Imp. Rulings - Preferential Transactions (Section-43) in IBC

Imp. Rulings - Preferential Transactions (Section-43) in IBC

Index;

1. NCLAT (2024.08.28) in Vivek Prakash Vs  Dinesh Kumar Gupta. [Company Appeal (AT) (Insolvency) No. 196 & 828 of 2023] (Amount written off is not preferential transaction)

2. NCLT Mumbai-1 (2024.05.22) in Mr. Ankur Kumar Vs. Mr. Jitendra Kikavat & others [I.A. 2020 of 2020 In C.P.(IB) No. 2300/MB/2018] (Net amounts received during the look back)

3. 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]

4. NCLAT (06.03.2024) in Md Sadique Islam & Ors. Vs. Niraj Kumar Agarwal & Ors. [Company Appeal (AT) (Ins.) No. 1081 of 2022 & I.A. No. 3178 of 2022] [Findings in respect of ingredients of each Transaction]

5. NCLT Kolkata (30.06.2022) in Kshitiz Chhawchharia vs. Madhumalati Merchandise Private Limited & Ors [I.A. (IB) No. 346/KB/2019 In CP(IB) No. 349 /KB/2017] [Compliance of Regulation 35A]

6. 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] 

7. 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]

8. 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]

9. 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]

10. 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]

11. 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]

12. 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] 

13. 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]

14. 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]

15. Hon’ble 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) (Ordinary course of Business)

16. 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] (Payment made to a creditor could be  considered as a preferential transaction)

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1. Following are the caveats of Section 43;

• a. There is a transfer of property or an interest thereof.

• b. Transfer is for the benefit of a creditor or a surety or a guarantor.

• c. Transfer is on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor;

• d. A preference shall be deemed to be given at a relevant time, if –

• - It is given to a related party (other than by reason only of being an employee), during the period of two years preceding the insolvency commencement date;

• - a preference is given to a person other than a related party during the period of one year preceding the insolvency commencement date.

• e. Preference is precluded if transfer is made in the ordinary course of the business or financial affairs of the corporate debtor or the transferee;

2. Thus an application under 43 r/w section 44 to succeed, applicant (Liquidator) has to satisfy all the criterias/caveats under section 43.

• a. That there is transfer of property or an interest thereof.

• b. That the transfer is for the benefit of a creditor or a surety or a guarantor.

• c. That the Transfer is on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor;

• d. That the transfer is within the relevant time.

• e. That the transfer has not been made in the ordinary course of the business or financial affairs of the corporate debtor or the transferee;

3. Assignment of Debt by a Creditor

1. Transfer/assignment of debt by a creditor to a third person does not contemplate transfer of property or an interest thereof of the corporate debtor. A creditor thus transfers/assigns his assets, not the assets of the CD. Important - Flow of Financial Transaction; First Debit then Credit

2. Assignment of Debt by CD. On the contrary if CD asks/facilitates a debtor of CD to pay/assign the dues of CD to the creditor of the CD, this will fall under the definition of preferential transaction.

3.1. Assignment of debt by a creditor is recognised & permitted under the provisions of the IBC. Regulation  of CIRP Regulations reads as under;

• # Regulation 28. Transfer of debt due to creditors.

• (1) In the event a creditor assigns or transfers the debt due to such creditor to any other person during the insolvency resolution process period, both parties shall, within seven days of such assignment or transfer, provide the interim resolution professional or the resolution professional, as the case may be, the terms of such assignment or transfer and the identity of the assignee or transferee.

• (2) The resolution professional shall notify each participant and the Adjudicating Authority of any resultant change in the committee within two days of such change.

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# Section 44. Orders in case of preferential transactions. -

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(d) require any person to pay such sums in respect of benefits received by him from the corporate debtor, such sums to the liquidator or the resolution professional, as the  Adjudicating Authority may direct;

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Provided that an order under this section shall not -

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(b) require a person, who received a benefit from the preferential transaction in good faith and for value to pay a sum to the liquidator or the resolution professional. 

Explanation-I: For the purpose of this section, it is clarified that where a person, who has acquired an interest in property from another person other than the corporate debtor, or who has received a benefit from the preference or such another person to whom the corporate debtor gave the preference, -

• (a) had sufficient information of the initiation or commencement of insolvency resolution process of the corporate debtor;

• (b) is a related party,

it shall be presumed that the interest was acquired, or the benefit was received otherwise than in good faith unless the contrary is shown.

