NCLAT dismisses appeal challenging preferential transaction orders under Section 43 IBC 2016, upholds Rs. 61 lakh restoration

NCLAT Chennai dismissed the appeal challenging preferential transaction orders under Section 43 of IBC 2016. The court held that appellants failed to discharge their burden under Section 101 of Evidence Act to prove transactions were conducted in ordinary course of business. The adjudicating authority correctly relied on unrebutted forensic audit reports identifying preferential transactions. Appellants could not establish exceptions under Section 43(3) of IBC. The court directed restoration of amounts totaling Rs. 61,33,107 to respondents, upholding the lower authority's findings based on sound logical reasoning and proper consideration of evidence.

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ISSUES PRESENTED and CONSIDERED

The core legal question considered was whether the identified transactions, as per the report of the Committee of Creditors dated 09.11.2020, constituted preferential transactions under Section 43 of the Insolvency and Bankruptcy Code, 2016 (I&B Code). The appeal arose from an order by the National Company Law Tribunal (NCLT), which directed the appellants to restore certain amounts deemed preferential transactions.

ISSUE-WISE DETAILED ANALYSIS

Relevant Legal Framework and Precedents

Section 43 of the I&B Code defines a preferential transaction as one where a corporate debtor transfers property or an interest thereof for the benefit of a creditor, surety, or guarantor for an antecedent financial or operational debt, placing them in a more favorable position than they would have been in a liquidation scenario under Section 53. The exceptions under Section 43(3) were also considered, which exclude transactions made in the ordinary course of business.

Court's Interpretation and Reasoning

The Tribunal interpreted Section 43 to require proof that the transactions provided a benefit to a creditor or guarantor beyond what would be available under a liquidation scenario. The burden of proof was on the appellants to demonstrate that the transactions fell within the exceptions of Section 43(3) as ordinary business transactions.

Key Evidence and Findings

The Tribunal relied on forensic audit reports indicating that certain transactions were preferential. The audit suggested that transactions totaling Rs.81.33 lakhs and Rs.78.81 lakhs were preferential and fraudulent, respectively. The appellants failed to provide sufficient evidence to counter the findings of the forensic audit.

Application of Law to Facts

The Tribunal applied the provisions of Section 43 to the facts, determining that the transactions in question were not conducted in the ordinary course of business. The appellants did not meet their burden to prove otherwise, as required by Section 101 of the Evidence Act.

Treatment of Competing Arguments

The appellants argued that the transactions were ordinary business activities and should not be considered preferential. However, the Tribunal found that the appellants failed to substantiate their claims with credible evidence or documentation, thus failing to rebut the forensic audit's conclusions.

Conclusions

The Tribunal concluded that the transactions were preferential under Section 43 of the I&B Code, and the appellants did not establish that they fell within the exceptions of Section 43(3). Consequently, the Tribunal upheld the NCLT's order requiring the appellants to restore the amounts to the corporate debtor.

SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning

The Tribunal noted: "The transactions, which have been detailed and determined by the Forensic Auditors in their report do not fall to be nor it was established to be falling under the exceptions as contemplated under Section 43(3) of I & B Code, 2016."

Core Principles Established

The decision reinforced the principle that the burden of proof lies with the party claiming a transaction falls within the ordinary course of business under Section 43(3). Failure to discharge this burden results in the transaction being deemed preferential.

Final Determinations on Each Issue

The Tribunal dismissed the appeal, affirming the NCLT's order that the transactions were preferential and directing the appellants to restore the specified amounts to the corporate debtor. The Tribunal found no merit in the appellants' arguments and concluded that the evidence supported the NCLT's findings.

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