NCLAT upholds avoidance transaction proceedings under IBC Sections 43, 45, 66 after appellants failed to participate despite opportunities

NCLAT dismissed the appeal challenging avoidance transaction proceedings under IBC Sections 43, 45, 66. Appellants claimed violation of natural justice and lack of fair hearing opportunity. NCLAT found that transaction audit report was shared with appellants who raised no objections. Despite being given opportunities to appear and file replies, appellants failed to participate in proceedings. Court held appellants cannot claim denial of natural justice when they themselves failed to utilize given opportunities, applying precedent from GVR Consulting Services case.

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Issues Involved:

1. Validity of the impugned order by the Adjudicating Authority.
2. Preferential transactions under Section 43 of the Insolvency and Bankruptcy Code, 2016.
3. Undervalued transactions under Section 45 of the Code.
4. Fraudulent transactions under Section 66 of the Code.
5. Procedural fairness and opportunity to present a defense.
6. Maintainability of a combined application under Sections 43, 45, and 66.

Issue-wise Detailed Analysis:

1. Validity of the Impugned Order:

The appeal challenged the order dated 20.06.2022, which directed certain respondents to pay specified amounts to the Corporate Debtor and initiated penal proceedings against suspended directors. The appellants contended that the order was non-speaking and arbitrary, alleging that they were not given a fair opportunity to present their case. However, the tribunal found that the appellants were given multiple opportunities to file a reply, which they failed to do. Consequently, the order was upheld, and the appeal was dismissed.

2. Preferential Transactions under Section 43:

The transaction audit revealed several transactions deemed preferential, totaling Rs. 502.46 lakh. These transactions were not conducted in the ordinary course of business and involved payments to various parties, including related entities and suspended directors, which were considered preferential under Section 43. The tribunal upheld the findings of the transaction auditor and the resolution professional, affirming the need to reverse these transactions as avoidance transactions under the Code.

3. Undervalued Transactions under Section 45:

The audit identified undervalued transactions amounting to Rs. 1721.19 lakh. These involved sales of goods at significantly lower prices than their cost, resulting in substantial losses. The tribunal noted that these transactions were intended to transfer assets out of the creditors' reach and were not conducted in the ordinary course of business. The findings were supported by the transaction auditor's report, which highlighted the lack of substantial evidence to justify these sales.

4. Fraudulent Transactions under Section 66:

Fraudulent transactions totaling Rs. 2384.32 lakh were identified, involving sales and purchases without any actual movement of goods. These transactions were intended to inflate sales and purchases artificially and write off non-existent stock. The tribunal found that the suspended directors had deliberately engaged in these transactions to defraud creditors. The findings were supported by the transaction auditor's observations, which noted the absence of genuine transactions and the intent to defraud.

5. Procedural Fairness and Opportunity to Present a Defense:

The appellants argued that they were not given a fair opportunity to present their case. However, the tribunal found that the appellants were given multiple opportunities to file a reply, which they failed to utilize. The order proceeding against them ex-parte was set aside, and they were granted time to file a reply, which they did not do. Consequently, their right to file a reply was closed, and the tribunal held that the appellants were responsible for their non-compliance.

6. Maintainability of a Combined Application under Sections 43, 45, and 66:

The appellants contended that a combined application under Sections 43, 45, and 66 was not maintainable, citing the Supreme Court's decision in Anuj Jain Vs. Axis Bank Ltd. However, the tribunal referred to a decision in GVR Consulting Services Pvt. Ltd., which emphasized that while the application was combined, the resolution professional had provided separate details under different heads for each type of transaction. The tribunal found no infirmity in the application and upheld its maintainability.

Conclusion:

The tribunal dismissed the appeal, finding no merit in the appellants' arguments. The tribunal upheld the findings of preferential, undervalued, and fraudulent transactions, affirming the order of the Adjudicating Authority. The tribunal emphasized that the appellants were given ample opportunity to present their case, which they failed to utilize, and upheld the maintainability of the combined application under the relevant sections of the Insolvency and Bankruptcy Code, 2016.

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