Mr.Shalabh Kumar Daga RP of M/s Silver Proteins Private Limited Vs. Mr.Himanshu Jamanbhai Domadia Ors. - None of the ingredients of Section 43, 45 and 49 of the IBC are fulfilled so as to bring home the guilt of the Corporate Debtor.

 NCLT Ahd-2 (2024.03.11) in Mr.Shalabh Kumar Daga RP of M/s Silver Proteins Private Limited  Vs. Mr.Himanshu Jamanbhai Domadia Ors. [(2024) ibclaw.in 294 NCLT, IA/154(AHM)2022 in CP(IB) 554 of 2018] held that;

• It is only resolved in the meeting of SCC that the application is to be filed. Nowhere the applicant has mentioned that he has formed an opinion whether the corporate debtor has been subjected to transaction covered under Section 43, 45 and 49 of the IBC that too before 115th day from the commencement of CIRP. 

• The preferential, undervalued and defrauding transactions requires intention of the party. The applicant not even stated that there was any such intention of the corporate debtor to defraud their creditors. 

• No proof regarding the transactions is filed by Applicant. Beneficiaries are not made parties. The applicant has not quantified the undue benefit received by the Corporate Debtor.

• Even on preporanduce of probability, the applicant failed to produce any evidence to satisfy ingredients of alleged sections.

• In view of Regulation 35A of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, it is mandatory for the liquidator to form an opinion regarding preferential, undervalued and defrauding transactions which is not at all done by the liquidator/applicant.

• None of the ingredients of Section 43, 45 and 49 of the IBC are fulfilled so as to bring home the guilt of the Corporate Debtor.

Excerpts of the order;

# 1. This application is filed under Sections 60(5), 43, 45 and 49 of the IBC, 2016. The applicant is the liquidator of M/s. Silver Proteins Pvt. Ltd. situated in Gujarat. The Corporate Insolvency Resolution Process (CIRP) was initiated against M/s. Silver Proteins Pvt. Ltd. on an application filed by the financial creditor i.e. Central Bank of India, from 29.06.2020 in CP (IB) 554 of 2018. Liquidation order was passed on 27.01.2021. 

# 2. The brief facts of the case are that on verification of books of account (Tally Data) and other documents, it was observed by the auditor that the company had made payment of Rs.89.77 lakhs in the name of repayment of unsecured loans to directors/related parties two years prior to CIRP. It was also found that unsecured loans outstanding from 2014-15 were repaid during 2018-19. So there are probable chances that these are preferential transactions as per Section 43 of IBC. The applicant also stated other preferential transactions with associate company M/s.Mahendra Oil Cake Industries Limited. By passing general entries in the name of rent, the corporate debtor credited Rs.56.70 lakhs and outflow fund of Rs.24.42 lakhs. The applicant also stated that there is related party transaction of corporate debtor with proprietorship firm of director Mr. Himanshu J Domadia i.e. Silver Proteins Pvt. Ltd, it was total debit of Rs.303.75 lakhs and total credit was Rs.236.44 lakhs. Some discrepancies were also found in the record. The company has also made payment to directors in the name of remuneration amounting to Rs.54.91 lakhs during F.Y.2013-14 to 2018-19 though the corporate debtor was suffering losses.

# 3. The applicant also stated that some undervalued transactions covered under Section 45 of the Code. According to applicant, there was huge decline of Rs.2463.66 lakhs in the closing inventory during F.Y. 2014-15. The ratio of stock to sales was  fluctuating every year. The reason given for decline is cancellation of contract by one China Company. The stock was sold at very low rate i.e.Rs.100 to Rs.128 per ton, instead of Rs.10,000 per ton. There is no documentary evidence to show the valuation. Therefore, auditor is forced to believe that the sale of stocks is done for consideration less than market value. The company has not implemented any standard pricing policy and the rates have been changed from customer to customer. According to applicant, all these are undervalued transactions covered under Section 45 of the Code. It is also alleged that the company had realized from debtors an amount of Rs.5600.27 lakhs. No documents in this regard were provided. Therefore, applicant and auditor are forced to believe that hiding of information is done with ulterior motive to defraud the creditors and are comes under scanner of Section 49 of the IBC. The corporate debtor had also written off balance of the debt amounting to Rs.10.82 lakhs without any reason. On the observation of report, clarification was sought from suspended management but it was not given. Hence, prayed for directing respondents to appropriate all these sums in the account of the corporate debtor maintained by the applicant.

