent Opinion or Determination by RP]

6. NCLT Kolkata (19.04.2022) in Pinaki Sarkar, Liquidator of Bansal Refineries Private Limited  Vs  Amicus Oil & Chemicals Private Limited & Ors. [IA (IB) No.295/KB/2020 in CP (IB) No.11/KB/2019] [Onus of Proof lies with the Liquidator]

7. NCLAT (06.04.2022) in Aditya Kumar Tibrewal RP Vs. Om Prakash Pandey, Suspended Director [Company Appeal (AT) Insolvency No. 583 of 2021] [Timeline is not Mandatory]

8. NCLT Kolkata (28.03.2022) in Nitesh Kumar More, Resolution Professional of SPS Steels Limited v. SPS Steels Limited & Ors.  [.I.A. (IB) No. 1200/KB/2019 in CP( IB) No. 1342/KB/2018 ] [Opinion & Determination by RP]

9. NCLT New Delhi-V (21.02.2022) in Satya Prakash Resolution Professional Y M Foodways Private Limited Vs. Uttam Roy & Ors. [L.A. No. 5610 of 2020 in Company Petition (IB)No.421/ND/2019] [Absence of specific Averments]

10. NCLT Chennai-1 (26.02.2021) in Mr. T.V. Balasubramanian Vs M/s. Kushal Traders & Anr. [MA/745/ 2019 in CP (IB)/1037/ 2018] [Identifying Preferential Transactions] 

11. HC Delhi (26.11.2020) in Venus Recruiters Private Limited vs. Union of India & Ors. [Company Appeal [W.P.(C) 8705/2019 & CM Appl. 36026/2019] [Survival of Avoidance Application]

12. NCLAT (12.10.2020) in Mirco Dynamics Vs. Cosmos Cooperative Bank Ltd. & Anr. [Comp. App (AT) (Insolvency) No. 875 of 2020] [Termination of insolvency & Survival of Misc. Applications]

13. Supreme Court of India (26.02.2020) in Anuj Jain IRP for Jaypee Infratech Limited Vs Axis Bank Limited Etc. (Civil Appeal Nos. 8512-8527 of 2019 and other petitions) [Attributes of Avoidance Application]

14. NCLT Chennai (06.02.2019) in The Resolution Professional for M/s. Orchid Pharma Limited  Vs. M/s. Hospira Healthcare India Pvt. Ltd & Others  [MA/87/IB/2018 in CP/540/IB/2017] [Attributes of Fraudulent Transactions]

15. NCLT Chennai (10.01.2019) in Mr. Ramkumar SV Vs. M/s. Serum Institute of India Limited  [MA/92/ 1B/2018 in CP/540/IB/CB/2017] [Attributes of Fraudulent Transactions]

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1). NCLAT (24.04.2023) In GVR Consulting Services Pvt. Ltd. & Ors. Vs. Pooja Bahry & Ors.. [Company Appeal (AT) (Insolvency) No. 369, 405 & 412 of 2022] held that;

• The consequences of offending preferential transaction are, obviously, drastic and practically operate towards annulling the effect of such transaction.

• For a transaction to fall within the mischief sought to be remedied by Sections 43 and 44 of the Code, it ought to be a preferential one answering to the requirements of sub-section (2) of Section 43; and the preference ought to have been given at a relevant time, as specified in subsection (4) of Section 43.

• In other words, since sub-sections (4) and (2) are deeming provisions, upon existence of the ingredients stated therein, the legal fiction would come into play; and such transaction entered into by a corporate debtor would be regarded as preferential transaction with the attendant consequences as per Section 44 of the Code, irrespective whether the transaction was in fact intended or even anticipated to be so.”

• Taking financial assistance from related and non-related parties which transactions are subject of enquiry in the present Appeal can not be held to be ordinary course of business of the Corporate Debtor.

• Money arranged from relative and other parties by the Corporate Debtor thus cannot be held to be part of ordinary course of business or part of financial affairs.

• We have already observed that question of intent and motive is not relevant while examining as to whether transaction is a preferential transaction. Judgement of the Hon’ble Supreme Court in “Anuj Jain” (supra) has clearly laid down about the irrelevance of the motive in such transaction.

