TaxTMI 
TaxTMI 
2026 (3) TMI 1538
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....en Agrifoods LLP to pay a sum of Rs. 2,00,50,000/- while declaring the transaction as preferential transaction. Introduction: 2. The Appellants claims that Respondent No. 1/RP/Liquidator of WSH Pvt. Ltd. approached the NCLT for offsetting of an amount of Rs. 2,00,50,000/- which was a receivable to the account of Corporate Debtor i.e. WSH Pvt. Ltd. from an entity, namely, WSH Hub LLP, as it is a preferential transaction. The Appellants contends that Respondent No. 1 has produced a sheet but not a ledger or book entry showing the adjustment of the money in the application filed before the NCLT. It also contends that Respondent No. 1 has not made any pleadings that the transaction is preferential under Section 43 of the Code. The Appellants further contends that there is no case of the RP that there was transfer of property of the Corporate Debtor to the benefit of the Appellant. Offsetting of the receivables from the third party with the payables to the Appellants without routing of any money to the Appellant does not make it a beneficiary. Since there was no transfer of property, Section 43 does not apply. Respondent No. 1 / RP has a right to recover the money from the third p....
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....4 of the Code; and/or B. Order and direct the Respondents No. 5 to pay Rs. 95,86,302/- (Rupees Ninety-Five Lakhs Eighty-Six Thousand Three Hundred Two only) being the preferential amount given to accordance with Section 43 read with Section 44 of the Code; and/or C. Order and direct the Respondent No. 1 to 3 to pay Rs. 1,09,99,150/- (Rupees One Crore Nine Lakhs Ninety-Nine Thousand One Hundred Fifty only) being the undervalued amount of Fixed Assets sold by the suspended management to Respondent No. 4 during the period of two years preceding the insolvency commencement date in accordance with Section 45 read with Section 46 of the Code; and/or D. Order and direct the Respondent No. 1 to pay an amount of Rs. 48,85,000/- (Rupees Forty-Eight Lakhs Eighty-Five Thousand only) being amount of rebate charged by related party during the period of preceding two years in accordance with Section 45 and 46 of the code; and/or E. Order and direct the Respondent No. 4 to contribute Rs. 1,14,40,150/- (Rupees One Crore Fourteen Lakhs Forty Thousand One Hundred Fifty only) to the assets of the Corporate Debtor, being the amount gained 1.85- by carrying on busines....
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....to July 2020, the Appellant purchased for approximately 12 crores and supplied to Respondent No. 3. Respondent 3 defaulted for 1.67 crores also, it remained in full control of the banking operations. 9. The Respondent No. 3 withdrew Rs. 1.20 Crores using withdrawal slips giving an impression that the R-4 paid to Appellant and Appellant withdrew it, whereas the same amount of money was deposited back to the account of Respondent No.3. The Appellant lodged criminal complaint with crime branch against R3 and R4. Police issued arrest warrants against all three accused. The proceedings are pending. CIRP commenced against the Corporate Debtor- WSH Pvt. Ltd. on 01.02.2021. 10. Second meeting of CoC held on 22.03.2021 appointed the 'Forensic Auditor' for the period of two years i.e. 2018-2019 & 2019-2020. The Forensic Auditor submitted its transaction audit report fayed 09.06.2021. Few relevant extracts from the Transaction Audit Report for the present Appeal are as follows: "a. Page 287: In accordance with the aforesaid resolution process, Resolution Professional Mr. Suhas Bhatt appointed M/s J. Singh and Associates, Chartered Accountant, Ahmedabad to conduct forens....
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....arm length basis. 13. Appellant contends that the Adjudicating Authority dismissed all the reported transactions except one i.e. preferential transactions. The Adjudicating Authority in the impugned order observes that from the contents of application and its Annexures it is seen that the basis of formation of the opinion by the application for the alleged transactions is very heavily on the Forensic Audit Report. The applicant has not attached the copies of the books of accounts of the Corporate Debtor, abstract of the Bank Accounts were attached, no agreements were attached with the application. Very minimal evidence is attached with the application, it is also noticed that there are disputes between the Respondents in the present matter and for which criminal action is pending at various forums. The operative para for the transaction under challenge is: "The Applicant has not attached the ledger account of the said related party along with any of its pleadings. The Respondent has merely stated in the reply that "to avoid banking transactions". The above methodology of account transfer was resorted to by the parties. In our view, this is clear violation, more particularly when....