# 4. The respondents, by filing reply, denied all the allegations leveled against them. The respondents contended that as per Regulation 35A of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, the Resolution Professional/Liquidator has to form an opinion whether ransactions are covered under Section 43, 45 and 49 of the

IBC, 2016 of the Code, then to take a decision to file application. No such opinion was formulated by the liquidator nor any determination has been made. Only the Stakeholders  Consultation Committee resolved to move an application against them. The forensic auditor report is ex facie, vague, speculative and indefinite. The applicant has filed combined application for avoidance transactions which is not permissible. They have also failed to produce documents to substantiate the allegations leveled against respondents. The respondents have given detailed explanation on all the transactions alleged by the applicant.

# 5. As far as payment of unsecured loan to director, the respondents have submitted that the same was within the knowledge of the Financial Creditor as audited annual accounts of the Corporate Debtor were submitted to the Financial Creditor. It is also stated that no objections has been raised by the Financial Creditor till date and hence, no preference has been given to Respondent No. 1. It is further submitted that Respondent No. 1 had granted loan to the Corporate Debtor and the Corporate Debtor would repay the loan to the Respondent No. 1 periodically. Therefore, the repayments were made in ordinary course of financial affairs of the Corporate Debtor. According to respondents, the Mahendra Oil Cake Industries Ltd. had leased factory premises along with machinery on land to the Corporate Debtor. The lease agreement was executed for a period of 5 years i.e., from 25.06.2009 to 30.06.2014. After expiry of the said lease deed, a 2nd lease agreement dated 6.06.2014 was executed for a period of 5 years i.e., from 01.07.2014 to 30.06.2019. As per the terms of the lease deed, the Corporate Debtor was required to pay an amount of Rs. 18,00,000/- per annum as rent to Mahendra Oil Cake Industries Ltd. Due to the Corporate Debtor was running into losses or unable to generate enough profit, the annual rent was reduced to Rs. 9,00,000/- per annum in 2nd lease deed. The Corporate Debtor had paid an amount of Rs. 24.42 lakhs to Mahendra Oil Cake Industries Ltd, towards rent which is less than the due amount.

# 6. According to respondent, since the account of the Corporate Debtor had turned NPA, the suppliers & customers were not inclined to carry out their business with the Corporate Debtor. Therefore, the proprietorship firm Silver Proteins - Jamnagar used to purchase unfiltered oil from suppliers and same was supplied to the Corporate Debtor at market rate and the purchase-sale transactions with Silver protein proprietorship firm were at arm's length and within the knowledge of the Financial Creditor. It is submitted that the present transaction is beyond the scope of section 43 not only because the transaction has taken place in ordinary course of business but also because no transfer of property has taken place from Corporate Debtor to a creditor or guarantor giving preference to it. Respondent, further submitted that remuneration and salary were paid by the corporate debtor to the suspended management towards the services rendered by them. It is further submitted that the Respondent Nos. 1 & 2 would draw less amount towards salary in the financial years in which the Corporate Debtor suffered heavy losses. The audited annual accounts for the F.Y 2017-2018 that the figures shown in forensic audit report towards remuneration to Suspended Management is incorrect and baseless. So, any payment made to the Respondent Nos. 1 & 2 would fall within the ambit of payment made in ordinary financial affairs of the Corporate Debtor. The salaries paid to the directors or employees of the Corporate Debtor will not fall within the ambit of preferential transaction.

