TaxTMI 
TaxTMI 
2026 (5) TMI 768
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.... Joshi, who are the suspended members of Board of Directors of the Corporate Debtor M/s KSS Ltd. and are hereinafter referred to as Appellants. The Appellants are aggrieved by the order dated 01.08.2025 passed by the Ld. National Company Law Tribunal, Mumbai Bench (Adjudicating Authority), in I.A. No. 4648 of 2023 filed in C.P. (IB) No 748/MB/2022. The Adjudicating Authority vide the impugned order allowed the Application filed by Respondent No. 1/Resolution Professional, preferred u/s. 43 of the Insolvency and Bankruptcy Code 2016 ("Code") relating to the transfer of Rs. 47,92,646/- to two sister concerns of Corporate Debtor viz. M/s. K Sera Sera Miniplex Ltd. & M/s. K Sera Sera Digital Cinema Limited. The impugned order directed the Appellants as well as Jayashree Vilas Gangurd/ Respondent No.2; Monika Meena, Respondent No.3; and Bhargav Vishalbhai Ahir, Respondent No.4, who were also suspended members of Board of Directors of CD to repay/refund Rs. 47,92,646/- to the Corporate Debtor, making them jointly and severally liable for the same. 2. The Appellants assert that The Respondent No.1/Resolution Professional failed in his duties by alleging these transactions as avoidable ....
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.... same. Submissions of the Appellant 4. The submission of Ld. Counsel for the appellant are as follows: i. That the Impugned Order is passed without appreciating proper facts and the same is arbitrary and is liable to be set aside. It is submitted that the Application was bad in law due to non-joinder of parties. It is submitted that two sister concern companies of the Corporate Debtor were not even made parties/Respondents in the subject I.A. despite the same being necessary parties for the adjudication of the subject I.A., which in itself renders the subject I.A. as being bad in law for non-joinder of necessary parties. ii. Ld. Counsel submits that Section 44 of the Code, 2016 stipulates the orders, which can be passed by the Adjudicating Authority in case of preferential transactions. Therefore, any order in terms of Section 44 of the Code, 2016 in an Application under Section 43 of the Code, 2016 could have been passed, only if the sister concerns were made parties to the Application under Section 43 of the Code, 2016. iii. Ld. Counsel submitted that the Hon'ble Supreme Court of India in 'Aliji Momonji & Co. v. Lalji Mavji & Ors.' [(1996) 5 SCC 3....
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....eferred to as "Anuj Jain case", thereby erroneously allowing the Application and directing the Appellants and Respondents No. 2 to 4 to repay/refund the aforementioned total amount of Rs. 47,92,646/- to the Corporate Debtor, while making the Appellants and Respondent No. 2 to 4 jointly and several liable for the same. vii. Ld. Counsel further submits that the Hon'ble Supreme Court of India whilst analysing Section 43 of the Code has laid down 5 questions which have to be answered in order to arrive at the conclusion whether the transaction musters the test of Section 43 of the Code or not. That it is submitted that 5 questions need to be answered in the facts of the present case in order to rule the aforementioned transfer of amounts as being preferential in nature u/s. 43 of the Code which are reproduced hereinunder: a) whether such transfer is for the benefit of a creditor or a surety or a guarantor - It is nowhere stated or pleaded in the subject I.A. or in the Transaction Audit Report annexed therein that the aforementioned two companies were creditors or surety of guarantor of the Corporate Debtor. Therefore, in the facts of the present case, this question is....
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....s. It is submitted that on a perusal of the Transaction Audit Report annexed with the subject I.A., it is evident that the said transactions are actually made in the ordinary course of business of the Corporate Debtor as well as of the aforementioned two transferee companies. viii. Ld. Counsel cited certain details from the Transaction Audit Report which are reproduced below: a) In regard to alleged transactions totaling to Rs. 39,00,000/- made towards M/s. K Sera Sera Miniplex Ltd., the Suspended Management, had stated that the same was paid for its working capital requirements. Ld. Counsel referred to query by the transaction Auditor regarding the transfer of Rs. 3.74 crores of Long-Term Unsecured Loan-good transferred to M/s. K Sera SeraMiniplex Ltd. during F.Y. 2021-22 and the Suspended Management had provided the ledgers w.r.t same stating that the said amount was assigned to M/s. K Sera Sera Miniplex Ltd. and is to be recovered from it subsequently. The same was accepted by the Auditor who had thereafter reiterated the list of sundry debtors therein. This establishes that such transactions were carried out in the ordinary course of business of the Corporate ....