Explanation-II. – A person shall be deemed to have sufficient information or opportunity to avail such information if a public announcement regarding the corporate insolvency resolution process has been made under section 13.

Blogger’s comments; Section 44 does not contemplate any action against the promoters/directors of the CD. Actions contemplated in this section are all against the person receiving the benefit from the preferential transactions. Proviso to section 44 provides protection to a such person (non related party) receiving the benefit in good faith for

value, prior to the date of commencement of the CIRP.

From the explanation I & II in the proviso of section 44, as above presumption of good faith will be in favour of the person who received a benefit from the preferential transaction, provided he is not a related party & the transaction was not done after the public announcement.

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1). NCLAT (2024.08.28) in Vivek Prakash Vs  Dinesh Kumar Gupta. [Company Appeal (AT) (Insolvency) No. 196 & 828 of 2023] held that; 

• When the allegations were made by the Liquidator that transactions are transaction which are covered under Section 66, there has to be Application of mind by the Adjudicating Authority to the ingredients which are required to be fulfilled for declaring the transaction to be a fraudulent transaction.

• “There is no finding by the Adjudicating Authority in the Impugned Order that ingredients of Section 66 are fulfilled. The mere fact that proceedings were Ex-Parte against the Appellant cannot be a reason to hold the ingredients of Section 66 are fulfilled without adverting to the relevant ingredients.

• Adjudicating Authority has not given any consideration or findings in the Impugned Order for holding the transaction are covered under Section 66. Ends of justice be served in setting aside the Order passed by the Adjudicating Authority dated 17.04.2023 and reviving the Application I.A.119/2022 for fresh consideration.

• “For holding transaction to be a preferential transaction, conditions enumerated in Section 43 need to be established.

• “The mere fact that certain amounts were written off cannot amount to preferential transaction within meaning of Section 43.

[ Link Synopsis ]

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2) NCLT Mumbai-1 (2024.05.22) in Mr. Ankur Kumar Vs. Mr. Jitendra Kikavat & others [I.A. 2020 of 2020 In C.P.(IB) No. 2300/MB/2018] held that; 

• “There is no need to prove any fraudulent intent for a preferential transaction. When we look into the scheme of Section 43 of the Code, subsection (2), a clear statutory provision is that a corporate debtor shall be deemed to have given a preference if conditions as mentioned in paragraph ‘a’ and ‘b’ are fulfilled. 

• When a provision provides for deeming fiction, ‘deeming fiction’ come into play on fulfilment of the requirement even if in fact it may not be so. In sub-section (3) of Section 43, certain exception has been provided. Thus those transactions which fall as exception under Sub- Section (3) can be taken out of sub-section 2 of Section 43, rest shall be covered by deeming fiction”.

• In the present case, it can not be said that it is in ordinary course of business of the recipient of the preference to realise their debts, particularly when the Corporate Debtor, a related party, is under financial stress. 

• However, we are of considered view that the net amounts received during the look back period shall only be said to be resulting into preference.

• Further, in relation to Karan J Kikavat Respondent in IA 1402/2020, the Applicant has explained that the amount withdrawn by this person was adjusted against the various Earnest Money Deposit (EMD) and tender fees paid by him on behalf of Corporate Debtor and all the EMD’s are still outstanding in the books of accounts of Corporate Debtor, hence, this appropriation was in nature of reimbursements, and do not result into preference having been given to this person.

[ Link Synopsis ]

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3). 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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4). NCLAT (06.03.2024) in Md Sadique Islam & Ors. Vs. Niraj Kumar Agarwal & Ors. [Company Appeal (AT) (Ins.) No. 1081 of 2022 & I.A. No. 3178 of 2022] held that;

• When we look into the aforesaid paras, it is clear that the Adjudicating Authority has recorded only its conclusions and that too without considering the preferential, undervalued and fraudulent, each transaction separately and there is general observation that the transactions are undervalued transactions as well as preferential and fraudulent transactions. 

• The ingredients of preferential, undervalued and fraudulent transaction are entirely different and there has to be application of mind to the ingredients of each transaction to come to conclusion that ingredients are satisfied and the transaction falls in the said category adverting to the given pleadings in the application. 