• We thus are of the view that the submissions of the Appellant on the ground that the transaction was entered into by the Corporate Debtor due to pressure put on it has no relevance and shall not change the nature of transaction from preferential transaction.

[ Link Synopsis ]

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2). NCLAT (10.10.2022) in Mrs. Renuka Devi Rangaswamy, RP of M/s. Regen Infrastructure and Services Pvt. Ltd. Vs. M/s. Regen Powertech Pvt. Ltd. [Comp. (AT) (CH) (Ins) No. 357 / 2022 & IA/814/2022] held that;

• In the present case, the reason given by the Respondent in respect to transfer of assets among its group companies appears to be plausible and cannot be brought under Section 66 (1) of IBC, 2016.

• Fraud is a sensitive and serious allegation and the authority claiming such allegation is duty bound to provide the copies of the report concerning the allegations even before issuing the Show-cause notice.

• Therefore, non-disclosure of the report of the transaction audit conducted by the RP of the Corporate Debtor is sufficient for this Tribunal to dismiss the present application since it amounts to gross violation of principles of natural justice.

• It must be borne in mind that whenever a ‘Fraud’ on a ‘Corporate Debtor’ is committed, in the course of carrying ‘business’, it does not necessarily mean that the ‘business’ is being carried on with an intent to ‘defraud’ the ‘Creditors’. 

• In this connection, this ‘Tribunal’ pertinently, points out that if the ‘Directors’ of a ‘Company’ had acted on a bona-fide belief that the ‘Company’ will recover from its ‘Financial Set Back’ / ‘Difficulties’ / ‘Problems’, then, it will not be liable for the ‘Act’ / ‘Offence’ of ‘Fraudulent Trading’, in the considered opinion of this ‘Tribunal’.

• The aspect of `Fraud’ is the cementing platform for a `Liability’. An element of Dishonesty’, is to be `Proved’ and the `Aspect of Dishonesty’, cannot be inferred, when the `Conduct of the concerned Individuals’ is `Receptive’ of more than one explanation,

• A company may actually be insolvent at a given time; but its directors may bona fide hold a different view. Even in a case where they are aware of the true position, they may still think that all was not lost and that they would be able to stem the rot by further borrowings and improving the business.

• Transfer of Asset’ among / within the ‘Group Companies’, will not partake the character of a ‘Fraudulent Trading’/`Wrongful Trading’, in the teeth of the ingredients of Section 66 (1) of the Insolvency & Bankruptcy Code, 2016.

[ Link Synopsis ]

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3). NCLT Chennai-II (01.07.2022) in M/s. Regen Powertech Pvt. Ltd. Represented by RP Ebenezar Inbaraj  Vs. Veeral Controls Pvt. Ltd. [IA(IBC)/491(CHE)/2021 in IBA/1099/2019 ] held that;

• # 8. The 1st Respondent has filed counter and it was submitted that a Resolution Plan approved by the CoC of the Corporate Debtor was submitted before this Adjudicating Authority and as a result vide Order dated 01.02.2022, this Adjudicating Authority had approved the Resolution Plan. Under such circumstances, it was submitted that the erstwhile Resolution Professional of the Corporate Debtor, the Applicant herein, lacks the locus standi to further the present Application filed under Section 66(1) of IBC. This is in consonance with the legal rational that the Role of a Resolution Professional comes to halt once the Resolution plan is approved by the Adjudicating Authority. This view was emphasized and upheld by the Delhi High court in the matter of M/s. Venus Recruiters Private Limited Vs. Union of India & Ors. W.P.(C) 8705/2019) & CM APPL. 36026/2019 (annexed as Annexure 1) wherein the High Court of Delhi held, in Para 51, as follows: 

• “Once a Resolution Plan is approved, the moratorium order under Section 14 shall cease to have effect and the RP shall forward all the records relating to the CIRP and the Resolution Plan to the Board to be recorded on it database. Thus, the role of a RP comes to an end here. “

• # 18. Admittedly in the present case, it could be seen that the cause title of the Application has not been changed or amended. It is also seen that after the approval of the Resolution Plan, the RP will become functus officio and hence he cannot prosecute the present Application under Section 66 of IBC, 2016. Under said circumstances, the present Application sans merit and liable to the dismissed and accordingly stands dismissed. No costs. 