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....e perusal of the Transaction Audit Report, it is established that the alleged transactions are excluded in terms of Section 43(3) of the Code as being transactions carried out in the course of ordinary business of the Corporate Debtor and of the above mentioned two transferee companies. x. It is the submission of Ld. Counsel that this Hon'ble Appellate Tribunal in its decision in 'Md Sadique Islam & Ors. v. Niraj Kumar Agarwal & Ors.', [Company Appeal (AT) (Ins.) No. 1081 of 2022] whilst allowing the Appeal and reviving the Application before the Adjudicating Authority, held that there has to be application of mind to the ingredients of each transaction to come to conclusion that ingredients are satisfied and transaction falls in the said category. xi. Ld. Counsel submits that in terms of Section 43(3) as has been interpreted by the Hon'ble Supreme Cour in Anuj Jain case, a transaction is excluded from being ruled as preferential if the same is being carried out in the ordinary course of business of the Corporate Debtor as well as that of the transferee companies. It is submitted that on a perusal of the Transaction Audit Report annexed with the subject I.A., it i....
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.... c. Whether the activity is normal or otherwise routine for the particular business (i.e. activities like advertising, staff training etc). d. Whether the activity is repetitive/frequent e. Whether the income, if any, earned from such activity/transaction is treated as business income in the company's books of account f. Whether the transactions are common in the particular industry g. Whether there is any historical practice to conduct such activities h. The financial scale of the activity with regard to the operations of the business i. Revenue generated by the activity j. Resources committed to the activity The above list is not exhaustive. Individually, none of the above parameters can amounts to the transactions being in the ordinary course of business. In other words, any activity which is routine and in accordance with the usual customs and practices of a particular business can be described to be 'in the ordinary course of business'. For a company, the interpretation needs to be contextual, taking into account the nature of the activity and its relevance in the overall context of the company's busi....
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....ct transaction audit, who submitted the Final Report of Transaction Audit on 03.08.2023 in view of which, the Respondent No. 1 had filed the Interlocutory Application No. 4648/2023 for the identified transactions. iii. Ld. Counsel further submits that the following two transactions have been identified to be preferential transactions (subject transactions): a) Transfer of a sum of Rs. 39,00,000/- (Rs. Thirty-Nine Lakhs Only/-) by the Corporate Debtor to its wholly owned subsidiary viz 'M/s K Sera Sera Miniplex Limited' within a review period of two years during the period of financial stress. b) Transfer of a sum of Rs. 8,92,646/- (Rs. Eight Lakh Ninety-Two Thousand Six Hundred Forty-Six only/-) to M/s K Sera Sera Digital Cinema Limited i.e. a sister concern for the outstanding debt within the review period as defined under Section 43 (4) of the Code. iv. It is submitted that the Ld. Adjudicating Authority has correctly held these transactions as preferential while holding the Appellants and Respondents No. 2 to 4 jointly and severally liable to repay/refund the amount of Rs. 47,92,646/- to the account of the Corporate Debtor. v. Ld. Cou....
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.... of the CIRP. d) Ld. Counsel submitted that the Corporate Debtor transferred a property to K Sera Sera Digital Cinema Limited during the period of two years preceding the commencement of CIRP against its antecedent debt for which a claim was filed and admitted. Thus, it was given preferential treatment over other creditors of the Corporate Debtor. e) That it is also an admitted position of fact that the transfer was made against the outstanding debt. Therefore, the said amount was not transferred during the ordinary course of business. vi. Ld. Counsel submits that with regard to the ground of the Appellants that the Respondent No. 1 did not discuss the Transaction Audit report with the CoC and has filed the Application without discussion with the CoC is without any substance and cannot be a ground of challenge. It is submitted that in terms of the provisions of the Code, the Resolution Professional is required to form an opinion, before filing the Application. It is clear from these sections that it is purely in the domain of Interim Resolution Professional/ Resolution Professional to appoint the Transaction Auditor and frame an opinion. Nowhere, in the C....
