TaxTMI 
TaxTMI 
2023 (4) TMI 1137
X X X X Extracts X X X X
X X X X Extracts X X X X
....s For the Respondents : Ms. Pooja Mahajan, Advocate with Ms. Pooja Bahry (erstwhile RP). Ms. Mehak Nayak, Advocate Mr. Milan Singh Negi, Mr. Nikhil Jha, Advocates for R-2-4. For the Appellant: Mr. Abhijeet Sinha, Mr. Gurcharan Singh Advocates. For the Respondents : Ms. Pooja Mahajan, Advocate with Ms. Pooja Bahry (erstwhile RP). Mr. Gurcharan Singh, Ms. Mehak Nayak, Advocates For the Appellant : Mr. Gaurav Mitra, Mr. Milan Singh Negi, Mr. Nikhil Jha, Advocates For the Respondent : Ms. Pooja Mahajan, Advocate with Ms. Pooja Bahry (erstwhile RP). Ms. Mehak Nayak, Advocate JUDGMENT ASHOK BHUSHAN , J. 1. These three Appeals have been filed against the same Order dated 02nd March, 2022 passed by the National Company Law Tribunal, New Delhi, Bench-V (hereinafter referred to as "The Adjudicating Authority") allowing I.A. No. 5768 of 2020 in Company Petition (IB) No. 814/ND/2019 filed by the Resolution Professional (RP in short) under Section 43 of the Insolvency and Bankruptcy Code, 2016 (Hereinafter referred to as "The Code"). The Adjudicating Authority by the Impugned Order held the transactions by the Corporate Debtor in favour of the Appellants as preferential ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ged by making payment from 06.09.2017 to 05.12.2017 totaling Rs. 90,00,000/-. With regard to Appellant No. 3-Keshika Exports Pvt. Ltd., antecedent liability of the corporate debtor towards Appellant No. 3 was discharged on 31.08.2018 of amount of Rs. 2,49,338/-. 5. We may notice brief facts giving rise to these Appeals. (i) CIRP against the Corporate Debtor commenced by Order dated 27.08.2019. On 16.09.2019 and 27.09.2019 public announcement was made. In CoC meeting dated 30.10.2019, Pooja Bahry was appointed as Resolution Professional of the Corporate Debtor. (ii) On 09.09.2020, Resolution Professional appointed a Transaction Auditor i.e. Pipara & Co. to conduct the audit of the Corporate Debtor for the period 01.04.2016 to 27.08.2019. Transaction Auditor submitted its final report to the Resolution Professional. Resolution Professional has published Form-G. Resolution Plan was approved on 21.09.2020 by the CoC and on 28.09.2020, an Application being I.A. No. 4588 of 2020 under Section 30(6) of the Code was filed by the RP seeking approval of the plan and on 28.01.2021, Resolution Plan was approved by the Adjudicating Authority. (iii) Transaction Audi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pellant was utilized by the corporate debtor for running its business and meeting its liabilities. The repayments by the Corporate Debtor was in ordinary course of business and were towards financial affairs of the corporate debtor which are clearly exempted from the preferential transactions within the meaning of Section 43 of the Code. It is further submitted that composite application filed by the RP under Section 43, 44, 45, 46, 66, 67 and 60(5) of the Code raising allegations against several party under different provisions of the Code was not maintainable in view of the law laid down by the Hon'ble Supreme Court in "Anuj Jain, IRP for Jaypee Infratech Limited Vs. Axis Bank Ltd. & Ors.", (2020) 8 SCC 401. 8. Mr. Gaurav Mitra, Learned Counsel for the Appellant submitted that the Resolution Professional had no authority to pursue the avoidance application in view of the position of law as declared by Delhi High Court in its Judgement "M/s. Venus Recruiters Pvt. Ltd. Vs. Union of India & Ors.", 2020 SCC OnLine DL 1479. In the present case, Resolution Plan does not authorize the Resolution Professional to pursue the Application. It is further submitted that alleged withdrawal o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....under Section 43(3) of the Code. Giving of loan to the Corporate Debtor was not part of ordinary course of business. Learned Counsel for the RP relied upon the Judgement of the Hon'ble Supreme Court in "Anuj Jain" (supra). In support of her submission, she submitted that present transactions do not fall in ordinary course of business. The Adjudicating Authority has rightly declared the transaction as preferential transactions. 10. We have considered the submissions of Learned Counsel for the parties and have perused the record. 11. The Adjudicating Authority having accepted the claim of Resolution Professional with respect to preferential transactions and having not accepted case of the RP with regard to other transactions, consideration in these Appeals are only with regard to preferential transactions within the meaning of Section 43 of the Code. 12. Section 43 of the Code deals with preferential transactions and relevant time. Section 43 of the Code is as follows: "43: Preferential transactions and relevant time.- (1) Where the liquidator or the resolution professional, as the case may be, is of the opinion that the corporate debtor has at a relevant t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....relevant time, if- (a) it is given to a related party (other than by reason only of being an employee), during the period of two years preceding the insolvency commencement date; or (b) a preference is given to a person other than a related party during the period of one year preceding the insolvency commencement date." 13. Section 44 deals with Order in case of preferential transactions. 