2025 (8) TMI 259 - AT - IBC

NCLAT Upholds Liquidator's Findings on Undervalued Transactions Under Section 45 IBC and Confirms One-Year Lookback

The NCLAT upheld the Liquidator's findings that the Corporate Debtor's transactions involving purchase and return of Hot Roll Trimming at significantly ... Preferential or undervalued transaction - Appellant’s purchase of Hot Roll Trimming (a byproduct) from the Corporate Debtor during the Financial Year 2016-17 - scope of forensic audit - lookback period with reference to under value transaction under section 45 of IBC - alleged misconduct by the Resolution Professional in some other cases as well as non- approval of appointment of Forensic Auditor by Adjudicating Authority - transaction arising out of ordinary course of business of Corporate Debtor or otherwise - transactions done by the Third Party can be covered under Section 45 of the Code or not. Are the transactions covered in forensic audit and Impugned Order in nature of purchased return as alleged by the Liquidator or are they in nature of fresh purchase as submitted by the Appellants? - HELD THAT:- The forensic audit clearly brings out the facts that the same material was purchased by the Corporate Debtor from the same Appellants earlier at much higher prices and were returned during Financial Year 2015-16 and 2016-17 at substantial reduced prices, causing losses to the Corporate Debtor - there are merit in the contentions of the Liquidators that by nature, HR Coil etc are non-perishable items and do not deteriorate, therefore, there was no reason for Corporate Debtor to return back i.e, purchase return at later stage at heavy discounted price which was done purely with intentions of giving undue benefit to the Appellants. The forensic auditor and the Resolution Professional/ Liquidator, based on the tally books, balance sheets and other records, have established these facts and the contentions of the Appellants could not be corroborated with respect to books as maintained by the Corporate Debtor. Lookback period with reference to under value transaction under section 45 of the Code - to be counted with respect to CIRP date or period is to be treated as full financial year preceding the CIRP date - calculations were correctly made in the present case with respect to stipulated Look-back period in the Code or not - HELD THAT:- The look back period for all transactions covered under Section 43, 45, 50 have been bifurcated into two categories i.e., transactions with related parties and transactions with unrelated parties. As per Code, for related parties, (as defined in Section 5(24) of the Code) look back period has been defined as two years preceding the CIRP date, whereas for unrelated parties, the look back period has been specified as one year from the CIRP date - the Resolution Professional has to act within the laid down time limits as provided in the Code and cannot go further back. The Resolution Professional is also required to file an application for avoidance transactions before the Adjudicating Authority only for the relevant period covering the relevant transactions of such nature. This is unlike no look back period under Section 66 of the Code i.e., fraudulent transaction, where the Resolution Professional/ Liquidator can go to any extent and examine any transactions since inception of the Corporate Debtor. The CIRP commenced on 28.04.2017, thus, the relevant period of look back period has to be between 28.04.2016 to 28.04.2017 - there is a significant difference in the amounts mentioned by the Respondent/Liquidator. The first table shows a total loss of Rs. 34.65 Crores (approx.) which has now been revised by the Respondent/ Liquidator, which works out to be Rs. 24.14 Crores (approx.). M/s Greenfield Overseas will be entitled to reduce figures of Rs. 2,70,87,587 from Rs. 5.49 Crores (approx..); M/s Arihant International will be entitled to reduce figure of Rs. 77,43,946 from Rs.2.38 Crores (approx.); M/s Marque Global will be entitled to reduced figure of Rs. 20,66,33,868 from Rs. 26.76 Crores. The Respondent will pursue recovery from the Appellants as per Liquidator’s reworked out revised figures. Whether the alleged misconduct by the Resolution Professional in some other cases as well as non-approval of forensic auditor by the Adjudicating Authority will have any bearing or impact in the present appeals? - HELD THAT:- As regards, appointment of forensic auditors, the reference is required to be made to Section 20(2)(b) and 25 (d) of the Code which we have already noted in earlier discussions. It is clear from these sections that it is purely in the domain of Interim Resolution Professional/ Resolution Professional to appoint the forensic auditor. It also needs to be understood that the CoC is empowered to approve the cost of such forensic auditor since, the same will form the CIRP cost. Nowhere, in the Code or Regulation it has been stipulated that the approval of the Adjudicating Authority is required. Hence, the contention of the Appellants in this regard not accepted where they have alleged misconduct against the Liquidator for not taking approval of the Adjudicating Authority before appointing M/s Khandelwal and Jain as forensic auditors. As regard, other two alleged misconduct by the Respondent/Liquidator which the Appellants has raised, where IBBI had suspended the liquidator, it is observed that in reply, the Liquidator has not submitted any facts or counter viewpoint. Be that it may, it is found that alleged misconduct of Liquidator in other cases, will not have any impact on the present case unless present case was also covered by such misconduct and thus, we shall not go any further into this aspect. There are no merit in the pleadings of the Appellants on this ground. Whether the impugned transaction covered under forensic report as well as impugned order, are arising out of ordinary course of business of Corporate Debtor or otherwise? - HELD THAT:- The liquidator could not verify the alleged fresh purchases by the Appellants as pleaded in the Appeal Paper Books with respect to tally books and other accounts available with the Corporate. The fact is taken into consideration that material like HR coil or even hot roll trimming (bye product) are not