2022 (8) TMI 231 - AT - Insolvency and Bankruptcy

Tribunal Upholds Preferential Transaction Ruling under I&B Code

The Tribunal upheld the Adjudicating Authority's decision, declaring certain transactions as preferential under Section 43 of the I&B Code, 2016. The ... Preferential transactions - Avoidance of preferential transactions - Powers and duties of liquidator to apply to the Adjudicating Authority - Prohibition on filing composite applications seeking concurrent reliefs under Sections 43, 45 and 66 - Admissibility and reliance on transaction and forensic audit report in liquidation proceedingsPreferential transactions - Avoidance of preferential transactions - Whether the transactions alleged by the Liquidator fall within the scope of preferential transactions and are liable to be avoided under Section 43 read with Section 44 of the I&B Code. - HELD THAT: - The Tribunal noted that the Liquidator filed I.A. relying on a transaction/forensic audit which identified preferential transactions during the relevant financial year, specifically repayment of a loan to the Director and a payment to a related person. The Adjudicating Authority confined its finding to avoidance of preferential transactions under Section 43 and, after considering the auditor's analysis of audited financial statements, bank statements and explanations available, held that specified amounts were preferential and directed their return to the Liquidator for distribution to stakeholders. The Tribunal observed that the auditor's mandate included identification of preferential transactions and that the auditor reported preferential payments that put the recipients in a beneficial position vis-a -vis other creditors. Having examined the pleadings, audit report and the Adjudicating Authority's order, the Tribunal found no legal infirmity in the Adjudicating Authority's view that the identified transactions were preferential and required avoidance under Section 43/44. [Paras 22, 30, 31, 36, 40]The finding that the specified transactions are preferential and must be returned to the Liquidator is upheld; the Adjudicating Authority's order on avoidance under Section 43/44 is sustained.Prohibition on filing composite applications seeking concurrent reliefs under Sections 43, 45 and 66 - Whether the Liquidator's filing of an application invoking multiple provisions (including Sections 43, 45 and 66) was impermissible as a composite application in view of the Supreme Court's observations in Anuj Jain. - HELD THAT: - The Tribunal acknowledged the binding principle in Anuj Jain that composite applications alleging preferential, undervalued and fraudulent transactions should generally be filed and dealt with distinctly because the scope and requisite enquiries differ under Sections 43, 45 and 66. However, the Tribunal found that the Adjudicating Authority's final order was limited in scope to avoidance of preferential transactions under Section 43, and that the Adjudicating Authority did not adjudicate undervalued or fraudulent aspects when passing the impugned order. In that factual matrix the Tribunal held that no prejudicial consequence arose from the Liquidator having pleaded multiple provisions, since the Adjudicating Authority's decision was restricted to Section 43 and was supported by the auditor's findings and material on record. [Paras 24, 36, 37, 38, 40]Principle against omnibus/composite applications is recognised, but as the Adjudicating Authority confined its decision to preferential transactions under Section 43, the Appeal cannot be sustained on that ground.Admissibility and reliance on transaction and forensic audit report in liquidation - Powers and duties of liquidator to apply to the Adjudicating Authority - Whether the Adjudicating Authority erred in relying on the transaction/forensic audit report and other material not directly adduced by the Liquidator or served on the Appellants, thereby violating principles of natural justice. - HELD THAT: - The Tribunal recorded that the Liquidator, empowered under Section 35(1)(n), appointed a professional to conduct a transaction/forensic audit under the Liquidation Process Regulations due to non-cooperation and absence of complete books of account. The audit report, based on audited financial statements, bank statements and explanations provided to the auditor (and noting limitations of scope because of non-cooperation), was placed before the Adjudicating Authority. The Tribunal observed that the Adjudicating Authority heard the parties, had earlier directed production of books and gave opportunities to the Appellants, and that the auditor's report formed the evidentiary basis for the Liquidator's opinion. On the record, the Tribunal concluded that reliance on the audit report and available material did not amount to a breach of natural justice and was sufficient to support the Adjudicating Authority's restricted finding under Section 43. [Paras 30, 32, 33, 36, 40]No fault in the Adjudicating Authority's reliance on the audit report and material placed by the Liquidator; reliance was permissible and did not vitiate the order.Final Conclusion: The Tribunal found the Adjudicating Authority's determination that the specified payments constituted preferential transactions to be supported by the transaction/forensic audit and material on record, rejected the Appellants' challenges, and dismissed the appeal; the order directing return of the identified amounts to the Liquidator is upheld. Issues Involved:1. Preferential transactions.2. Composite application under multiple provisions.3. Natural justice and evidence submission.4. Applicability of Section 66 by the Liquidator.5. Compliance and cooperation by the Appellants.Issue-wise Detailed Analysis:1. Preferential Transactions:The Liquidator filed an application under Sections 35(1)(n), 43, 44, 45, 46, 48, 49, 60(5), and 66 of the I&B Code, 2016, seeking to declare certain transactions as preferential. The transactions in question were a loan repayment of Rs.42,50,397/- to the Director and Rs.6,28,000/- to the wife of the Director. The Adjudicating Authority found these transactions to be preferential under Section 43 of the Code. The Liquidator's audit report identified these transactions as preferential, given their timing and the preferential treatment of the Director over other creditors.2. Composite Application Under Multiple Provisions:The Appellants argued that the filing of a composite application under multiple provisions violated the Supreme Court's dicta in Anuj Jain IRP for Jaypee Infratech Limited Vs. Axis Bank & Ors., which mandates separate applications for different types of transactions. However, the Tribunal noted that the Adjudicating Authority's decision was based solely on the preferential nature of the transactions, thereby not violating the Supreme Court's guidelines.3. Natural Justice and Evidence Submission:The Appellants contended that the Liquidator did not provide them with the Transaction Audit Report and Forensic Audit Report, violating natural justice principles. The Tribunal observed that the Liquidator had addressed letters to the Appellants seeking explanations and documents, but the Appellants did not respond or provide the required information. The Tribunal found that the Appellants had ample opportunity to present their case but failed to do so.4. Applicability of Section 66 by the Liquidator:The Appellants argued that only a Resolution Professional, not a Liquidator, could invoke Section 66 of the Code. The Tribunal clarified that Section 66, which deals with fraudulent trading, is not limited to Resolution Professionals and can be invoked during the liquidation process as well. However, the Adjudicating Authority's decision focused on preferential transactions, not on fraudulent trading under Section 66.5. Compliance and Cooperation by the Appellants:The Liquidator had requested the Appellants to provide books of accounts and other necessary documents for the liquidation process, but the Appellants did not comply. The Tribunal noted the lack of cooperation from the Appellants, which hindered the audit process. The Adjudicating Authority had previously directed the Appellants to provide the required documents, but they failed to do so.Conclusion:The Tribunal upheld the Adjudicating Authority's decision, finding no legal infirmity in declaring the transactions as preferential. The appeal was dismissed, and the Appellants were directed to return the amounts to the Liquidator for distribution among the stakeholders. The Tribunal emphasized the importance of compliance and cooperation in the liquidation process and upheld the principles of natural justice.