The NCLAT, New Delhi opined that as per Section 43 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC”), there is no need to prove any fraudulent intention for a preferential transaction. If the conditions mentioned are met, the transactions are deemed to be preferential. A legal fiction comes into play and therefore, intent does not matter.
It was expounded that the money arranged from the relatives cannot be part of the ordinary course of business of financial affairs. Further, as per Section 43, whether the intent was there or not is an irrelevant consideration. It was also ruled that any transaction under any notice, demand or threat shall not lose its character of preferential transaction merely because a notice or demand was issued by the Lender.
Brief Facts:
The three appeals have been filed against the order of the NCLT vide which it was held that the transactions of the Corporate Debtor (“CD”) in favour of the Appellants are preferential and therefore, a refund was ordered.
Brief Background:
The Corporate Insolvency Resolution Process (“CIRP”) was ordered against the CD after which a Transaction Auditor was appointed by the CD. Thereafter, a resolution plan was proposed and the same was approved by the NCLT.
The Transaction auditor submitted a report on the findings related to certain transactions of the CD. The NCLT passed an order vide which it held that the transactions with Respondent No. 1 to 7 were preferential transactions as per Section 43 of the IBC.
Hence, the present appeals.
Contentions of the Appellants:
It was argued that the transactions were entered into the ordinary course of business. Further, the CD took the loan from the Appellants to run its business and hence, the amount was towards the financial affairs of the CD which are exempted from the purview of the preferential transactions.
It was also contended that the Resolution Professional (“RP”) cannot pursue the avoidance application as the issue has already been addressed in the cases Anuj Jain v. Axis Bank Ltd. & Ors. (2020 8 SCC 401) and M/s. Venus Recruiters Pvt. Ltd. V. Union of India (2020 SCC OnLine DL 1479).
Contentions of the RP:
It was argued that it was only after due satisfaction that the transactions were preferential and undervalued, that the avoidance application was filed before the NCLT. Further, at the time of consideration of the Resolution Plan, the details regarding the avoidance application were duly placed before the Committee of Creditors (“CoC”). The avoidance application was filed before the resolution plan was approved.
Observations of the Tribunal:
It was observed that it was undisputed that the dispute between the parties regarding repayment to related parties and non-related parties was within the lookout period.
It was noted that the legislations such as the Provincial Insolvency Act, of 1920 and the Companies Act, of 1956 all dealt differently with the concept of avoidance transactions.
It was opined that as per Section 43, there is no need to prove any fraudulent intention for a preferential transaction. If the conditions mentioned are met, the transactions are deemed to be preferential. A legal fiction comes into play and therefore, intent does not matter.
Applying the ratio laid down by the Hon’ble Supreme Court in the case of Anuj Jain v. Axis Bank Ltd. & Ors. (2020 8 SCC 401), it was to be ascertained whether the repayment of the loan by the CD was in the ordinary course of business or not.
The Tribunal ruled that the expressions “ordinary course of business” or “financial affairs” have to read “esjudem generis”. All transactions cannot qualify as relating to financial affairs. The transaction must fall into place as part of the undistinguished common flow of the business done. In this case, the Appellant cannot claim that the financial position became unstable due to the market condition and therefore, money had to be arranged from the relatives and other parties.
It was expounded that the money arranged from the relatives cannot be part of the ordinary course of business of financial affairs. Further, as per Section 43, whether the intent was there or not is an irrelevant consideration. It was also ruled that any transaction under any notice, demand or threat shall not lose its character of preferential transaction merely because a notice or demand was issued by the Lender.
The decision of the Tribunal:
Based on the aforementioned reasons, the NCLAT upheld the order of the NCLT and accordingly, directed the Appellants to refund the money.
Case Title: GVR Consulting Services Pvt. Ltd. & Anr. V. Pooja Bahry & Ors. with other connected matters
Coram: Justice Ashok Bhushan, Barun Mitra (Technical Member)
Case No.: Company Appeal (AT) (Insolvency) No. 405 of 2022 with other connected matters
Advocates for Appellants: Advs. Mr. Abhijeet Sinha, Ms. Aditi Sharma, Mr. Gaurav Mitra, Mr. Nikhil Jha
Advocates for Respondents: Advs. Ms. Pooja Mahajan, Ms. Mehak Nayak, Mr. Milan Singh Negi
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