# 7. The forensic audit report prepared by the concerned auditor is baseless and prepared without application of any mind. It is stated that as per the contract, the Corporate Debtor had to supply 200 metric tons of Indian Groundnut Edible Oil to M/s. China SDIC International Trade Co. Ltd. and same was supplied to it. The Corporate Debtor had raised invoice dated 01.08.2012, bearing No. P14G of USD 4,58,430.48/- on M/s. China SDIC International Trade Co. Ltd. against the said invoice, M/s. China SDIC International Trade Co. Ltd. had only paid an amount of USD 3,35,763/- on the pretext that goods supplied to it were of inferior quality. Respondents further submitted that realization from debtors worth Rs.5600.27 lakhs in an account other than account maintained with Central Bank of India will only amount to breach of terms and conditions of the sanction letter. Respondents submitted that there is no siphoning of funds or diversion of funds into the personal accounts of the Suspended Management or related parties. It is submitted that Section 45 applies only when either of the requisite is fulfilled

• a. The Corporate Debtor makes a gift to a person; or

• b. When the Corporate Debtor transfers an asset to a person at a value which is significantly less than the market value. 

So, no assets have been transferred from corporate debtor to any person.

# 8. The respondent further submitted that there is no evidence on record to substantiate the allegations.Different amounts are mentioned in the forensic report and in the application. The

respondents have provided all details of the corporate debtor to the applicant. Hence, the allegations of non-cooperation are baseless. None of the transaction is covered under Sections 43, 45 and 49 of the IBC, 2016. Hence, prayed for dismissal of the application.

# 9. The applicant/liquidator has filed its rejoinder affidavit in response to the reply filed by the respondents. The respondents and applicants have filed the written arguments. The respondent has relied upon the judgment of Hon’ble NCLAT in the matter of Mr. Saptarshi Nath & Anr. Vs. Kapil Dev Taneja [Company Appeal (AT) (Insolvency) No. 1356 of 2022] 

# 10. Heard Ld. Counsel for the applicant and Ld. Counsel for the respondents also gone through the written submissions filed by the parties and citations.

# 11. With respect to the first given transaction i.e. repayment of unsecured loans amounting to Rs.89.72 lakhs and Rs.1.33 lakhs, the respondent submitted that it was within the knowledge of financial creditor as audited annual accounts were submitted to the financial creditor at that time financial creditor has not raised any objection. Respondent No. 1 granted loan to corporate debtor and it was repaying the same periodically. Thus, payments were made in the ordinary course of financial affairs of the corporate debtor. Such affairs i.e. the transfer made in the ordinary course of business are excluded from the preferential transactions. With respect to payment of rent to Mahendra Oil Cake Industries, the respondent relied upon lease agreement from 25.06.2009 to 30.06.2014 and second lease agreement from 01.07.2014 to 30.06.2019. The yearly rent was Rs.18,00,000/-. According to respondent as the corporate debtor was running into losses, annual rent was reduced to Rs.9,00,000 per annum. The amount paid is less than the due amount. The respondent also annexed copies of both the lease agreements. This transaction was also done in the ordinary course of business. So it will not fall within the purview of preferential transaction.

# 12. The applicant also alleged that the corporate debtor entered into purchase-sale transaction with proprietorship firm of the Director Mr. Himanshu J. Domadia namely Silver Proteins, Jamnagar, with an intent to defraud the creditors of the corporate debtor. According to respondents, no preference is given to proprietorship firm/Silver Proteins. It is further stated that as the account of the corporate debtor turn NPA, the suppliers and customers were not inclined to carry out business with it. Therefore, Silver Proteins, Jamnagar firm used to purchase unfiltered oil from suppliers and same was supplied to corporate debtor at market rate. The corporate debtor also sells whose products to proprietorship of Silver Proteins to sell further. These transactions were within the knowledge of financial creditor. The respondent also produced purchase and sale invoices with the firm. The respondent submitted that a separate IA bearing No. 154 of 2022 is also filed by the applicant alleging this transaction as preferential transactions. Thus, the applicant himself is not clear whether the transaction is preferential in nature or fraudulent. He cannot seek same reliefs in two applications. Nowhere applicant clearly opined that this transaction is having intention to defraud the creditors of the corporate debtor or the transactions were done for any fraudulent purpose. Only because the auditor suspected these transactions, the applicant filed this application. The argument of respondent is that the applicant himself is not sure whether the transaction is preferential or fraudulent holds water.