prone to deterioration. Therefore, there are logic in the contentions of the Liquidator that such huge discount cannot be treated as done in ordinary course of business - there are no merit in the arguments of the Appellants on this ground and the same is rejected. Whether, the transactions done by the Third Party can be covered under Section 45 of the Code? - HELD THAT:- The intent of Section 45 of the Code is with respect to transactions done by the Corporate Debtor which involves transfer of one or more assets for a consideration the value of which is significantly less. Thus, such third parties, like the Appellants in the present three appeals, become beneficiary of undervalued transactions. We also take into consideration the fact that intention Section 45 of the Code, is to reverse the effect such transfers and bring back assets or their value back to the Corporate Debtor’s estate for the benefit of all creditors - the Code provides two different lookback period with respect to related party and unrelated party and the third party falls in the category of unrelated party. Therefore, the contentions of the Appellants, that being unrelated party, they could not have been proceeded against under Section 45 of the Code, do not warrant any merit and stand rejected. Thus, on all accounts, except the impugned transactions beyond stipulated look back period as per code, the appeals fail and stand dismissed. ISSUES: Whether the impugned transactions are in the nature of purchase returns by the Corporate Debtor or fresh purchases as claimed by the appellants.What is the applicable look-back period under Section 45 of the Insolvency and Bankruptcy Code, 2016 ('Code') for undervalued transactions? Whether the look-back period is to be counted from the Insolvency Commencement Date (ICD) or the entire preceding financial year.Whether the calculations of the impugned transactions conform to the statutory look-back period.Whether alleged misconduct of the Resolution Professional/Liquidator in other cases and the non-approval of the forensic auditor by the Adjudicating Authority affect the present appeals.Whether the impugned transactions fall within the ordinary course of business of the Corporate Debtor.Whether transactions involving third parties can be subject to avoidance under Section 45 of the Code. RULINGS / HOLDINGS: The transactions are purchase returns by the Corporate Debtor at significantly discounted prices, not fresh purchases; this is supported by forensic audit, Tally books, and balance sheets, and the appellants failed to provide documentation such as GST invoices to substantiate their claim of fresh purchases.The look-back period under Section 45 is one year preceding the Insolvency Commencement Date (28.04.2016 to 28.04.2017) for transactions with unrelated parties; the entire preceding financial year is not the relevant period. The calculations initially made were adjusted to conform to this statutory look-back period; the appellants are entitled to reduction in amounts payable based on revised figures submitted by the Liquidator.The alleged misconduct of the Resolution Professional in other cases and the non-approval of the forensic auditor by the Adjudicating Authority have no bearing on the present appeals; the appointment of forensic auditors lies within the authority of the Resolution Professional and the Committee of Creditors, not requiring Adjudicating Authority approval.The impugned transactions are not in the ordinary course of business as they involved returning goods at heavily discounted prices causing losses to the Corporate Debtor; the nature, timing, and valuation of these transactions do not align with ordinary business practices.Transactions involving third parties, including unrelated parties, fall within the scope of Section 45 of the Code; such parties can be subject to avoidance applications, and the Code distinguishes look-back periods for related and unrelated parties accordingly. RATIONALE: The Court applied the definitions and distinctions between purchase, sales, purchase returns, and sales returns, considering GST input tax credit mechanisms and the absence of GST documentation supporting appellants' claims of fresh purchases. The forensic audit and financial records showed the Corporate Debtor purchased goods and subsequently returned the same at discounted prices, causing losses, which is consistent with undervalued transactions under Section 45.The statutory framework under Sections 43, 45, and 50 of the Code prescribes specific look-back periods counted from the Insolvency Commencement Date; the Court relied on Section 25(2)(j) and Regulation 35(a) of the IBBI CIRP Regulations, 2016, emphasizing the Resolution Professional's duty to investigate within the prescribed period. The Court accepted the Liquidator's revised calculations conforming to the one-year look-back period for unrelated parties, as per the Code.Sections 20(2)(a) and 25(2)(d) of the Code empower the Resolution Professional to appoint professionals including forensic auditors without necessity of Adjudicating Authority approval; the Court distinguished the present case from alleged misconduct in other matters and held such external factors irrelevant absent direct impact on the present proceedings.The Court examined the ordinary course of business doctrine, considering factors such as the Corporate Debtor's business objectives, frequency and nature of transactions, and industry practices. The significant undervaluation and timing of returns, along with the non-perishable nature of goods like HR Coils, indicated transactions were not ordinary but designed to benefit specific parties, consistent with precedents including Swiss Ribbons Pvt. Ltd. and Anuj Jain.Section 45 of the Code contemplates avoidance of undervalued transactions involving both related and unrelated parties; the Court rejected the appellants' reliance on judgments concerning Section 66 (fraudulent transactions) which require proof of fraudulent intent, noting that undervalued transactions under Section 45 focus on objective undervaluation irrespective of intent. The statutory differentiation of look-back periods for related and unrelated parties confirms third parties can be subject to avoidance actions.