Mr. Rishabh Chand Lodha vs Mr. Anil Baldva & Ors.

Per: Shri Deep Chandra Joshi, Judicial Member

This Interlocutory Application ('IA') bearing IA No. 395/JRP/2022 is filed by the Resolution Professional of M/s Baldva Textiles Private Limited ('Corporate Debtor') under Section 43 read with Section 60(5) of the Insolvency and Bankruptcy Code, 2016 (‘Code/IBC’) and Regulation 35A (3) of the IBBI (Insolvency Resolution Process of Corporate Persons) Regulation, 2016 (‘CIRP Regulation’) seeking declaration of certain transactions as preferential and seeking appropriate directions against the Respondents.

The Adjudicating Authority vide Order dated 11.11.2021 admitted CP(IB) No. 28/9/JPR/2021 under Section 9 of the IBC, filed by Mr. Ajay Jain sole proprietor of M/s Radium Fibers (‘Operational Creditor’) against M/s Baldva Textiles Private Limited (‘Corporate Debtor’) and Mr. Prashant Agarwal was appointed as Interim Resolution Professional (‘IRP’) to conduct the CIRP of the Corporate Debtor. However, in the third CoC meeting held on 13.01.2022 CoC resolved to appoint the Applicant as the Resolution Professional of the Corporate Debtor which was allowed by this Adjudicating Authority vide order dated 28.01.2022.

The Applicant has moved the present Application on the following set of facts:

The Applicant submits that certain avoidance transactions were carried out by the Corporate Debtor along with the Respondents prior to the commencement of the Corporate Insolvency Resolution Process (‘CIRP’). The Respondent No. 1 & 2 are the suspended directors of the Corporate Debtor, Respondent No. 3 is an erstwhile director who has retired from the directorship on 28.08.2019 and Respondent No. 4 is the promoter and shareholder of the Corporate Debtor. It is further stated that all four (4) Respondents are related parties to the Corporate Debtor in terms of Section 5(24) (a) & (b) of the Code.

In view of the provisions of Code the Respondent No. 1 & 2 being the suspended directors of the Corporate Debtor are duty-bound to cooperate throughout for smooth functioning and carry out the CIRP. However, the Respondent No. 1 & 2 did not provide the relevant documents/information. It is submitted that with the available records the Applicant perused/examined the available financial documents and opined that the transactions of the Corporate Debtor are not falling in line with the ordinary course of business and have been carried out to provide benefits to others at the cost and expenses of the Corporate Debtor.

To ascertain the nature of the suspicious transaction the IRP took the assistance of M/s Pipara and Co, Chartered Accountants as Transaction Auditor ('Auditor') for carrying out the transaction audit of the accounts of the Corporate Debtor during the look-back period i.e., 11.11.2019 to 11.11.2021 qua related parties and 11.11.2019 to 11.11.2020 qua non-related parties.

The Transaction Auditor has submitted a detailed Transaction Audit report on 11.07.2022 to the Applicant, wherein the Auditor has identified several transactions/arrangements, which were improper, wrongful, illegal, and identified as preferential transactions under Section 43 of the Code. Copy of the Transaction Audit Report dated 11.07.2022 is annexed as Annexure-A1 of the Application.

In compliance with sub-regulation (2) of the Regulation 35A of the CIRP Regulation the Applicant perused the Transaction Audit Report and prepared its Determination Report dated 13.07.2022 wherein it was opined that the Corporate Debtor has been subjected to preferential transactions under Section 43 and undervalued transactions covered and Section 45 of the Code. It is also submitted that several transactions are not ascertained due to the non-availability of relevant documents thus the Applicant reserves its right to file an appropriate Application as and when such determination is made. Copy of the Determination Report dated 13.07.2022 is annexed as Annexeure-A2 of the Application.

The Audit Report and Determination Report have been prepared based on the following documents retrieved from the Suspended Directors and officials of the Corporate Debtor, as mentioned below:

- Audited Financial Statement for the year ended 31.02.2020 and 31.03.2021; - MCA published data relating to Corporate Debtor; - Complete Set of Income Tax Return along with acknowledgement - Copy of sales tax/VAT/service tax/GST returns; - Copy of all bank accounts in soft copy along with narrations for the period under audit;

- Details of bank accounts opened or closed during such period by the company.

As per the financial statements of the Corporate Debtor for the period from 11.11.2019 to 31.03.2020, the Corporate Debtor repaid an unsecured loan to the extent of Rs. 15,50,000/- (Rupees Fifteen Lakh Fifty Thousand Only) to Respondent No. 1 to 4. It is pertinent to note the Corporate Debtor has ignored/bypassed the repayment of debt of other similar creditors and gave preference to the Respondents. The details of the preferential payment of unsecured loan made to Respondents are as follows:

Copy of the Ledger Account annexed as Annexure-A4 (Colly) of the Application

The Respondents have filed their reply vide Dairy No. 531/2023 dated 27.02.2023 and stated the following:

The Respondents have submitted that this Adjudicating Authority vide order dated 09.11.2022 approved the Resolution Plan of M/s BMD International. As per the approved resolution plan, there was no provision with regard to the continuation of the present Application under Section 43 of the Code.