[ Link - Synopsis ]

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4). NCLT Kolkata (30.05.2022) in Shri Kuldeep Verma, RP  v. Induslnd Media and Communications Limited (IMCL) & Ors. [I.A. (IB) No. 841/KB/2020 And I.A. (IB) No. 1288/KB/2020 In C.P. (IB) No. 1510/KB/2018 ] held that;

• From the above, and the relief sought in prayer part, it is clear that the RP himself was not sure as to whether the transactions impugned are wrong as alleged. He himself is seeking a Forensic Audit, as is evident from one of his prayers in the application. 

• We are of the view that the RP can file an application under section 25(2) (j) only after being satisfied about the particular transactions being avoidable, fraudulent or undervalued. 

• Similarly, in terms of Section 25(2(d), it was incumbent upon the RP to seek assistance of the Forensic Audit if so required, to engage the services of accountants, legal or other professionals with a view to satisfy himself about the transactions being avoidable.

• Specific material facts are required to be pleaded if a transaction is sought to be brought under the mischief sought to be remedied by Sections 45/46/47 or Section 66 of the Code. 

• As noticed, the scope of enquiry in relation to the questions as to whether a transaction is of giving preference at a relevant time, is entirely different. Hence, it would be expected of any resolution professional to keep such requirements in view while making a motion to the Adjudicating Authority”.

• the arena and scope of the requisite enquiries, to find if the transaction is undervalued or is intended to defraud the creditors or had been of wrongful/fraudulent trading are entirely different

• “It is settled law that shares are separate and distinct from the assets of the company, and transfer of shares cannot be construed as transfer of assets of the company.

[ Link Synopsis ]

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5). NCLT Kolkata (06.05.2022) in Jitendra Lohia Vs. Nikhil Chowdhury and 13 others [I.A.(IB) No. 208 /KB/2021 in C.P (IB) No.204/KB/2019 ] held that;

• # 13. In reply to the application, all the respondents have vigorously opposed the averments and allegations made in the application. It is stated that the Transaction Auditor’s Report does not bear any definite conclusion in respect of the criteria required to be fulfilled in order to prefer the  instant application. It is stated that no independent opinion or determination has been formed by the Resolution Professional in the said application. It is stated that the application and allegations made out are reproductions of what is stated in the Transaction Auditor’s Report without application of mind. It is stated that the Transaction Auditor’s Report contains several disclaimers /limitations which will appear from the report itself and the same renders the report totally unreliable and even from the report, it is ex-facie clear that no definite conclusion has been formed by the Transaction Auditor and that he has proceeded mechanically without application of mind on the basis of erroneous surmises and conjectures. It is stated that even though it is ex-facie clear from the said application that no definite conclusion has been formed by the Transaction Auditor and that the Transaction Auditor’s Report contains several disclaimers/ limitations rendering the report totally unreliable, the Resolution Professional has proceeded mechanically without application of mind on the basis of erroneous surmises and conjectures to prefer the said application. It is stated that the said report categorically failed to identify and /or establish any of the alleged transactions within the scope and ambit of section 43 of the said Code, 2016. It is stated that it is evident from the said report that the auditor as appointed has not established the fact whether such transactions had taken place in the nature of ordinary course of business or otherwise. It is stated that the said application has been filed after inordinate delay and beyond the time limit as specified by the Insolvency and Bankruptcy Code, 2016 and its Regulations. It is stated that said application has been made in violation of Rule 35A of the IBBI (Resolution Process for Corporate persons) Regulations, 2016 and is thus not maintainable.

