Preferential transaction and moratorium rules do not apply when VAT recovery is made from a third party, not the corporate debtor.

Section 43 of the Insolvency and Bankruptcy Code was not attracted because the alleged preferential payment was made by a third party in response to a statutory notice under the Madhya Pradesh VAT Act, not by the corporate debtor through any transfer of property or interest. Section 14 was also not breached because the VAT amount was recovered from the third party under the statutory recovery mechanism, without any recovery from the corporate debtor or its assets. On that basis, the direction to refund the amount was held unsustainable and the resolution professional's application could not survive.

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Issues: (i) Whether the deposit made by a third party pursuant to a statutory notice under the Madhya Pradesh VAT Act could be treated as a preferential transaction by the corporate debtor under the Insolvency and Bankruptcy Code, 2016. (ii) Whether recovery of VAT dues from the third party during the moratorium period amounted to a violation of moratorium under the Insolvency and Bankruptcy Code, 2016.

Issue (i): Whether the deposit made by a third party pursuant to a statutory notice under the Madhya Pradesh VAT Act could be treated as a preferential transaction by the corporate debtor under the Insolvency and Bankruptcy Code, 2016.

Analysis: A preferential transaction under Section 43 requires a transfer of property or interest by the corporate debtor at the relevant time. The deposit in question was made by a third party in response to a notice under Section 28(1) of the Madhya Pradesh VAT Act, 2002, and not by the corporate debtor. Since the transaction was not one created by the corporate debtor, the statutory conditions for invoking Section 43 were not satisfied.

Conclusion: The transaction was not a preferential transaction and Section 43 was not attracted.

Issue (ii): Whether recovery of VAT dues from the third party during the moratorium period amounted to a violation of moratorium under the Insolvency and Bankruptcy Code, 2016.

Analysis: The moratorium under Section 14 prohibits proceedings and recovery actions against the corporate debtor and its assets. The amount here was recovered from a third party who had availed input tax credit and was required to discharge liability under the statutory recovery mechanism. No amount was recovered from the corporate debtor or from its assets, and the payment made by the third party to reverse input tax benefit could not be characterised as a recovery in breach of moratorium.

Conclusion: There was no violation of moratorium under Section 14.

Final Conclusion: The impugned direction to refund the amount was unsustainable, and the resolution professional's application did not survive.

Ratio Decidendi: Section 43 applies only where the corporate debtor itself has given a preference by transfer of property or interest, and Section 14 is not violated where recovery is made from a third party under a statutory notice without any recovery from the corporate debtor or its assets.

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