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....Vs. Anil Goel, Company Appeal (AT) (Ins) No. 1088/2024 & Ors. had framed inter alia the below question: a) What is the lookback period with reference to under value transaction under Section 45 of the Code. b) Whether Look Back period is to be counted with respect to CIRP date of period is to be treated as full financial year preceding the CIRP date. 20. Appellant claims that this Appellate Tribunal held that the Look back period in Section 43, 45 and 50 have been categorised into two categories i.e. transaction with related parties and transactions with unrelated parties and look back period has been defined as two year preceding the CIRP date for related parties. It was held that Look Back period is to be counted from insolvency commencement date and the Resolution Professional has to act within the prescribed time limit and cannot go further back. 21. Furthermore, this Appellate Tribunal in the order dated 14.10.2024 passed in the matter of Company Appeal (AT) (Ins) No. 242 of 2024 Siddharth Bharatbhushan Jain & Ors Vs. SBI & Ors. held that the look back period cannot be extended beyond two years. 22. Appellant contends that the transaction is beyond R....
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....ential transaction. The transactions entered in ordinary course of business is excluded from the purview of Section 43. The Hon'ble Supreme Court in Anuj Jain (supra) at Para No. 28 and Greefield (supra) in Para 51 has explained the meaning of Ordinary Course of Business. The Corporate Debtor is trader in the vegetables and the WSH LLP focused on the business of transportation of vegetables and fruits. The transactions between the parties are carried out in ordinary course of business. Submissions on behalf of the Respondent No. 1 27. It is an undisputed and admitted position that Appellant No. 1, Mr Atul Babulal Prajapati, was at the relevant time: • Director and Key Managerial Personnel of the Corporate Debtor, WSH Private Limited; • exercising complete control over Wholesale Hub LLP; and • the sole proprietor of M/s Atul Babulal Prajapati. 28. It is further undisputed that Wholesale Hub LLP was indebted to the Corporate Debtor, and amounts were due and payable by Wholesale Hub LLP to WSH Private Limited. It is also undisputed that instead of such amounts being credited into the bank account of the Corporate Debtor, the same wer....
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.... & (b): being a Director/ Key Managerial Personnel of the Corporate Debtor; • s. 5(24)(c): Whole Hub LLP being an LLP controlled by him; • s. 5(24)(m)(iii): interchange of managerial personnel and overlapping control; • s. 5(24)(h): Corporate Debtor accustomed to act on his directions. Thus, Wholesale Hub LLP and the Appellant's proprietorship are related parties of the Corporate Debtor, and any transaction in their favour is subject to stricter scrutiny. 31. Furthermore, Section 43(2) IBC defines a preferential transaction as which reads are below: "(2) A corporate debtor shall be deemed to have given a preference if: (a) there is a transfer of property or interest thereof for the benefit of a creditor, surety or guarantor, on account of an antecedent financial or operational debt no liability; and (b) the transfer has the effect of putting such creditor, surety or guarantor in a position more beneficial than it would have been in the event of distribution of assets under Section 53." The facts of the present case satisfy both limbs: • Section 43(2)(a): The diversion of receivables from Whole sale H....
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....id, around 6 have filed their claims, aggregating to an amount exceeding approx. Rs. 1.5 Crores. The said claims remained outstanding when the impugned set-off adjustment was effected. Despite the existence of multiple unpaid creditors, the receivable of the Corporate Debtor was adjusted through accounting entries in favour of the Appellant alone. The effect of such adjustment was that the Appellant's dues stood settled, while the claims of other creditors continued to remain unpaid. Such selective adjustment, undertaken in the backdrop of outstanding creditor claims, does not reflect a routine or ordinary business transaction and had the effect of placing the Appellant in a more beneficial position in comparison to other creditors, thereby attracting the provisions of Section 43 of the Code. Furthermore, the diversion was carried out without authority, purely for the Appellant's benefit and to the detriment of the creditors and stakeholders of the Corporate Debtor. Such conduct also attracts Sections 66(1) and 66(2) of the Code. The forensic audit conclusively establishes that the Appellant orchestrated and benefited from the diversion. 37. Under Insolvency Jurisprudenc....
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....efore, the contention made by the appellant that they are not benefited is totally misconceived and baseless. 44. The Appellant raises another argument, that the transaction reduced the losses of the Corporate Debtor. Such a ground is baseless as the transaction is made to a related party; in other words, it can be said that the appellant had routed the transaction to benefit himself only, therefore, the diversion extinguished recoverable receivables and prejudiced other creditors. Thus, the transaction falls under Section 43(2)(b). 45. The ground of the appellant is that the proof beyond a reasonable doubt is required. IBC proceedings are civil in nature. The correct standard is preponderance of probabilities. Hon'ble Supreme Court in the case of Anuj Jain v/s Axi Bank Ltd (supra) was pleased to observe that Section 43 operates as a legal fiction, requiring that the transactions meeting the stipulated conditions be treated as preferential, irrespective of whether they were intended or anticipated to be so. 46. The impugned transaction was undertaken within the statutory look- back period, involved related parties under common control, resulted in transfer of property ....