# 13. The applicant alleged that Rs.7.62 lakhs was paid to the suspended management in the last two years towards remuneration. According to respondent, salary of Respondent No.1 was Rs.1,20,000/- whereas salary of Respondent No.2 was Rs.1,40,000/- in F.Y 2016-17 and F.Y 2017-18. He has relied upon the audited annual accounts for those financial years. As the salary was paid to the directors since the inception of corporate debtor, it was paid in the ordinary financial affairs of the corporate debtor. So, it will not fall within the purview of preferential transaction. 

# 14. According to applicant, on verification of financial statements and other records by the auditor, it was seen that there was huge decline of Rs.2463.66 lakhs in the closing inventory during the F.Y. 2014-15 as compared to last year. According to respondent, the deterioration of funds was due to cancellation of an agreement by M/s. China SDIC International Trade Co. Ltd. through agent M/s. Singhal Trading Corporation. As per the contract, corporate debtor had supplied 200 metric tons of groundnut edible oil to the China company which was supplied and invoice was raised on 01.08.2012 but lessor amount was paid by the company, as the goods supplied were of not superior quality. Thus, the explanation for decline of stock was given by the respondent. The respondent also produced copy of contract, invoice, settlement etc. Thus, it also does not smell of any fraudulent transaction.

# 15. The applicant alleged that the corporate debtor has realized debts worth Rs.5600.27 lakhs in accounts other than Cash Credit account maintained with Central Bank of India. Therefore, it is undervalued transaction with an intention to defraud the creditors. According to applicant, on analyzing books of account and record available to the auditor this transaction is realized, it is mentioned by the auditor. The auditor has also mentioned that no documents in this regard were provided to him. Therefore, applicant is forced to believe that hiding of information is done with ulterior motive to defraud the creditors. Though the clarification was sought from suspended management by emails no such clarification was given. However, according to respondent, no documentary proof  to that effect is produced by the applicant and it can only amount to breach of terms and conditions of the sanctioned letter. The respondent further stated that there are no allegations of syphoning of funds into the personal account of the suspended management. The respondent further submitted that as per Section 49 of IBC, where the corporate debtor has entered into an undervalued transaction as referred to in Section 45(2) and when Adjudicating Authority is satisfied that such transaction was deliberately entered then only the offence is made out. Only the auditor’s report stated that the funds were deposited in HDFC Bank account instead of Central Bank of India. Auditor has given a table showing the amount realized from debtors since 2013-14 to 2019-20. Auditor himself mentioned that the credit facilities were declared as NPA on 01.07.2015. Moreover, no bank statement, etc. were produced on record. The auditor as well as applicant is not sure about alleged transactions.

# 16. Regulation 35A of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, is provides as under:- 

• “(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 transaction covered under sections 43, 45, 50 or 66.

• (2) Where the resolution professional 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 or before the one hundred and fifteenth day of the insolvency commencement date”.

# 21. After receiving report from the forensic auditor, liquidator has placed observations made by the auditor in the meeting with the Stakeholders Consultation Committee (SCC). In the said meeting, following resolution was passed:-

• “RESOLVED THAT, Mr. Shalabh Kumar Daga, Liquidator is hereby authorized to take opinion on the matter and engage reputed lawyer for the purpose of filing application u/s. 43,45, 49, 50, 66 or any other sections or provision of Insolvency and Bankruptcy Code to the honourable NCLT, Ahmedabad and the fees will be paid by SCC”

Thus, applicant appears to have not applied his mind to the facts of alleged transactions. The applicant has only relied upon the report of financial auditor. The applicant has apprehension that there are probable chances that these transactions were entered fraudulently.

