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Judgment
This application has been filed by the Liquidator of the Corporate Debtor
seeking following reliefs:
A. Allow the present application filed by the Applicant/Liquidator and declare transactions mentioned in Para No.8 of this Application as a nullity for being preferential, executed by the suspended management of the Corporate Debtor in favour of Respondent;
B. Direct the Respondent to pay back/remit to the CD the advances transferred from the Corporate Debtor's bank accounts amounting to Rs.52,84,000/- (Rupees Fifty-Two Lacs Eighty Four Thousand Only) along with interest till the date of actual payment;
C. Pass such other and further orders as this Hon'ble Tribunal may deem fit and proper in the interest of justice.
Corporate Insolvency Resolution Process (CIRP) of the Corporate Debtor commenced vide order dated 03.07.2019. In the absence of any viable resolution plan, the CoC of the CD passed a resolution with 100% voting for liquidation of the CD, and this Adjudicating Authority (AA) vide order dated 16.09.2020 ordered for commencement of Liquidation in an application bearing IA No. 3641/2020.
The Applicant has submitted as follows:
That vide engagement letter dated 19.09.2019, M/S Kansal Singla & Associates was engaged to conduct the forensic/transaction audit of the CD with reference to Section 43, 45, 47 & 49 of the Insolvency & Bankruptcy Code 2016 (IBC).
Final Forensic/Transaction Review Report (FAR) was prepared and submitted by the forensic auditor on 08.10.2020.
As per the FAR, a transaction has occurred between the CD and M/S Vallabh Steel Ltd. (VSL), which is a related party of the CD, as Mr. Kapil Kumar Jain, a director of Vallabh Steel Ltd., is the father of Mr. Rahul Jain, an erstwhile director in the CD. Further, it has been submitted that the suspended board with respect to the transaction has failed to disclose the relationship between the parties to the transaction in violation of applicable provisions of the Companies Act and prescribed accounting standards.
Transaction in question is that VSL had advanced unsecured loans to the Corporate Debtor and the erstwhile management of the Corporate Debtor repaid the loan amount to VSL during the period of 31.07.2017 to 03.07.2019 in a preferential manner by bypassing the secured financial creditors who were entitled to be repaid in priority over other creditors.
Financial Statement of VSL for period 01.04.2018 to 31.03.2019, shows that VSL had paid Rs.5,26,000/- to the CD. Furthermore, the FRR also stipulates that the account maintained by the Corporate Debtor that of VSL was more like a current account and numerous debit as well as credit journal vouchers had been issued during Financial Year 2016-17 & 2017-18 by the Corporate Debtor. It clearly stipulates that various transactions occurred between the Corporate Debtor and VSL which was never declared as a related party by the erstwhile management of the Corporate Debtor.
During the relevant period of 2 years immediately prior to CIRP commencement, i.e., between 31.07.2017 and 03.07.2019, there were total credits worth Rs. 1,94,77,000/- and Debits worth Rs. 2,47,61,000/- in the account of the CD, meaning thereby preferred payments made to VSL by the erstwhile management of the Corporate Debtor during the relevant period was Rs. 52,84,000/- (Rs. 2,47,61,000 – Rs. 1,94,77,000). The said credits made in favor of VSL are not in the ordinary course of the business, but rather have been titled as 'Unsecured Loan' rendering VSL as one of the creditors of the CD. During the relevant period of credit in favor VSL, CD was not involved in business as it had ceased its business operations in November 2017. The said credit has been made in favor of VSL, in preference to other creditors, including secured financial creditor, whose debt remained outstanding.
Respondent has submitted as under:
Erstwhile RP namely, Mr. Narender Kumar Sharma had also obtained FAR dated 09.06.2020 and the same was placed before the CoC in the 5th meeting convened on 15.06.2020 whereupon it was concluded that no action was required to be taken in terms of sections 43, 45, 47, and 49.
Relevant portion of the are extracted below:
The Applicant has not determined the alleged antecedent debt and also has not placed any ledger maintained by CD with the Respondent reflecting alleged credits and debits. No bank statements have been produced which would reflect dates of alleged transaction.
Further, the Applicant, despite having a transaction report obtained by the erstwhile RP, decided to appoint a new forensic auditor, which casts a doubt on the professional conduct of the Applicant, the present Liquidator. Further fact of accepting the delayed report from the newly appointed transaction auditor adds to misconduct of the Applicant, as the report was supposed to be submitted in October 2019; however, the same was submitted only in October 2020. The Applicant has not given reasons for not resorting to transaction audit report obtained by the erstwhile RP.
Further, CD was in financial crunch and was in need of running capital / liquidity to keep the CD a running concern and VSL at multiple occasions endorsed unsecured loans to the CD but that does not mean they were not in the ordinary course of business and in fact the Applicant itself has admitted in paragraph 9 of the Application that VSL advances borrowings to the CD for conduct of business on regular basis.
The Application is thus liable to be dismissed for the want of evidence.
In response to the above, Applicant has submitted as follows:
The Respondent must disclose the source for obtaining minutes of the CoC meetings.
CD was doing minimal operations during the relevant period and the same is summarized below:
Transaction with the Respondent was thus not in the ordinary course of business.
Findings and Analysis:
It is pertinent to peruse relevant portion of Forensic Audit Report which is extracted below:
…
It has not been disputed that the VSL is related party to the CD and thus relevant period to look back is 2 years from commencement of CIRP vide order dated 03.07.2019. The table above under clause 4.8 of the FAR, shows that as on 31.03.2018, an unsecured loan of VSL substantially stood discharged, which prima facie reflects that some part of liability of CD was discharged in favor of VSL during the lookback period.