• # 15. It is stated that the respondents are not the Creditors of the corporate debtor and no payment as alleged have been made to the respondents from the Corporate Debtor. It is stated that the payments made to the respondents by the Corporate Debtor are in ordinary course of business and are financial affairs of the respondents. Hence, the question of putting the respondents in a beneficial position over the creditors of the corporate debtor, which is undergoing corporate insolvency resolution process, does not and cannot arise. It is stated that the Transaction Auditor’s Report does not bear any definite conclusion in respect of the criteria required to be fulfilled in order to prefer the instant application. It is stated that no independent opinion or determination has been formed by the Resolution Professional in the said application. It is stated that the application and allegations made out are reproduction of what is stated in the Transaction Auditor’s Report without application of mind. It is stated that the Transaction Auditor’s Report contains several disclaimers/ limitations which will appear from the report itself and the same renders the report totally unreliable and even from the report it is ex-facie clear that no definite conclusion has been formed by the Transaction Auditor and that he has proceeded mechanically without application of mind on the basis of erroneous surmises and conjectures. It is stated that even though it is ex-facie clear from the said application that no definite conclusion has been formed by the Transaction Auditor and that the Transaction Auditor’s Report contains several disclaimers/ limitations rendering the report totally unreliable, the ResolutionProfessional has proceeded mechanically without application of mind on the basis of erroneous surmises and conjectures to prefer the said application

• # 16. We have carefully seen the averments of the application and corresponding reply of the respondents. We have noticed that the allegations made in application do not constitute anything actionable against the respondents. It was the duty of the RP to come to a conclusive determination before filing an application with the Adjudicating Authority. Simply by repeating the extracts or observations made in the forensic auditors report, the RP could not make an independent determination about the nature of transactions as required by Regulation 35A (2) of the CIRP Regulations.

[ Link - Synopsis ]

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6). NCLT Kolkata (19.04.2022) in Pinaki Sarkar, Liquidator of Bansal Refineries Private Limited  Vs  Amicus Oil & Chemicals Private Limited & Ors. [IA (IB) No.295/KB/2020 in CP (IB) No.11/KB/2019]  dismissed the avoidance application due to non-appearance & non prosecution by RP.

• The Liquidator has stated in his application that the above transactions are undervalued and fraudulent in terms of sections 45 and 66 of the Code as the sale of inventory was entered into with the related parties at a price lower than the book value . . . . . . . However, these are allegations that cannot be made lightly, and the Liquidator has to prove the same before the Adjudicating Authority.

• The Liquidator should not expect that applications filed by him will be given due consideration even if he, as applicant, does not choose to appear. We do not see any reason to treat the Liquidator differently from other applicants whose applications will meet the same fate if they choose not to appear on multiple occasions.

[ Link - Synopsis ]

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7). NCLAT (06.04.2022) in Aditya Kumar Tibrewal RP Vs. Om Prakash Pandey, Suspended Director [Company Appeal (AT) Insolvency No. 583 of 2021] held that;

• “The question as to whether a statute is mandatory or directory depends upon the intent of the legislature and not upon the language in which the intent is clothed. 

• The meaning and intention of the legislature must govern, and these are to be ascertained, not only from the phraseology of the provisions but also by considering its nature, its design, and the consequences which would follow from construing it the one way or the other….”

• In event the actions taken by the Resolution Professional after the timeline prescribed in Regulation 35A of the CIRP Regulations are to be annulled, the undervalued and fraudulent transactions will go out of the reach of Resolution Process, reach of the Court and shall cause great inconvenience and injustice to Corporate Debtor. 

• Hence, we are of the view that timeline prescribed in Regulation 35A of the CIRP Regulations is only directory and any action taken by the Resolution Professional beyond the time prescribed under Regulation 35A of the CIRP Regulations cannot be held to be non-est or void only on the ground that it is beyond the period prescribed under Regulation 35A of the CIRP Regulations. 

• There may be genuine and valid reasons for Resolution Professional not to file application for avoiding the transactions within time prescribed which are question relating to each case and has to be examined on case-to-case basis and if there are reasons due to which Resolution Professional could not file the Application within time the same has to be examined on merit.

• The Law laid down by the Hon’ble Supreme Court in the above judgment which deals with the interpretation of provisions of the Code itself are applicable to interpretation of Regulation 35A of CIRP Regulations and following the above judgment we hold that timeline prescribed in Regulation 35A of CIRP Regulations is directory and not mandatory.