22. It is only resolved in the meeting of SCC that the application is to be filed. Nowhere the applicant has mentioned that he has formed an opinion whether the corporate debtor has been subjected to transaction covered under Section 43, 45 and 49 of the IBC that too before 115th day from the commencement of CIRP. The preferential, undervalued and defrauding transactions requires intention of the party. The applicant not even stated that there was any such intention of the corporate debtor to defraud their creditors. No proof regarding the transactions is filed by Applicant. Beneficiaries are not made parties. The applicant has not quantified the undue benefit received by the Corporate Debtor. Even on preporanduce of probability, the applicant failed to produce any evidence to satisfy ingredients of alleged sections. In view of Regulation 35A of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, it is mandatory for the liquidator to form an opinion regarding preferential, undervalued and defrauding transactions which is not at all done by the liquidator/applicant. Thus, it cannot be said that the transactions mentioned by the applicant are preferential, undervalued and defrauding transactions. As discussed above, the transactions alleged do not appears to be preferential, undervalued and defrauding. None of the ingredients of Section 43, 45 and 49 of the IBC are fulfilled so as to bring home the guilt of the Corporate Debtor. We, therefore, held that the transactions mentioned by the applicant have not been established as preferential, undervalued and defrauding transactions by the applicant.

23. Hence, we pass the following order:-

ORDER

Application is rejected.

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Md Sadique Islam & Ors. Vs. Niraj Kumar Agarwal & Ors. - 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.

 NCLAT (2024.03.06) 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.

Excerpts of the order;

06.03.2024: Heard learned counsel for the Appellant as well as learned counsel appearing for the Resolution Professional. This Appeal has been filed against order dated 06.07.2022 passed by the Adjudicating Authority in I.A. No.314/KB/2022. The Appellant before us were Respondent No.3 to 7 to the I.A. No. 314/KB/2021. The Resolution Professional had filed the application under Sections 43, 45, 49 and 66 of the IBC Code seeking relief.

# 2. Learned counsel for the Appellant fairly submits that the Appellant could not file Reply to the I.A. Learned counsel for the Appellant challenging the order contends that the Adjudicating Authority in the impugned order has only noticed the opinion of the Resolution Professional and has not adjudicated about the ingredients of Section 43, 45, 49 and 66, specifically. It is sub mitted that in view of the judgment of Hon’ble Supreme Court in “Anuj Jain vs. Axis Bank Limited and Ors.” there has to be consideration for the relevant ingredients which are different for preferential transactions, undervalued transactions as well as fraudulent transactions. Learned counsel for the Appellant submits that the Adjudicating Authority relying on the opinion of the Resolution Professional proceeded to allow the application without returning any finding that ingredients are proved.

# 3. Learned counsel for the Resolution Professional refuting the submissions of learned counsel for the Appellant submits that the Resolution Professional has filed an application relying on the Transaction Audit Report and the Resolution Professional has given all details separately in the application which have been accepted by the Adjudicating Authority.

# 4. We have considered the submissions of learned counsel for the parties and perused the record.

# 5. The Adjudicating Authority in Para 26 of the order has noticed the law laid down by Hon’ble Supreme Court in the matter of “Anuj Jain vs. Axis Bank Limited and Ors.” and quoted Para 29.1 of the judgment of Hon’ble Supreme Court, which is as follows:

• “26. Now seen in the context of law laid down by the Hon'ble Supreme Court in Anuj Jain vs. Axis Bank Limited and Ors., MANU/SC/022812020, observed in paragraph 29.1 as follows:

• “29.1. However, we are implied to make one comment as regards the application made by IRP. it is noticed that in the present case, the JRP 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.””

# 6. When we look into the judgment of Adjudicating Authority from Para 1 to 25, the Adjudicating Authority has only noted the facts of the case and respective contentions of both the parties. Findings of the Adjudicating Authority are only contained in Paras 27 and 28, which are as follows:

• “27. Let us now consider whether these transactions have taken place within the look back period with respect to undervalued and preferential transactions i.e. one year preceding the insolvency commencement date. From the table given in paragraph 8 above, it is pertinent to note that only the transactions that have been entered into with Respondent Nos. 3, 4, 5, 6, 7, 8, 11 fall within the look back period.

• 28. The Resolution Professional has clearly determined the undervalued transactions as well as preferential and fraudulent transactions. There transactions entered into with Respondent Nos. 3, 4, 5, 6, 7, 8, 11 by Respondents No.1 and 2 were clearly done with the intention to defraud the other creditors, hence, the Respondent Nos. 1 and 2 have entered into fraudulent transactions.”