• The Adjudicating Authority ought to have adverted to the said pleadings and returned the finding regarding the fulfilment of ingredients of each provision.

[ Link Synopsis ]

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5). NCLT Kolkata (30.06.2022) in Kshitiz Chhawchharia vs. Madhumalati Merchandise Private Limited & Ors [I.A. (IB) No. 346/KB/2019 In CP(IB) No. 349 /KB/2017] held that;

6.7. ``According to regulation 35A(1) of the CIRP Regulations, 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 on or before the seventy-fifth day of the insolvency commencement date. According to the regulation 35A(2), on or before the one hundred and fifteenth day of the insolvency commencement date, the Resolution Professional is also required to make a determination to that effect.

6.8. Further, Regulation 35A(3) of the CIRP Regulations provides that upon making such determination under regulation 35A(2), the Resolution Professional shall apply to the Adjudicating Authority for the appropriate relief on or before the one hundred and thirty-fifth day of the insolvency commencement date. In this case, the one hundred and thirty fifth day is on 23 May 2018. The instant application being IA. (IBC) 346/KB/2019 has been filed on 20 March 2019, thus making it clear that the Applicant has not complied with the provisions of regulation 35A within the timeline provided therein.

6.9.  . ., we do not see any “determination” within the meaning of regulation 35A of the CIRP Regulations. Therefore, we will not act as court of first instance to determine the nature of the transactions mentioned hereinabove.

6.1 In light of the above facts and circumstances, the adjudicating Authority is satisfied that the instant application is not maintainable and the same is therefore rejected. “

[ Link Synopsis ]

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6). 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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7). 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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8). 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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9). 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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10). 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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11). 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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12). 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:- 

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• 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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13). 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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14). 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.

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15). Hon’ble 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), speaking on the role of RP/Liquidator for identifying Preferential Transactions held that;

#  20. The analysis foregoing leads to the position that in order to find as to whether a transaction, of transfer of property or an interest thereof of the corporate debtor, falls squarely within the ambit of Section 43 of the Code, ordinarily, the following questions shall have to be examined in a given case:

(i). As to whether such transfer is for the benefit of a creditor or a surety or a guarantor?

(ii). As to whether such transfer is for or on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor?

(iii). As to whether such transfer 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 being made in accordance with Section 53?

(iv). If such transfer had been for the benefit of a related party (other than an employee), as to whether the same was made during the period of two years preceding the insolvency commencement date; and if such transfer had been for the benefit of an unrelated party, as to whether the same was made during the period of one year preceding the insolvency commencement date?

(v) As to whether such transfer is not an excluded transaction in terms of sub-section (3) of Section 43?

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# 25.6.1. Thus, the enquiry now boils down to the question as to whether the impugned transfers were made in the ordinary course of business or financial affairs of the corporate debtor JIL. It remains trite that an activity could be regarded as ‘business’ if there is a course of dealings,which are either actually continued or contemplated to be continued with a profit motive. [State of Andhra Pradesh v. H. Abdul Bakshi and Bros.: 1964 STC 644 (at p. 647).] As regards the meaning and essence of the expression ‘ordinary course of business’, reference made by the appellants to the decision of the High Court of Australia in Downs Distributing Co (supra), could be usefully recounted as under:-

-  “As was pointed out in Burns v. McFarlane the issues in sub-s. 2(b) of s. 95 of the Bankruptcy Act 1924-1933 are “(1) good faith; (2) valuable consideration; and (3) ordinary course of business.” This last expression it was said “does not require an investigation of the course pursued in any particular trade or vocation and it does not refer to what is normal or usual in the business of the debtor or that of the creditor.” It is an additional requirement and is cumulative upon good faith and valuable consideration. It is, therefore, not so much a question of fairness and absence of symptoms of bankruptcy as of the everyday usual or normal character of the transaction. The provision does not require that the transaction shall be in the course of any particular trade, vocation or business. It speaks of the course of business in general. But it does suppose that according to the ordinary and common flow of transactions in affairs of business there is a  course, an ordinary course. It means that the transaction must fall into place as part of the undistinguished common flow of business done, that it should form part of the ordinary course of business as carried on, calling for no remark and arising out of no special or particular situation.” 

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16). 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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