The transactions mentioned in the Application are not preferential transactions however it was done in an ordinary course of business. The present Application is filed by the Resolution Professional with the intent to harass the Respondents/Suspended Directors. Moreover, the transactions which are mentioned in the Application have taken place before the look-back period i.e., 2017-18.

It is submitted that the suspended directors have been regularly providing the interest-bearing loan to the Corporate Debtor for the short term since 2017 and accounts for the period from 2017 to 2021 have been regularly audited by the statutory auditor of the Company. The payment of interest on unsecured loans has been mentioned in the audit report of the auditor.

We have heard the submissions made by the learned counsel for the Applicant and perused the Application and Reply along with the documents enclosed therein.

The provision of Section 43 of the Code is reiterated below for reference:

Further, the Hon’ble Supreme Court has elaborated the scope and ambit of the Section in the matter of Anuj Jain vs. Interim Resolution Professional for Jaypee Infratech Limited vs. Axis Bank Limited Etc. Etc. CIVIL APPEAL NOS. 8512-8527 OF 2019, whereby the following has been held:

Hence, conjoint reasoning of the aforementioned enunciates that Section 43(2) categorised those transactions as Preferential Transactions in which there is a transfer of property or an interest thereof of the corporate debtor for the benefit of a creditor/surety/guarantor and effecting a beneficial position to the creditor/surety/guarantor than it would have been in the event of a distribution of assets being made in accordance with section 53. On the other hand, Section 43(3) elucidates the transactions exempted from the clutches of Section 43(2) i.e., a preference shall not include transfers made in the ordinary course of the business or financial affairs of the Corporate Debtor or the transferee or any transfer creating a security interest in property acquired by the Corporate Debtor to the extent that 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 a security interest and was used by corporate debtor to acquire such property and the same has been registered with an information utility on or before thirty days after the corporate debtor receives possession of such property.

The payments made in favour of the related parties and non-related parties had the effect of putting the surety/creditor/guarantor in a more beneficial position than they would have been in the event of distribution of assets of the Corporate Debtor in accordance with Section 53 of the Code. The payments alleged under Section 43 as Preferential shall not fall under any of the exceptions under Section 43(3) of the Code. The Hon’ble Supreme Court in Anuj Jain (supra) held that the ordinary course of business ought to be seen from the perspective of the Corporate Debtor as well as the transferee.

In the case at hand, the Transactional Auditor has mentioned in their Audit Report that transactions amounting to Rs. 15,50,000/- (Rupees Fifteen Lakh Fifty Thousand Only) are considered preferential transactions where the Corporate Debtor has given preference in making payments of interest and unsecured loan to the related parties, details of the repayment of unsecured loan to the creditors are as follows:

It is noted that in various instances, the Corporate Debtor has given preference in the payments to the Respondents which attracts the provisions of Section 43 of the IBC, 2016. The transaction auditor in its report has identified repayment of the loans to the directors and opined that such transactions are covered under Section 43 of the Code, 2016. The Corporate Debtor has transferred Rs. 15,000/- (Rupees Fifteen Thousand Only) to Respondent No. 4, the nature of the transaction is considered as a preferential transaction in terms of Section 43 of the Code even though the purpose of the transfer is not defined.

Therefore, in view of the foregoing observations, we hereby direct the following in accordance with Section 43 of the Code:

Respondent No. 1 is directed to repay the amount of Rs. 11,30,000/- (Rupees Eleven Lakh Thirty Thousand Only) to Corporate Debtor in terms of Section 44(1) of the Insolvency and Bankruptcy Code, 2016. 12.2 Respondent No. 2 is directed to repay the amount of Rs. 80,000/- (Rupees Eighty Thousand Only) to the Corporate Debtor in terms of Section 44(1) of the Insolvency and Bankruptcy Code, 2016. 12.3 Respondent No. 3 is directed to repay the amount of Rs. 3,25,000/- (Rupees Three Lakh Twenty-Five Thousand Only) to the Corporate Debtor in terms of Section 44(1) of the Insolvency and Bankruptcy Code, 2016. 12.4 Respondent No. 4 is directed to repay the amount of Rs. 15,000/- (Rupees Fifteen Thousand Only) to the Corporate Debtor in terms of Section 44(1) of the Insolvency and Bankruptcy Code, 2016.

The Registry is directed to provide a copy of this Order to all the parties.