# 7. 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. The Adjudicating Authority has only in two paras i.e. 27 and 28 has recorded his conclusion without giving any reason and without adverting to any pleadings or materials on record.

# 8. We, thus, are of the view that the order passed by the Adjudicating Authority cannot be sustained. Order impugned is set aside. The Application I.A. No.314/KB/2021 is revived before the Adjudicating Authority to be heard afresh and decided in accordance with law.

# 9. Learned counsel for the Appellant submits that the Appellant could not file reply, hence, they may be given opportunity to file reply before the Adjudicating Authority. They may file Reply within two weeks from today. The Appeal is disposed of accordingly.

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Gloster Cables Ltd. Vs. Fort Gloster Industries Ltd. & Ors. - We have found that the legislature has used the different language in Section 43 and 45 of the Code because in Section 43, the RP or the liquidator has to form an opinion whereas in Section 45 the RP or the liquidator has to examine and then determine that the transaction in question were undervalued during the relevant period.

 NCLAT (2024.01.25) in Gloster Cables Ltd. Vs. Fort Gloster Industries Ltd. & Ors.. [Comp. App (AT) (Ins) No. 1343 of 2019] held that;

• We have found that the legislature has used the different language in Section 43 and 45 of the Code because in Section 43, the RP or the liquidator has to form an opinion whereas in Section 45 the RP or the liquidator has to examine and then determine that the transaction in question were undervalued during the relevant period.

• In the case of Anuj Jain (Supra) the Hon’ble Supreme Court has also held that 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. 

Excerpts of the order;

# 15. In rebuttal, Counsel for the Appellant has argued that his whole case is based upon the supplemental trademark agreement dated 15.07.2008, the validity of which has not been challenged by Respondents before the Adjudicating Authority and no finding has been recorded in this regard except that the agreement was executed during the subsistence of the order of stay of the BIFR. It is further submitted that even if the agreement was stated to be insufficiently stamped yet it is a curable defect and the proper stamped duty has been paid. It is also reiterated that in the 5th CoC meeting, the CoC was apprised that the forensic audit report found no preferential, undervalued, fraudulent or wrongful trading transactions. In the forensic audit report, no related party preferential or fraudulent transaction whatsoever was found, therefore, the RP had rightly not filed the application under Section 43, 45, 49, 50 and 66 of the Code but the Adjudicating Authority has committed an error in suo motu passing the order and declaring the transaction between the parties being hit by Section 43 and 44 of the Code.

 

# 16. We have heard Counsel for the parties and perused the record with their able assistance.

 

# 27. The next submission of the Appellant is that the Adjudicating Authority has committed an error in holding that the transaction relied upon by the Appellant is undervalued transaction and is hit by Section 45(2)(b) and that it is also against the provisions of Section 43(2)(a) being a preferential transaction as it has been done within a period of two years preceding of commencement of CIRP and has referred to Section 43, 45 and 46 of the Code which are reproduced as under:-

 

“Section 43: Preferential transactions and relevant time.

*43. (1) Where the liquidator or the resolution professional, as the case may be, is of the opinion that the corporate debtor has at a relevant time given a preference in such transactions and in such manner as laid down in sub-section (2) to any persons as referred to in sub-section (4), he shall apply to the Adjudicating Authority for avoidance of preferential transactions and for, one or more of the orders referred to in section 44.

(2) A corporate debtor shall be deemed to have given a preference, if— (a) there is a transfer of property or an interest thereof of the corporate debtor for the benefit of a creditor or a surety or a guarantor for or on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor; and

(b) the transfer under clause (a) has the effect of putting such creditor or a surety or a guarantor in a beneficial position than it would have been in the event of a distribution of assets being made in accordance with section 53.

(3) For the purposes of sub-section (2), a preference shall not include the following transfer-

(a) transfer made in the ordinary course of the business or financial affairs of the corporate debtor or the transferee;

(b) any transfer creating a security interest in property acquired by the corporate debtor to the extent that-

(i) such security interest secures new value and was given at the time of or after the signing of a security agreement that contains a description of such property as security interest and was used by corporate debtor to acquire such property; and

(ii) such transfer was registered with an information utility on or before thirty days after the corporate debtor receives possession of such property:

Provided that any transfer made in pursuance of the order of a court shall not, preclude such transfer to be deemed as giving of preference by the corporate debtor.

