Fraudulent and preferential transaction findings need full statutory ingredients, not mere audit material or accounting write-offs.
Fraudulent and preferential transaction findings under the Insolvency and Bankruptcy Code require reasoned findings on every statutory ingredient, supported by relevant material. An order based only on audit material, ex parte status, or unexplained financial entries cannot sustain a declaration under section 66. Likewise, a write-off of receivables or related accounting entries, without proof of a transfer conferring a better position on a creditor within the relevant period, does not by itself establish preference under section 43. The challenged findings were set aside to that extent, and the fraud issue was remitted for fresh adjudication with liberty to file a reply.
Issues: (i) whether the order declaring transactions fraudulent under section 66 of the Insolvency and Bankruptcy Code, 2016 could stand when the adjudicating authority recorded no reasoned findings on the statutory ingredients; (ii) whether write-off of receivables and related accounting entries could, by themselves, constitute preferential transactions under section 43 of the Insolvency and Bankruptcy Code, 2016.
Issue (i): whether the order declaring transactions fraudulent under section 66 of the Insolvency and Bankruptcy Code, 2016 could stand when the adjudicating authority recorded no reasoned findings on the statutory ingredients.
Analysis: The impugned order proceeded on the basis of the transaction audit material and the ex parte status of the respondents, but it did not analyse the ingredients required for a finding of fraudulent transaction. The order contained no substantive finding showing how the alleged dealings satisfied the statutory test, and the relevant financial material was not examined in a reasoned manner.
Conclusion: The order under section 66 could not be sustained and was set aside for fresh consideration, with liberty to file a reply before the adjudicating authority.
Issue (ii): whether write-off of receivables and related accounting entries could, by themselves, constitute preferential transactions under section 43 of the Insolvency and Bankruptcy Code, 2016.
Analysis: Preference under section 43 requires the constituent elements of a transfer conferring a benefit on a creditor or related person within the relevant time and in a manner that places such person in a better position than distribution under section 53. The mere write-off of amounts, without material showing a transfer answering those ingredients, does not establish a preferential transaction. The order also lacked findings showing how the statutory conditions were met.
Conclusion: The finding of preferential transaction could not be sustained, and the impugned directions were set aside to the extent they related to the appellant.
Final Conclusion: The appellate tribunal granted partial relief by setting aside the challenged findings for want of reasoned satisfaction of the statutory requirements and by remitting one matter for fresh adjudication.
Ratio Decidendi: A transaction cannot be declared fraudulent or preferential unless the adjudicating authority records reasoned findings establishing every statutory ingredient on the basis of relevant material; a mere audit opinion, ex parte appearance, or accounting write-off is insufficient.
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AI Drafter ✕
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