Group financing security not avoidable absent preference, undervaluation, or fraudulent intent under insolvency law.

Mortgages created by a corporate debtor to secure borrowings of its holding company were held outside the avoidance provisions of the Insolvency and Bankruptcy Code. The security did not amount to a preferential transaction because it was not given for an antecedent debt of the corporate debtor or to improve a creditor's position in its own insolvency distribution. It was also not an undervalued transaction, as the statutory elements of gift or inadequate consideration were not established. Finally, the arrangements did not constitute fraudulent trading or wrongful trading because there was no material showing intent to defraud creditors or continuation of business without due diligence.

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Issues: (i) whether the mortgages created by the corporate debtor in favour of lenders of its holding company amounted to preferential transactions under the Insolvency and Bankruptcy Code, 2016; (ii) whether those mortgages were undervalued transactions; and (iii) whether the transactions amounted to fraudulent trading or wrongful trading.

Issue (i): Whether the mortgages created by the corporate debtor in favour of lenders of its holding company amounted to preferential transactions under the Insolvency and Bankruptcy Code, 2016.

Analysis: Preference under section 43 requires a transfer of property or an interest therein for the benefit of a creditor, surety or guarantor on account of an antecedent debt owed by the corporate debtor, and the transfer must place such person in a better position than in distribution under section 53. The mortgages in question were created to secure financial assistance advanced to the holding company, not to discharge any antecedent debt of the corporate debtor. The security was also treated as part of the ordinary course of the business and financial arrangements within the lending consortium.

Conclusion: The transactions were not preferential transactions and could not be avoided under section 43.

Issue (ii): Whether those mortgages were undervalued transactions.

Analysis: An undervalued transaction under section 45 requires a gift or a transfer for consideration significantly less than the value of the consideration provided by the corporate debtor, and the relevant period under section 46 must be satisfied. The mortgages were not gifts and did not involve a transfer for inadequate consideration in relation to any liability of the corporate debtor. The challenged securities were created to secure borrowings of the holding company, and the statutory ingredients of undervaluation were not established.

Conclusion: The transactions were not undervalued transactions and section 45 had no application.

Issue (iii): Whether the transactions amounted to fraudulent trading or wrongful trading.

Analysis: Section 66 applies where the business of the corporate debtor is carried on with intent to defraud creditors or for a fraudulent purpose, or where directors continue business without due diligence despite knowing insolvency is unavoidable. The mortgages were executed as security arrangements in the ordinary course of group financing and there was no finding or material showing intent to defraud the creditors of the corporate debtor. Mere criticism of the commercial wisdom of the transactions was insufficient to attract section 66.

Conclusion: The transactions did not amount to fraudulent trading or wrongful trading.

Final Conclusion: The avoidance order could not be sustained against the appellants, and the mortgage transactions were held to be outside the scope of the avoidance provisions invoked by the resolution professional.

Ratio Decidendi: A security created by a corporate debtor for borrowings of a related group entity does not attract avoidance under sections 43, 45 or 66 unless the statutory ingredients of preference, undervaluation or fraudulent intent are independently established.

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