• We thus conclude that for transactions defrauding creditors and fraudulent trading or wrongful trading as under Section 66 the timeline prescribed under Section 46 is not applicable.

• The expression “shall” in regulation 35A (1), 35A(2) and 35A(3) is not mandatory and requirement of “forming an opinion” under Section 35A(1) “make a determination” under Section 35A(2) and “shall apply to the Adjudicating Authority for appropriate relief on or before 135th day of the Insolvency Commencement Date” are only directory.

• The timeline prescribed for transactions under Section 46 does not cover the transactions covered by Section 49 and 66 of the Code.

[ Link - Synopsis ]

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8). NCLT Kolkata (28.03.2022) in Nitesh Kumar More, Resolution Professional of SPS Steels Limited v. SPS Steels Limited & Ors.  [.I.A. (IB) No. 1200/KB/2019 in CP( IB) No. 1342/KB/2018 ] held that;

• # 33. On perusal of the I.A., the Applicant has not made any submission as to the opinion formed or the determination arrived at with respect to the preferential transactions. The Applicant in his application has time and again only relied on the Report filed by the Auditor.

• # 34. Therefore, the Applicant has clearly not formed an opinion nor has he made a determination as to the transactions made.

• # 35. Although the present I.A. is hit by regulation 35A of the CIRP Regulations and hence it is not maintainable, certain observations are also pertinent to be noted. On perusal of the report of the Auditor, internal page nos. 7 and 8 contain the list of debtors and creditors of the Corporate Debtor, wherein the amounts due, amounts received and payments made have been given. The Corporate Debtor received payments from its debtors and has also made payments to its creditors. The payment made to Aftek Traders Private Limited would have been deemed to be preferential if the Corporate Debtor did not make payments to the other creditors and only made payment to Aftek Traders Private Limited, the Corporate Debtor has made payment to Bholanath Ingots Private Limited and Sublabh Steels Private Limited along with Aftek Traders Private Limited.

• # 36. We have taken a consistent stand that the RP is duty-bound to comply not only with the timelines under regulation 35A but also that the opinion and determination required to be made in terms of sub-regulations (1) and (2) therefore are important constituents before filing the applications in respect of avoidance transactions. As Adjudicating Authority, we are required to go by the RP’s determination and not on the views of the transaction auditor appointed by the RP.

• # 37. The facts and circumstances of the present application do not inspire our confidence that it is maintainable ex facie. The application is hit by regulation 35A of the CIRP Regulations for there is no independent opinion or determination of the Applicant towards the transactions in question.

[ Link - Synopsis ]

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9). NCLT New Delhi-V (21.02.2022) in Satya Prakash Resolution Professional Y M Foodways Private Limited Vs. Uttam Roy & Ors. [L.A. No. 5610 of 2020 in Company Petition (IB)No.421/ND/2019] held that;

• # 20. As per the averments made in the application and the report of the transaction Audit Report, we observe that the period of transaction is from 20th November, 2017 to 21 November, 2019 and both the respondents were not the directors from 22nd November, 2017, rather Respondent No.- 1 was appointed on 07th September, 2018 and the Respondent No.- 2 was appointed on 20th February, 2018. 

• # 21. We further notice that the applicant has not bifurcated the amount which was defrauded during the tenure of Respondent No.-1 and Respondent No. - 2 respectively rather he simply reproduced the report of the Transit Audit Report without stating the liability of the individual directors. We further observe that nowhere in the application, the applicant has stated if these two respondents were not the directors of the Corporate Debtor, then who were the directors from 22nd November, 2017 till the date of appointment of Respondent No.- 2 Le. 20th February 2018, therefore, in our considered view, the averments made in the application is vague and not clear, under such circumstances, it is very difficult to establish the liability of the Respondents under Section 66 of the IBC. 

• # 22. In sequel to the above, in our considered view, in the absence of specific averments against the individual respondent, the applicant has failed to established that to what extent and from which period the Respondent No. 1 and 2 are liable under Section 66 of the IBC, 2016. 

• # 23. Under such circumstances, we have no option but to reject the prayer of the applicant, accordingly, the prayer (B) of the applicant is hereby rejected, and the application is hereby dismissed. However, the applicant is at liberty to file a fresh application after specifying the specific period and the amount for which the respondents are liable. 