14. The Adjudicating Authority in the Impugned Order has noted in detail the facts and transactions which have been questioned by the Resolution Professional in the avoidance application. In paragraph 8(vii) of the Order, repayment to related parties and repayment to non-related parties have been separately noticed by the Adjudicating Authority. It is relevant to notice the paragraph 8(vii) which is to be following effect: "vii. TAR highlighted that during the relevant period provided in Section 43(4) of the Code, the following repayment/transfer were made by the Corporate Debtor to its related parties from 27.08.2017 to 27.08.2019 and to non-related parties from 27.08.2018 to 27.08.2019 to discharge its antecedent liability : Date Name o....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 2,80,99,338 Repayment to Non-Related Parties D. Dyna Rasayan Udyog Private Limited 27.08.2018 Dyna Rasayan Udyog Private Limited 40,00,000 Repayment of unsecured loan 28.08.2018 Dyna Rasayan Udyog Private Limited 45,00,000 Repayment of unsecured loan 29.08.2018 Dyna Rasayan Udyog Private Limited 7,29,987 Repayment of interest on unsecured loan 29.08.2018 Dyna Rasayan Udyog Private Limited 65,00,000 Repayment of unsecured loan Total (D) 1,57,29,987 E. GVR Electronics Private Limited 27.08.2018 GVR Electronics Private Limited 25,00,000 Repayment of unsecured loan 29.08.2018 GVR Electronics Private Limited 25,00,000 Repayment of unsecured loan 31.08.2018 GVR Electronics Private Limited 25,00,000 Repayment of unsecured loan 04.09.2018 GVR Electronics Private Limited 15,00,000 Repayment of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ovable, delivery of goods, payment, execution or other act relating to property made, taken or done by or against a company within six months before the commencement of its winding up which, had it been made, taken or done by or against an individual within three months before the presentation of an insolvency petition on which he is adjudged insolvent, would be deemed in his insolvency a fraudulent preference, shall in the event of the company being wound up, be deemed a fraudulent preference of its creditors and be invalid accordingly: Provided that, in relation to things made, taken or done before the commencement of this Act, this subsection shall have effect with the substitution, for the reference to six months, of a reference to three months. (2) For the purposes of sub-section (1), the presentation of a petition for winding up in the case of a winding up by the Tribunal, and the passing of a resolution for winding up in the case of a voluntary winding up, shall be deemed to correspond to the act of insolvency in the case of an individual." 18. Section 531A deals with Avoidance of Voluntary Transfer. Section 531A is as follows: "Any transfer of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... law not only because the policy upon which they are based is sound, but also because they may result in recovery of assets or their value for the benefit of creditors generally and because provisions of this nature help to create a code of fair commercial conduct that is part of appropriate standards for the governance of commercial entities. It should be noted that, in the cross-border context, jurisdictions with insolvency laws that do not provide for avoidance of certain types of transaction, may encounter difficulties with recognition of proceedings and cooperation with courts and insolvency officials of jurisdictions where those transactions are subject to avoidance. 153. Notwithstanding the generally accepted rationale of avoidance provisions, it is important to bear in mind that many of the transactions that may be subject to avoidance in insolvency are perfectly normal and acceptable when they occur outside that context, but become suspect only when they occur in proximity to the commencement of insolvency proceedings. Avoidance powers are not intended to replace or otherwise affect other devices for the protection of the interests of creditors that would be avail....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing clear and predictable avoidance criteria and defences that will enable all parties to assess potential risks and avoid disputes, for example objective criteria focusing on the effect or result of transactions rather than on the intent of the parties. Where elements such as "ordinary course of business" are included they should be clearly defined and circumscribed by an insolvency law." 22. Paragraph 177 is as follows: "177. Preferential transactions may be subject to avoidance where: (a) the transaction took place within the specified suspect period; (b) the transaction involved a transfer to a creditor on account of a pre-existing debt; and (c) as a result of the transaction, the creditor received a larger percentage of its claim from the debtor's assets than other creditors of the same rank or class (in other words, a preference). Many insolvency laws also require that the debtor was insolvent or close to insolvent when the transaction took place and some further require that the debtor have an intention to create a preference. The rationale for including these types of transaction within the scope of avoidance provisions is that, when