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....red by the exception under Section 43 (3) (a) of the Code. It has also been stated that the alleged transaction does not fall within the five criteria's which have been laid down by the Hon'ble Supreme Court in Anuj Jain's (supra). 8. Per contra the Respondent No.1/ RP has stated that the appellants have not denied the transfer of funds and their main defence is that such transfer is done in the ordinarily course of business. It is also submitted that no supporting documents have been provided to show that the aforesaid transactions are in ordinarily course of business. It is an admitted fact that the two companies to whom the transfer has been done are sister concerns of the Corporate Debtor. In the case of related parties, the look back period provided in the Code is two years. The Code also provides that any transfer to related parties during the look back period would be deemed to be preferential. The RP has powers under the Code to appoint Transaction Auditors to identify preferential and undervalued transactions and for this the approval of Committee of Creditors is not required. It is his submission that the appeal is devoid of any merit and should be dismissed forthwith.....
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.... provide for consultation by RP with CoC to appoint professionals. RP is empowered under the Code to appoint Transaction Auditors and accordingly, we do not find any merit in this contention of the appellant. 13. Regarding the contention of Respondent that application under section 43 has been filed by the RP without the approval of CoC, we note that the Code does not have any such provision in this regard. On the contrary, under Section 25(2)(j), the RP is duty-bound to file application for avoidance of transactions under Chapter-III of the Code and it is one of the statutory responsibilities of the RP. Such contention of Respondent again is without any merit. 14. The appellant has also invited our attention to non-joinder of the two subsidiary companies of the corporate debtor who are the parties in the aforesaid preferential transactions. It is the submission of the appellant that their presence was necessary for complete and effectual adjudication of the disputes and in absence of their participation in proceedings, the effective and complete adjudication is not possible. The appellants have cited the judgment of Hon'ble Supreme Court in Aliji Momonji (supra) in this rega....
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.... 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 thirty days after the corporate debtor receives possession of such property: PROVIDED that any transfer made in pursuance of the order of a court shall not, preclude such transfer to be deemed as giving of preference by the corporate debtor. Explanation: For the purpose of sub-section (3) of this section, "new value" means money or its worth in goods, services, or new credit, or release by the transferee of proper....
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....e Transaction Auditor has identified the same to be likely preferential transaction. A reply was sought from the management, wherein it was stated that amount was paid for the working capital requirement of wholly owned subsidiary company. The Auditors in their comment have noted that KSS Ltd. (CD) should have utilized the funds in paying of its own creditors instead of transferring it to the subsidiary company as KSS Ltd. itself was incurring losses in that period. The auditor therefore reached the conclusion that the company has given preference to its subsidiary. 22. Page 32 of the Transaction Audit Report relates to the second transfer of Rs. 8,92,646/- in FY 2021-22 to M/s K Sera Sera Digital Cinema Ltd. The Transaction Auditor again identified the transaction to be likely preferential. The reply from the management in this case was that the amount was paid against old outstanding. Based on the same the audit reached the conclusion that there is no such amount outstanding as per data provided to them, the company has been incurring losses, it should have cleared the debts of outsiders first and then of the related parties so it seems to be a preferential transaction. 23.....
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....K.Sera Sera Digital Cinema has filed a claim of Rs. 3,08,58,210.63 which was admitted by the Resolution Professional/ Respondent No.1 here. This is an admitted position on record. K. Sera Sera Digital Cinema is therefore a creditor of the CD and is squarely covered by Section 43 (2) (a) of the Code. Accordingly, the transfer of Rs. 8 Lakhs made by the CD to its sister concern K. Sera Sera Digital Cinema has to be treated as preferential transaction as under Section 43 (2)(b) of the code, it would have the effect of putting K.Sera Sera Digital Cinema in a beneficial position than it would have been in case of distribution of assets made under Section 53. Such transaction cannot be said to have been made in ordinary course of business under the exception provided in Section 43 (3) (1) of the Code. 27. Based on the documents on record, we note the following: i. The transferee companies namely, K. Sera Sera Miniplex Ltd. and K. Sera Sera Digital Cinema Ltd. are subsidiary companies of the CD, and are related parties. ii. There is a transfer of Rs. 39 Lakhs to M/s K. Sera Sera Miniplex Ltd. and Rs. 8,92,646/- to K. Sera Sera Digital Cinema Ltd. In the CIRP of CD M/s....