Explanation.—For the purpose of sub-section (3) of this section, “new value” means money or its worth in goods, services, or new credit, or release by the transferee of property previously transferred to such transferee in a transaction that is neither void nor voidable by the liquidator or the resolution professional under this Code, including proceeds of such property, but does not include a financial debt or operational debt substituted for existing financial debt or operational debt.

(4) A preference shall be deemed to be given at a relevant time, if—

(a) 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; or

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

 

Section 45: Avoidance of undervalued transactions.

45. (1) If the liquidator or the resolution professional, as the case may be, on an examination of the transactions of the corporate debtor referred to in sub-section (2) determines that certain transactions were made during the relevant period under section 46, which were undervalued, he shall make an application to the Adjudicating Authority to declare such transactions as void and reverse the effect of such transaction in accordance with this Chapter.

(2) A transaction shall be considered undervalued where the corporate debtor—

(a) makes a gift to a person; or

(b) enters into a transaction with a person which involves the transfer of one or more assets by the corporate debtor for a consideration the value of which is significantly less than the value of the consideration provided by the corporate debtor,

and such transaction has not taken place in the ordinary course of business of the corporate debtor.

 

Section 46. Relevant period for avoidable transactions.

(1) In an application for avoiding a transaction at undervalue, the liquidator or the resolution professional, as the case may be, shall demonstrate that—

(i) such transaction was made with any person within the period of one year preceding the insolvency commencement date; or

(ii) such transaction was made with a related party within the period of two years preceding the insolvency commencement date.

(2) The Adjudicating Authority may require an independent expert to assess evidence relating to the value of the transactions mentioned in this section”

 

# 28. It is submitted that it is an admitted case that no application has been filed by the RP for obtaining an order of the Adjudicating Authority under Section 43 and 45 and the order has been passed by the Adjudicating Authority suo motu. It is submitted that as per Section 43(1) the liquidator or the resolution professional, as the case may be, has to form an opinion that the corporate debtor has at a relevant time given a preference in such transactions and in such manner as laid down in sub-section (2) to any persons as referred to in sub-section (4) and then he shall apply to the Adjudicating Authority for avoidance of preferential transactions and for, one or more of the orders referred to in section 44. Similarly, it is submitted that for the purpose of avoidance of undervalued transaction, it is for the liquidator or the RP to examine the transaction of the corporate debtor and determine that the transactions made during the relevant period under Section 46 were undervalued and then he shall make an application to the Adjudicating Authority to declare such transaction as void. In this regard, Counsel for the Appellant has placed reliance upon the judgment in the case of Anuj Jain (Supra) and referred to para 140 which is reproduced as under:-

• # 140.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 105 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. We have found that the legislature has used the different language in Section 43 and 45 of the Code because in Section 43, the RP or the liquidator has to form an opinion whereas in Section 45 the RP or the liquidator has to examine and then determine that the transaction in question were undervalued during the relevant period. In the case of Anuj Jain (Supra) the Hon’ble Supreme Court has also held that 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. It further said that it is expected of any resolution professional to keep such requirements in view while making a motion to the Adjudicating Authority But in any case the action could not have been taken under Section 43 and 45 without there being an application moved by the RP. In the present case, the CoC was apprised in its 5th meeting that the forensic audit report found no preferential, undervalued, fraudulent or wrongful trading transactions nor it has found any related party preferential or fraudulent transaction whatsoever, therefore, only on the basis that the trademark was hypothecated for a bigger amount and has been assigned for lesser amount would not be a criteria for the purpose of declaring it to be undervalued transaction without there being sufficient material before the Adjudicating Authority to pass such an order, therefore, in our considered opinion, the finding recorded in this regard is not in accordance with law and thus reversed.

 

30. In view of the aforesaid discussions, the present appeal is hereby allowed and the impugned order is set aside. No costs. 

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