Further from the perusal of the relevant extract of above transaction report / FAR, a fact derived undisputedly is that the CD has transferred a sum to the tune of INR 247.61 Lacs to VSL, during the lookback period.
At this stage, it is relevant to note Section 43 of the IBC, which reads as follows:
Section 43: Preferential transactions and relevant time.
43.(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 time given a preference in such transactions and in such manner as laid down in sub-section (2) to any persons as referred to in sub-section (4), he shall apply to the Adjudicating Authority for avoidance of preferential transactions and for, one or more of the orders referred to in section
44.(2) A corporate debtor shall be deemed to have 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 transfer —
(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 property previously transferred to such transferee in a transaction that is neither void nor voidable by the liquidator or the resolution professional under this Code, including proceeds of such property, but does not include a financial debt or operational debt substituted for existing financial debt or operational debt.
(4)A preference shall be deemed to be given at a 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.
There is no need to prove any fraudulent intent for a preferential transaction. When we look into the scheme of Section 43 of the Code, sub-section (2), a clear statutory provision is that a corporate debtor shall be deemed to have given a preference if conditions as mentioned in paragraph ‘a’ and ‘b’ are fulfilled. When a provision provides for deeming fiction, deeming fiction comes into play on fulfilment of the requirements even if in fact it may not be so. When the deeming provisions come into existence the transaction entered into between the corporate debtor would be regarded as preferential transaction with attendant consequences irrespective whether the transaction was in fact intended or even anticipated to be so.
The transfer of sum to related party, VSL, as shown in FAR is prima facie in preference to the other secured creditors (Banks) and thus falls in breach of ranking prescribed under section 53 of the IBC. Such payment to VSL, as established from the records, post VSL in a position better than what it would have been in case distribution as per ranking order prescribed under section 53.
Respondent has failed to show that any record which would suggest that the payments in question were part of the ordinary course of business.
The Hon’ble NCLAT in the judgment of GVR Consulting Services Pvt. Ltd. v. Pooja Bahry, Company Appeal (AT) (Insolvency) No. 405 with 369 and 412 of 2022 had held as follows:
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 of the Corporate Debtor” cannot be given an extended meaning as contended by Learned Counsel for the Appellants that all financial transactions done by the Corporate Debtor is covered within expression “financial affairs’ hence the loan taken by the corporate debtor from different related and non-related parties is part of the financial affairs cannot be accepted. The Judgement of the Hon’ble Supreme Court in “Anuj Jain” (Supra), the emphasis has been given that transaction must fall into place as part of the undistinguished common flow of the business done. Undistinguished common flow of the business of the Corporate Debtor does not contemplate any such or particular situation where the Corporate Debtor’s claim that its financial position became unstable due to market condition and had started arranging money from their relatives and other parties. Money arranged from relative and other parties by the Corporate Debtor thus cannot be held to be part of ordinary course of business or part of financial affairs.
In view of the same, we are of the view that payments made to related party VSL, cannot be considered in ordinary course of business and thus we are inclined to allow this Application.
Section 44 of the IBC reads as follows:
44.The Adjudicating Authority, may, on an application made by the resolution professional or liquidator under sub-section (1) of section 43, by an order:
(a)require any property transferred in connection with the giving of the preference to be vested in the corporate debtor;
(b)require any property to be so vested if it represents the application either of the proceeds of sale of property so transferred or of money so transferred;
(c)release or discharge (in whole or in part) of any security interest created by the corporate debtor;
(d)require any person to pay such sums in respect of benefits received by him from the corporate debtor, such sums to the liquidator or the resolution professional, as the Adjudicating Authority may direct;
(e)direct any guarantor, whose financial debts or operational debts owed to any person were released or discharged (in whole or in part) by the giving of the preference, to be under such new or revived financial debts or operational debts to that person as the Adjudicating Authority deems appropriate;
(f)direct for providing security or charge on any property for the discharge of any financial debt or operational debt under the order, and such security or charge to have the same priority as a security or charge released or discharged wholly or in part by the giving of the preference; and
(g)direct for providing the extent to which any person whose property is so vested in the corporate debtor, or on whom financial debts or operational debts are imposed by the order, are to be proved in the liquidation or the corporate insolvency resolution process for financial debts or operational debts which arose from, or were released or discharged wholly or in part by the giving of the preference:
Provided that an order under this section shall not—
(a)affect any interest in property which was acquired from a person other than the corporate debtor or any interest derived from such interest and was acquired in good faith and for value;
(b)require a person, who received a benefit from the preferential transaction in good faith and for value to pay a sum to the liquidator or the resolution professional.
Explanation I.—For the purpose of this section, it is clarified that where a person, who has acquired an interest in property from another person other than the corporate debtor, or who has received a benefit from the preference or such another person to whom the corporate debtor gave the preference,—
(i)had sufficient information of the initiation or commencement of insolvency resolution process of the corporate debtor;
(ii)is a related party, it shall be presumed that the interest was acquired or the benefit was received otherwise than in good faith unless the contrary is shown.
Explanation II.—A person shall be deemed to have sufficient information or opportunity to avail such information if a public announcement regarding the corporate insolvency resolution process has been made under section 13.
In view of the power vested with this AA under section 44, we hereby direct Respondent to repay the preferentially paid amount Rs. 52,84,000/- (Rupees Fifty-Two Lacs Eighty Four Thousand Only) along with the interest at 10% p.a. to be calculated since the date of preferential payment till actual realization, to the liquidation estate of the CD.
In view of the above, the Application bearing IA-563/2022 is Allowed.