[ Link - Synopsis ]

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10). NCLT Chennai-1 (26.02.2021) in Mr. T.V. Balasubramanian Vs M/s. Kushal Traders & Anr. [MA/745/ 2019 in CP (IB)/1037/ 2018]held that;

• # 17. After a detailed discussion by the Hon’ble Supreme Court of India in relation to the provisions of Section 43 of IBC, 2016 the following has been culled out at Paragraph No.28.1 for the benefit of the Resolution Professional as well as for the benefit of this Authority to ascertain a transaction as preferential which reads as follows:- 

• XXXXXX

• 3. Having thus obtained two sub-sets of transactions to scan, the steps thereafter would be to examine every transaction in each of these sub-sets 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. 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). 

[ Link - Synopsis ]

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11). HC Delhi (26.11.2020) in Venus Recruiters Private Limited vs. Union of India & Ors. [Company Appeal [W.P.(C) 8705/2019 & CM Appl. 36026/2019] held that;

• Once the Plan is approved and the new management takes over, it is completely up to the new management to decide whether to continue a transaction or agreement or not. Thus, if the CoC or the RP are of the view that there are any transactions which are objectionable in nature, the order in respect thereof would have to be passed prior to the approval of the Resolution Plan.

• The above discussion is only in the context of Resolution processes and would however not apply in case of liquidation proceedings. In the case of a liquidation process, the situation may be different inasmuch as the liquidator may be able to take over and prosecute applications for avoidance of objectionable transactions. The benefit of orders passed in respect of such transactions may be passed on to the Corporate Debtor which may assist in liquidating the company at the final stage.

[ Link - Synopsis ]

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12). NCLAT (12.10.2020) in Mirco Dynamics Vs. Cosmos Cooperative Bank Ltd. & Anr. [Comp. App (AT) (Insolvency) No. 875 of 2020] held that;. The insolvency resolution process set in motion on the basis of a flawed order of admission which stands set aside for being hit by limitation stands terminated and all MAs relating to this process stand dismissed on legally tenable grounds. We find no flaw in the impugned order. The appeal is accordingly dismissed.

Facts of the case;

• This Appellate Tribunal while setting aside the impugned order of admission dated 23rd September, 2019 passed by the Adjudicating Authority dismissed the application preferred under Section 7 of Í&B Code’ and directed the Adjudicating Authority to close the proceedings.

• The Adjudicating Authority, while closing the proceedings in the main Company Petition also closed all pending applications including M.A. 472/2019 and 479/2019 which related to complaint of perjury made by a Director of the Corporate Debtor.

[ Link - Synopsis ]

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13). Supreme Court of India (26.02.2020) in Anuj Jain IRP for Jaypee Infratech Limited Vs Axis Bank Limited Etc. (Civil Appeal Nos. 8512-8527 of 2019 and other petitions)  held that;

• # 29. Having found that the transactions in question cannot be countenanced, for being of preference during a relevant time to a related party; and having approved the order passed by NCLT in that regard, we do not consider it necessary to deal with the other length of arguments advanced by the learned counsel for parties on the questions as to whether the transactions are undervalued and/or fraudulent too. In the totality of circumstances, we would prefer leaving the said questions at that only, while also leaving all the related questions of law open; to be examined in an appropriate case.

