2022 (3) TMI 756 - AT - Insolvency and Bankruptcy

Adjudicator upholds undervalued plant sale decision, dismisses appeal, affirms preferential transaction.

The Adjudicating Authority's decision on 04.10.2021, declaring the sale of the plant at Taloja Industrial Area as undervalued and ordering the return of ... Undervalued transaction under Section 45 read with Section 46 - preferential transaction - reversal of effect of void transaction and restoration of assets to the resolution professional - principles of natural justice in adjudicatory proceedings - competence of the Adjudicating Authority to declare transactions void and direct possession - effect of conditional NOC of mortgagee on valuation of saleUndervalued transaction under Section 45 read with Section 46 - effect of conditional NOC of mortgagee on valuation of sale - The sale/assignment dated 05.08.2019 was an undervalued transaction falling within the ambit of Section 45 read with Section 46 and liable to be declared void. - HELD THAT: - The Adjudicating Authority relied on the Transaction Audit Report which recorded that Yes Bank's conditional NOC required sale at not less than Rs.17.86 crore while the Agreement of 05.08.2019 recorded consideration of Rs.11 crore and only about Rs.0.63 crore was actually paid and possession was handed over. The transaction occurred within the one year relevant period preceding the insolvency commencement date. The disparity between the bank's conditioned value and the consideration actually paid, the handing over of possession on receipt of only a nominal amount, and absence of payment schedule timing for the balance together demonstrate that the consideration was significantly less than the value provided by the corporate debtor and that the transaction was undervalued. The Adjudicating Authority correctly treated the transaction as voidable under the statutory scheme and found no error in that conclusion. [Paras 6, 8, 9, 10, 11]Transaction dated 05.08.2019 held to be an undervalued transaction and voidable under Section 45 read with Section 46.Preferential transaction - reversal of effect of void transaction and restoration of assets to the resolution professional - The transaction also constituted a preferential transaction entered into to defeat creditors' rights and consequent reversal of its effect and handing over possession to the resolution professional was permissible. - HELD THAT: - The factual findings-possession handed over on receipt of a small advance, cessation of payment of the balance, and timing shortly before initiation of CIRP-indicate that the transaction favoured the assignee and undermined creditors. The Code permits the resolution professional to seek declaration of such transactions as void and to reverse their effect; accordingly, directing possession to be handed over to the resolution professional was a consequential and permissible remedy to restore the asset to the insolvency estate. [Paras 9, 11, 12]Transaction characterised as preferential and reversal of its effect with direction to hand possession to the resolution professional upheld.Principles of natural justice in adjudicatory proceedings - The Adjudicating Authority did not violate principles of natural justice in passing the impugned order. - HELD THAT: - The appellant had notice of and participated in proceedings before the Adjudicating Authority and had filed an interlocutory application seeking restraint; the record indicates the appellant (or its representatives) was heard on 30.09.2021 and the suspended directors who executed the impugned transactions were also served and heard. The assignee (appellant) cannot be placed in a better position than the corporate debtor whose actions were under scrutiny. On these facts the contention of non hearing was rejected. [Paras 13]No breach of natural justice found; appellant was aware of and had opportunity to be heard.Competence of the Adjudicating Authority to declare transactions void and direct possession - The Adjudicating Authority acted within its power under Section 45(1) in directing handing over possession to the resolution professional and did not exceed jurisdiction by treating the transaction as void. - HELD THAT: - Section 45(1) empowers the resolution professional to apply for declaration of undervalued transactions as void and to reverse their effects. The impugned order directed possession to be handed over to the resolution professional as a consequential action of declaring the transaction void. The Adjudicating Authority did not itself purport to cancel a registered instrument beyond declaring the transaction void in effect; the pendency of other interlocutory applications (I.A. No.1304/2020 and I.A. No.699/2020) did not preclude adjudication of the application under Sections 43 and 45, and the pendency had no bearing on the power to reverse the effect of the transaction. [Paras 12]Adjudicating Authority's direction to hand possession to the resolution professional is within the remedial power under Section 45(1) and not beyond jurisdiction; pendency of related applications did not preclude the order.Final Conclusion: The appeal is dismissed. The Adjudicating Authority correctly held the 05.08.2019 transaction to be undervalued and preferential, and its consequential direction to hand possession of the plant to the resolution professional was within its statutory power; there was no breach of natural justice warranting interference. Issues Involved:1. Validity of the sale of the plant at Taloja Industrial Area.2. Allegations of preferential and undervalued transactions.3. Compliance with principles of natural justice.4. Authority of the Adjudicating Authority to cancel registered agreements.Detailed Analysis:1. Validity of the Sale of the Plant at Taloja Industrial Area:The Corporate Debtor’s plant at Plot M-6, Taloja Industrial Area was mortgaged to Yes Bank. A conditional No Objection Certificate (NOC) was issued by Yes Bank on 01st August 2019 for the sale of the property for at least Rs. 17.86 Crore. However, the plant was sold for Rs. 11 Crore, with only Rs.0.63 Crore received as consideration. The Adjudicating Authority, relying on the Transaction Audit Report, found the sale to be undervalued and ordered the cancellation of the sale and the return of the plant’s possession to the Resolution Professional.2. Allegations of Preferential and Undervalued Transactions:The Transaction Audit Report identified several preferential and undervalued transactions, including the sale of the Taloja plant. The Resolution Professional filed an application under Sections 43 and 45 of the Insolvency and Bankruptcy Code (IBC) to reverse these transactions. The Adjudicating Authority found that the sale of the plant was significantly undervalued, as the property was sold for Rs. 11 Crore against the conditional NOC value of Rs. 17.86 Crore, and only Rs.0.63 Crore was paid. The transaction was deemed to be made to defeat the rights of the creditors and was declared void.3. Compliance with Principles of Natural Justice:The Appellant argued that the Adjudicating Authority violated the principles of natural justice by not hearing them, despite being an affected party. However, the court noted that the Appellant was aware of the proceedings and had filed an application (I.A. No. 699 of 2020) seeking to restrain the Resolution Professional from taking control of the property. The Appellant was heard on 30th September 2021, and the suspended directors of the Corporate Debtor were also heard. Therefore, the court found no violation of natural justice principles.4. Authority of the Adjudicating Authority to Cancel Registered Agreements:The Appellant contended that the Adjudicating Authority did not have the jurisdiction to cancel a registered agreement. The court clarified that under Section 45(1) of the IBC, the Resolution Professional can apply to the Adjudicating Authority to declare transactions as void and reverse their effects. The Adjudicating Authority inferred the cancellation of the sale due to non-payment of the full consideration and directed the possession of the plant to be handed over to the Resolution Professional. This action was deemed within the authority of the Adjudicating Authority.Conclusion:The Adjudicating Authority’s order dated 04.10.2021, declaring the sale of the Taloja plant as an undervalued transaction and directing the return of possession to the Resolution Professional, was upheld. The appeal was dismissed, affirming the findings that the transaction was preferential and undervalued, and that the Appellant was heard in accordance with the principles of natural justice.