they occur very close to the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed in its order as follows: "On the above basis, it is clear that the company application filed by the Resolution Applicant deserves to be allowed. Hence, is allowed. ORDER The company application filed by the Resolution Professional under Sec. 66, 43 & 45 of the Insolvency and Bankruptcy 2016 is allowed. The impugned transactions, details of which are given in the schedule of the judgment are declared as fraudulent, preferential and undervalued transactions as defined under section 66, 43 and 45 of the Code respectively. Transactions given in the following schedule of property have been found as preferential, undervalued and fraudulent, therefore, we pass the order for release and discharge of the security interest created by the Corporate Debtor in favour of lenders of the Jaiprakash Associates Ltd. under the provision of Section 44(c) of the Insolvency and Bankruptcy Code 2016. We also pass an order under Section 48(a) of the Code that the properties mortgaged by way of preferential and undervalued transactions shall from now on be deemed to be vested in the Corporate Debtor." 25. NCLAT has upturned the Order of the Adjudicating Authority. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....consequences of offending preferential transaction are, obviously, drastic and practically operate towards annulling the effect of such transaction. Looking to the contents, context and consequences, we are at one with the contentions urged on behalf of the respondents with reference to the decisions in Devinder Singh and other cited cases, that these provisions need to be strictly construed. However, even if we proceed on strict construction of Section 43 of the Code, the underlying principles and the object cannot be lost sight of. In other words, the construction has to be such that leads towards achieving the object of these provisions. 21.1. Looking at the broad features of Section 43 of the Code, it is noticed that as per sub-section (1) thereof, when the liquidator or the resolution professional, as the case may be, is of the opinion that the corporate debtor has, at a relevant time, given a preference in such transactions and in such manner as specified in subsection (2), to any person/persons as referred to in subsection (4), he is required to apply to the Adjudicating Authority for avoidance of preferential transactions and for one or more of the orders referred ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....) a transfer creating security interest in a property acquired by the corporate debtor to the extent that such security interest secures new value and was given at the time specified in subclause (i) of clause (b) of Section 43(3) and subject to fulfilment of other requirements of sub-clause (ii) thereof. The meaning of the expression "new value" has also been explained in this provision." 27. In paragraph 22 and 22.1 while dealing with Sub-Section (2) and Sub-Section (4) of Section 43, following has been observed by the Hon'ble Supreme Court: "22. In order to understand and imbibe the provisions concerning preference at a relevant time, it is necessary to notice that as per the charging parts of Section 43 of the Code i.e., sub-sections (4) and (2) thereof, a corporate debtor shall be deemed to have given preference at a relevant time if the twin requirements of clauses (a) and (b) of sub-section (2) coupled with the applicable requirements of either clause (a) or clause (b) of sub-section (4), as the case may be, are satisfied. 22.1. To put it more explicit, the sum total of subsections (2) and (4) is that a corporate debtor shall be deemed to have given a pr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....9. Hon'ble Supreme Court after analyzing the provision of Section 43 noted net consequences of Section 43 in Paragraph 22.5. In paragraph 23, 23.1, 23.2, 23.3, 23.4 and 23.5 laid down following: "23. The analysis foregoing leads to the position that in order to find as to whether a transaction, of transfer of property or an interest thereof of the corporate debtor, falls squarely within the ambit of Section 43 of the Code, ordinarily, the following questions shall have to be examined in a given case: 23.1. As to whether such transfer is for the benefit of a creditor or a surety or a guarantor? 23.2. As to whether such transfer is for or on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor? 23.3. As to whether such transfer has the effect of putting such creditor or surety or guarantor in a beneficial position than it would have been in the event of distribution of assets being made in accordance with Section 53? 23.4. If such transfer had been for the benefit of a related party (other than an employee), as to whether the same was made during the period of two years preceding the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ating the provision itself. ..... 