2023 (3) TMI 245 - AT - Insolvency and Bankruptcy

Tribunal Upholds Decision on Preferential Transactions: Appellants' Claims Dismissed

The Tribunal upheld the Adjudicating Authority's decision, declaring transactions between the appellants and the corporate debtor as preferential, ... Preferential transactions - Undervalued transactions / Avoidance of undervalued transactions - Fraudulent trading / Wrongful trading - Relevant time for avoidable transactions (one year preceding insolvency commencement date) - Related party transfers and siphoning of assets - Transaction Audit Report as documentary basis for avoidance - Corporate Insolvency Resolution Process (CIRP) - Insolvency commencement date and reserved admission orderPreferential transactions - Relevant time for avoidable transactions (one year preceding insolvency commencement date) - Related party transfers and siphoning of assets - Option Agreement linked transfers to the corporate debtor constituted preferential transactions and are avoidable under the Code. - HELD THAT: - On the material before it - bank statements, the Option Agreements and the Transaction Audit Report (TAR) - the Tribunal found that the sums paid by Pray Projects and Fervent Securities to the corporate debtor were transferred almost immediately to group entities SUIL and STPL and thus were not retained as assets of the corporate debtor. Those transfers occurred within the relevant one year period preceding the insolvency commencement date (18.12.2018). The corporate debtor had admitted debt/default and the section 7 hearing had been reserved before these transactions, rendering the transactions suspect. In these circumstances the transfers operated as preferences within the meaning of the Code and prejudiced the legitimate interests of other creditors. The Adjudicating Authority's finding that the transactions amounted to preferential transactions was upheld. [Paras 27, 29, 30, 38]Preferential transactions held to have been given within the relevant period and avoided; impugned finding on preference upheld.Undervalued transactions / Avoidance of undervalued transactions - Transaction Audit Report as documentary basis for avoidance - The Option Agreements amounted to undervalued transactions and are voidable under the Code. - HELD THAT: - The Tribunal concluded that the effective value received and retained by the corporate debtor in respect of the Option Agreements was nil because the consideration amounts (Rs. 5 crores and Rs. 1 crore) were immediately routed to related group entities. Such transfer of assets for consideration significantly less than the value provided by the corporate debtor, not in the ordinary course of business and occurring within the statutory relevant period, falls within the statutory test for undervalued/avoidance transactions. The TAR and bank records furnished sufficient documentary evidence to support the Adjudicating Authority's determination that the transactions were undervalued and therefore voidable. [Paras 26, 28, 38]Option Agreements declared undervalued and avoidable; the Adjudicating Authority's order on undervalue sustained.Fraudulent trading / Wrongful trading - Insolvency commencement date and reserved admission order - The transactions surrounding the Option Agreements were tainted by fraud/wrongful intent and the Adjudicating Authority's findings under the fraudulent trading provision were upheld. - HELD THAT: - The Tribunal noted circumstances pointing to fraudulent or wrongful conduct: the timing of the transactions immediately after the section 7 hearing was reserved and after the corporate debtor had admitted debt/default; absence of board resolutions, absence of NOC from the mortgagee, under stamped and unregistered option documents; and circular transfer pattern evidenced by the TAR and bank records. These features, taken together, supported the Adjudicating Authority's satisfaction that the transactions were designed to defeat creditors and were therefore tainted by fraud/wrongful intent within the meaning of the Code. The Tribunal distinguished authorities where no convincing documentary material existed, observing that here the TAR and bank records supplied the necessary material to sustain the finding of fraudulent conduct. [Paras 30, 31, 35, 37, 38]Findings of fraudulent/wrongful trading upheld; transactions declared null and void on that basis as well.Final Conclusion: The Tribunal affirms the Adjudicating Authority's avoidance of the two Option Agreements as preferential, undervalued and tainted by fraudulent/wrongful trading; the Option Agreements are declared null and void and the appellants cannot claim payment from the corporate debtor under the CIRP. The appeals are dismissed. Issues Involved:1. Whether the transactions between the appellants and the corporate debtor were preferential, undervalued, and fraudulent under Sections 43, 45, and 66 of the Insolvency and Bankruptcy Code (IBC).2. Whether the claims lodged by the appellants in the Corporate Insolvency Resolution Process (CIRP) of the corporate debtor were valid and binding.Issue-wise Detailed Analysis:1. Preferential, Undervalued, and Fraudulent Transactions:The appellants, Pray Projects Private Limited and Fervent Securities Private Limited, challenged the order of the Adjudicating Authority (National Company Law Tribunal, Mumbai) which held their transactions with the corporate debtor, Mayurpankh Properties Private Limited (MPPL), as preferential, undervalued, and fraudulent under Sections 43, 45, and 66 of the IBC.Pray Projects' Transaction:- In 2014, Pray Projects gave an unsecured loan of Rs. 5 crores to Sunshine Housing Infra Pvt. Ltd. (SHIPL).- In 2018, SHIPL transferred Rs. 5 crores to Pray Projects for onward transfer to MPPL as consideration for an Option Agreement (Option Agreement-I).- Pray Projects paid Rs. 5 crores to MPPL in five tranches, and an Option Agreement was signed on 15.12.2018, giving Pray Projects an option to purchase an area in MPPL's 'Chambers' project.Fervent Securities' Transaction:- Fervent Securities advanced Rs. 1 crore to MPPL, and an Option Agreement (Option Agreement-II) was signed on 17.12.2018, granting an option to purchase an area in the 'Chambers' project.Transaction Audit Report (TAR):- The TAR revealed that the corporate debtor transferred the amounts received from Pray Projects and Fervent Securities to related parties, Sunshine Urban Infrastructure Ltd (SUIL) and Sunshine Tracon Pvt. Ltd. (STPL), almost immediately.- The report suggested that these transactions were used as conduits for fund transfers among related parties, indicating preferential and undervalued transactions.Legal Provisions:- Section 43 IBC: Defines preferential transactions as those benefiting a creditor over others in the period preceding the insolvency commencement date.- Section 45 IBC: Defines undervalued transactions as those where the consideration is significantly less than the value of the assets transferred.- Section 66 IBC: Addresses fraudulent trading and wrongful trading, holding parties liable for defrauding creditors.Analysis:- The transactions were deemed preferential as they were executed within one year preceding the insolvency commencement date and benefited specific creditors (Pray Projects and Fervent Securities).- The transactions were undervalued as the consideration received by MPPL was immediately transferred to related parties, thus not adding value to MPPL's assets.- The timing of the transactions, just before the insolvency commencement date, and the lack of proper documentation and board resolutions, indicated fraudulent intent to defraud actual creditors.2. Validity and Binding Nature of Claims:Arguments by Appellants:- The appellants claimed that the transactions were genuine commercial transactions done at arm's length and were unaware of the impending CIRP.- They argued that their claims were accepted by the Resolution Professional as unsecured financial creditors.Judgment:- The Tribunal found that the amounts paid by Pray Projects and Fervent Securities were not retained by MPPL but transferred to related parties, thus not forming part of MPPL's assets.- The Option Agreements were declared null and void, and the interest created in MPPL's property was deemed non-existent.- The Tribunal held that the transactions were preferential, undervalued, and fraudulent, and thus the claims lodged by the appellants were not binding on MPPL.Conclusion:- The appeals were dismissed, and the Impugned Order was upheld, declaring the transactions as avoidance transactions under Sections 43 and 45 of the IBC and not binding on the corporate debtor. The appellants' claims were invalidated, and no costs were awarded.