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....e find that Wholesale Hub LLP and the Appellant's proprietorship are related parties of the Corporate Debtor, and any transaction in their favour is subject to stricter scrutiny. Thus, the transaction made by the Appellant falls under the definition of related party as provided under Section 5(24) of the Code. The transaction falls squarely within the ambit of "related party" under Section 5(24) IВС under multiple clauses of Section 5(24): • s. 5(24)(a) & (b): being a Director/ Key Managerial Personnel of the Corporate Debtor; • s. 5(24)(c): Whole Hub LLP being an LLP controlled by him; • s. 5(24)(m)(iii): interchange of managerial personnel and overlapping control; • s. 5(24)(h): Corporate Debtor accustomed to act on his directions. Transaction within look-back period per section 431 of the Code 51. It is also undisputed that Wholesale Hub LLP was indebted to the Corporate Debtor, and amounts were due and payable by Wholesale Hub LLP to WSH Private Limited. Instead of such amounts being credited into the bank account of the Corporate Debtor, the same were diverted and adjusted through accounting entries and ....
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....referential payment to creditors related to the company whether at arm's length price or not is one of the questions due to non- availability of the clear-cut agreement with the supplier...." 54. We note that the insolvency commenced on 01.02.2021 in this case. The transactions that have been offset out at page No. 308 at Annexure - B are as follows: "Annexure - B Offsetting transactions. Period Party Name Debit Party Name Credit Observation 2018-19 Wholesale Hub Ent LLP 2,00,50141.00 M/s Atul Babulal Prajapati 2,00,50141.00 Off-Setting Entry Total 2,00,50141.00 Total 2,00,50141.00 55. This transaction relates to 30.06.2019 and very much within the relevant time period i.e. during the period two years preceding the insolvency commencement date if it is given to a related party. This has been confirmed by respondent in its additional affidavit dated 9th February 2026 in which it brings to our notice that this is noted in the books of accounts of WSH Private Limited CD on 30th June 2019. The additional affidavit clearly demonstrates from the ledger accounts that a) there is a debit entry of Rs. 2,0....
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....satisfy both limbs of Section 43(2) for preferential transactions i.e.: • Section 43(2)(a): The diversion of receivables from Whole sale Hub LLP, a related party debtor of the Corporate Debtor, to the Appellant's proprietorship concern was in respect of an antecedent liability of Whole sale Hub LLP. Section 43(2)(b): Such diversion extinguished Whole sale Hub LLP's liability to the Corporate Debtor and simultaneously benefited the Appellant personally, thereby placing the Appellant/related party in a position more beneficial than other creditors of the corporate debtor. 61. We note that a transfer under Section 43 is not confined to the physical movement of funds. The extinguishment, relinquishment, or reduction of an enforceable receivable through accounting entries itself amounts to a transfer of property or an interest therein within the meaning of Section 43(2)(a). Such transfer was clearly in respect of an antecedent liability owed to the Appellant and/or his controlled entities. Further, the said transfer had the effect of: • satisfying the Appellant's dues; • reducing the asset pool of the Corporate Debtor; and ....
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....urse of business as: • it involved related parties under common control; • it bypassed the Corporate Debtor's banking channels; • it lacked any corporate authorisation; and • it resulted in the extinguishment of recoverable receivables. Thus the impugned transaction does not qualify as one undertaken in the ordinary course of business. 65. Furthermore, the records of the Corporate Debtor reflect that, at the relevant time, there were around 14 outstanding creditors. Around 6 have filed their claims, aggregating to an amount exceeding approx.. Rs. 1.5 Crores. The said claims remained outstanding when the impugned set-off adjustment was affected. Despite the existence of multiple unpaid creditors, the receivable of the Corporate Debtor was adjusted through accounting entries in favour of the Appellant alone. The effect of such adjustment was that the Appellant's dues stood settled, while the claims of other creditors continued to remain unpaid. Such selective adjustment, undertaken in the backdrop of outstanding creditor claims, does not reflect a routine or ordinary business transaction and had the effect of placing t....
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....e given a preference, if- (a) there is a transfer of property or an interest thereof of the corporate debtor for the benefit of a creditor or a surety or a guarantor for or on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor; and (b) the transfer under clause (a) has the effect of putting such creditor or a surety or a guarantor in a beneficial position than it would have been in the event of a distribution of assets being made in accordance with section 53. (3) For the purposes of sub-section (2), a preference shall not include the following transfers- (a) transfer made in the ordinary course of the business or financial affairs of the corporate debtor or the transferee; (b) any transfer creating a security interest in property acquired by the corporate debtor to the extent that- (i) such security interest secures new value and was given at the time of or after the signing of a security agreement that contains a description of such property as security interest and was used by corporate debtor to acquire such property; and (ii) such transfer was registered with an information utility on or before thi....