28.5. Looking to the scheme and intent of the provisions in question and applying the principles aforesaid, we have no hesitation in accepting the submissions made on behalf of the appellants that the said contents of clause (a) of sub-section (3) of Section 43 call for purposive interpretation so as to ensure that the provision operates in sync with the intention of legislature and achieves the avowed objectives. Therefore, the expression "or", appearing as disjunctive between the expressions "corporate debtor" and "transferee", ought to be read as "and"; so as to be conjunctive of the two expressions i.e., "corporate debtor" and "transferee". Thus read, clause (a) of subsection (3) of Section 43 shall mean that, for the purposes of sub-section (2), a preference shall not include the transfer made in the ordinary course of the business or financial affairs of the corporate debtor and the transferee. Only by way of such reading of "or" as "and", it could be ensured that the principal focus of the enquiry on dealings and affairs of the corporate debtor is not distracted and remains on its trajectory, so as to reach to the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion shall be in the course of any particular trade, vocation or business. It speaks of the course of business in general. But it does suppose that according to the ordinary and common flow of transactions in affairs of business there is a course, an ordinary course. It means that the transaction must fall into place as part of the undistinguished common flow of business done, that it should form part of the ordinary course of business as carried on, calling for no remark and arising out of no special or particular situation." 33. In the above judgement, last part of the judgement of High Court of Australia was highlighted by the Hon'ble Supreme Court which may be quoted here to find out the purpose of emphasis: "It means that the transaction must fall into place as part of the undistinguished common flow of business done, that it should form part of the ordinary course of business as carried on, calling for no remark and arising out of no special or particular situation." 34. In paragraph 28.6.2, Hon'ble Supreme Court further laid down as follows: "28.6.2. Taking up the transactions in question, we are clearly of the view that even when furnishing a security....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the Corporate Debtor was in ordinary course of business and was financial affairs of the corporate debtor or not. 36. The Corporate Debtor-NTL Electronics India Ltd. was engaged in the business of manufacturing and electronics component and projects. In paragraph 7.1 of the Company Appeal (AT) Ins. No. 412 of 2022, following has been stated about the business of the Corporate Debtor: "7.1 That the corporate debtor was incorporated on 26.04.2022 with the appellant no.1 and 2 as promoters and was being managed by them. The corporate debtor was engaged in the business of manufacturing of electronics components and products and as such it required financial assistance from time to time, being so certain financial assistance was sought from and accordingly extended by Axis Bank, ICICI Bank and Karnataka Bank." 37. Taking financial assistance from related and non-related parties which transactions are subject of enquiry in the present Appeal can not be held to be ordinary course of business of the Corporate Debtor. The expression "ordinary course of business" or "financial affairs of the Corporate Debtor" has to be read "ejusdem generis". The expression "financial affairs....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ithin a month from the date of receipt of the said amount and submit the compliance report soon thereafter. And if the respondents no. 1,2,4,5,6 and 7 failed to deposit the said amount within the period then same shall be recovered in accordance with the provision of law." 39. In so far as the Judgement of the Delhi High Court in "M/s Venus Recruiters Pvt. Ltd. Vs. Union of India & Ors." as relied upon by Learned Counsel for the Respondent, the judgement of Venus Recruiters has already been overruled by the Division Bench of the Delhi High Court in "Tata Steel BSL Ltd. Vs. Venus Recruiters Pvt. Ltd." decided on 13.01.2023 hence no more applicable. 40. We may also notice one more submission advanced by Learned Counsel for the Appellant-Mr. Abhijeet Sinha. It is submitted that the transaction in question were undertaken due to the pressure on behalf of Lenders. Corporate Debtor has issued certain security cheque and notices were issued and demands were issued from Lenders for payment of their dues. When the payments were made under the pressure of notice and demand including threat of initiating proceeding under Section 138 of the Negotiable and Instrument Act, the transaction ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....udulent preference, the question should be addressed whether it was done to prefer one of the creditors to the exclusion of others. If it was done not with a view to prefer one of the creditors but to save one's own skin, say a threat of prosecution looming large or to avoid prosecution, certainly the transfer could. not in such circumstances be fraudulent preference. This decision has been followed in In re M. L G. Trust Ltd. Reference may also be made to In re F. L. E. Holdings Ltd. In that case a passage from Buckley on the Companies Acts, 13th Edition (1957), is quoted which shows that as preference implies selection and selection implies freedom of choice, a payment must in order to constitute a preference be voluntarily made, and that a payment made under pressure, e.g., in the shape of proceedings actual or threatened by the creditor concerned, or fear of such proceedings, is not for this purpose a voluntary payment. Viewed from this angle, the transfer by way of mortgage by directors in favour of the Central Board of Trustees would not prima facie appear to be fraudulent preference as it appears that it was done under the threat of imminent prosecution." 