• # 29.1. However, we are impelled to make one comment as regards the application made by IRP. It is noticed that in the present case, the IRP moved one composite application purportedly under Sections 43, 45 and 66 of the Code while alleging that the transactions in question were preferential as also undervalued and fraudulent. In our view, in the scheme of the Code, the parameters and the requisite enquiries as also the consequences in relation to these aspects are different and such difference is explicit in the related provisions. As noticed, the question of intent is not involved in Section 43 and by virtue of legal fiction, upon existence of the given ingredients, a transaction is deemed to be of giving preference at a relevant time. However, whether a transaction is undervalued requires a different enquiry as per Sections 45 and 46 of the Code and significantly, such application can also be made by the creditor under Section 47 of the Code. The consequences of undervaluation are contained in Sections 48 and 49. Per Section 49, if the undervalued transaction is referable to sub-section (2) of Section 45, the Adjudicating Authority may look at the intent to examine if such undervaluation was to defraud the creditors. On the other hand, the provisions of Section 66 related to fraudulent trading and wrongful trading entail the liabilities on the persons responsible therefor. We are not elaborating on all these aspects for being not necessary as the transactions in question are already held preferential and hence, the order for their avoidance is required to be approved; but it appears expedient to observe that the arena and scope of the requisite enquiries, to find if the transaction is undervalued or is intended to defraud the creditors or had been of wrongful/fraudulent trading are entirely different. Specific material facts are required to be pleaded if a transaction is sought to be brought under the mischief sought to be remedied by Sections 45/46/47 or Section 66 of the Code. As noticed, the scope of enquiry in relation to the questions as to whether a transaction is of giving preference at a relevant time, is entirely different. Hence, it would be expected of any resolution professional to keep such requirements in view while making a motion to the Adjudicating Authority.

• # 29.2. In the present case, it is noticed that NCLT in its detailed and considered order essentially dealt with the features of the transaction in question being preferential at a relevant time but recorded combined findings on all these three aspects that the impugned transactions were preferential, undervalued and fraudulent. Appropriate it would have been to deal with all these aspects separately and distinctively.

• # 29.3. We are conscious of the fact that IBC is comparatively a new legislation and various aspects expected therein are in the progression of taking proper shape, particularly in the adjudicatory processes envisaged. Having said so, we would leave this aspect at that only, while expecting all the concerned to be more attentive to the scheme, object and requirements of the provisions contained in the Code.

[ Link Synopsis ]

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14). NCLT Chennai (06.02.2019) in The Resolution Professional for M/s. Orchid Pharma Limited  Vs. M/s. Hospira Healthcare India Pvt. Ltd & Others  [MA/87/IB/2018 in CP/540/IB/2017] held that;

• The elementary difference between section 66 and other avoidance transactions is, fraudulent intention to defraud the creditors has to be proved by the person asserting such allegation. Intention is the element of difference in this section.

• it is pertinent to note that the person filing this kind of application, with an imputation of fraud, has to give all the details disclosing how these Respondents Mhave committed fraud in respect to the transaction impugned before this Bench, not only that, the RP has to prove that these answering Respondents committed fraud as detailed in the application.

• One more aspect that should not be ignored from reading of section 66 is, it is a qualified section with multiple caveats to invoke this subject matter jurisdiction, first, transaction shall be entered into with an object to defraud the creditors, second, such parties shall be in know of such intention, and to pass an order under this section, it has to be seen that director/partner of the corporate debtor is for sure aware of the fact that commencement of CIRP is inevitable and lastly, it has to be proved that such director or partner has not exercised due diligence in minimising the potential loss to the creditors of the Corporate debtor. 

• On the top of it, in explanation to section 66 of the Code, it has been laid down that presumption lies in favour of the director/partner that he has exercised due diligence as expected from a person carrying such function, to rebut this statutory presumption, sufficient material has to be placed. 

• One thing is evident from this section that burden is cast upon the RP to prove that fraud is committed by the director/partner, unless it is proved the presumption remains in force in favour of the director/partner.

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15). NCLT Chennai (10.01.2019) in Mr. Ramkumar SV Vs. M/s. Serum Institute of India Limited  [MA/92/ 1B/2018 in CP/540/IB/CB/2017] Held that;

• To say it is a preferential transaction, it has to be  tested u/s.43 of the Code, to say it is fraudulent trading, it has to be  tested u/s.66 of the Code.

• As to Section 66 is concerned, here the case is that R1 is creditor to the  Corporate Debtor company, therefore the Corporate Debtor was under  obligation to make payment to R1 herein. If at all payment has been made  other than in ordinary course of business, at the most it could be  considered as a preferential transaction but not as a fraudulent transaction  because payment was made towards the Creditor.

• Payments made to the creditors and such payments cannot be  brought under the caption of either fraudulent trading or wrongful  trading, moreover legislature normally will not provide overlapping  jurisdiction under two heads,

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