42. Gujarat ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....efit in the circumstances then prevailing or whether the dominant motive of the company in effecting the said transaction was to favour one creditor to another. 32. By its letter dated August 3, 1985, Bank of Maharashtra had already threatened in writing to the effect that it would adopt legal proceedings both against Monark Enterprises as well as against "the company" if the sum of Rs. 14.63 lakhs with overdue interest remained unpaid. The threat of legal proceedings was an imminent threat. It is an admitted fact that the company did not pay the decretal instalments which had fallen due from November 1, 1986. By reason of the default clause provided in the consent terms, Monark Enterprises were entitled to execute the decree or present a winding-up petition against the company or resort to such other legal remedies as were available to them under the law. The prospect of further legal proceedings by Monark Enterprises against the company to recover the decretal dues was too obvious. Reasonable inferences can be easily drawn if required. The court must endeavor to take a view consistent with common sense and the ordinary course of human conduct. It is obvious to me that th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Monark Enterprises were facing threats from the Bank of Maharashtra mainly because of the company having defaulted in respect of its obligation to discharge its liability to pay the amount in question." 44. Bombay High Court has referred to Judgment of the Gujarat High Court and further noticed the Halsbury's Laws of England. Paragraph 33 are as follows: "36. Paragraphs 908, 909, 913, 915, 918 and 920 of the Halsbury's Laws of England, Volume 2, 4th edition, set out the statement of law on the subject of fraudulent preference neatly and clearly. The principles of law operating in the field of bankruptcy/insolvency law are imported into the Companies Act. In order that a transaction may be set aside as a fraudulent preference, it is necessary to prove that it was carried out with the view, that is to say, the principal or ??? view, of giving the creditor a preference over the other creditors. Paragraph 914 of the said volume formulates the statement of law on the subject of test to be applied in the following words: "914. Test to be applied. - In order to ascertain whether the giving of a preference was the principal or dominant view in the debtor's mind....
X X X X Extracts X X X X
X X X X Extracts X X X X
....but if the transaction was entered into as a result of a design by directors to give preference to certain creditors and to siphon off the funds, definitely the court is not helpless. The test would be whether the company entered into such transaction to save its own skin for its own benefit in the circumstances then prevailing or whether the dominant motive of the company is to favour one creditor over another. This is not a case where the transferee could contend that he is not aware of the infirmity in the resolution or designs or motive behind the transaction. With full knowledge of what is going on in the company the transferee entered into the transaction with designs with the active assistance of the persons in the management of the company." 48. In the above judgement, the Madras High Court has given weight to the dominant motive of the Company in transaction. We have already observed that question of intent and motive is not relevant while examining as to whether transaction is a preferential transaction. Judgement of the Hon'ble Supreme Court in "Anuj Jain" (supra) has clearly laid down about the irrelevance of the motive in such transaction. 49. Learned Counsel for....
X X X X Extracts X X X X
X X X X Extracts X X X X
....first notice the law as has been laid down by the Hon'ble Supreme in paragraph 32.1 in "Anuj Jain" (supra). In paragraph 32.1, observations of the Hon'ble Supreme Court are as follows: "32.1. However, we are impelled to make one comment as regards the application made by IRP. It is noticed that in the present case, the IRP moved one composite application purportedly under Sections 43, 45 and 66 of the Code while alleging that the transactions in question were preferential as also undervalued and fraudulent. In our view, in the scheme of the Code, the parameters and the requisite enquiries as also the consequences in relation to these aspects are different and such difference is explicit in the related provisions. As noticed, the question of intent is not involved in Section 43 and by virtue of legal fiction, upon existence of the given ingredients, a transaction is deemed to be of giving preference at a relevant time. However, whether a transaction is undervalued requires a different enquiry as per Sections 45 and 46 of the Code and significantly, such application can also be made by the creditor under Section 47 of the Code. The consequences of undervaluation are containe....