The NCLAT, New Delhi ruled that the timeline in Regulations 35A of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (hereinafter referred to as “2016 Regulations”) was not mandatory and that the requirement to approach NCLT on or before the 135th day of the insolvency commencement day (“ICD”) is only directory in nature. Further, the fact that there was a delay in the determination of opinion cannot by itself be a ground for the non-maintainability of the petition.
In the present case, there was a gap of nearly 8 months.
Further, the formation of opinion has to be completed on or before the 75th day of the ICD, and the determination of the opinion on or before the 115th day of the ICD. In the present case, these timelines were not adhered to by the Resolution Professional (“RP”).
It was noted that the RP was not provided with any documents from the suspended management. Moreover, the work in preparing the report was hindered due to the Covid-19 pandemic. Hence, it was held that the delay in submitting applications under Sections 43 and 66 was with sufficient cause and not due to laxity or leniency.
Further, the purpose of Section 43 was enunciated which is to determine and nullify the preferential transactions undertaken by the parties at the relevant time to withdraw money from a distressed corporate debtor when it is on the verge of the commencement of the corporate insolvency resolution process (“CIRP”).
Brief Facts:
The present appeal has been preferred against the order of the NCLT vide which the application filed by the Appellant (Resolution Professional) seeking avoidance of preferential and fraudulent transactions carried by suspended directors of the Corporate Debtor was dismissed.
Brief Background:
A CIRP was initiated against the Corporate Debtor (Tayal Foods Ltd.). The RP sought documents from the suspended management, however, the documents were not provided. Therefore, an application was preferred before the NCLT.
A Transaction Auditor (“TA”) was appointed by the RP as some suspicious transactions came to light from the balance sheet provided by the Financial Creditors. The report submitted by TA showed that certain transactions fell under Sections 43 and 66 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC”).
Thereafter, a resolution plan was sent to NCLT for approval. This was followed by an application filed under Sections 43 and 66. The said application was dismissed and hence, the present appeal.
Contentions of the Appellant:
It was submitted that since the Committee of Creditors had approved a resolution plan, the same had to be sent to the NCLT. There were no clarifications received from the ex-management regarding the suspicious transactions.
Certain transactions were contended to be personal and hence, it was argued that these transactions could not have been done in the ordinary course of business. Many transactions reflecting preferential transactions and with related parties were pointed out.
It was also submitted that the suspended directors sold the stocks held outside the book of account and the allegation of siphoning off money was made.
Contentions of the Respondent:
It was contended that RP failed to comply with Regulation 35A 2016 Regulations. It was submitted that there was a delay of nearly 17 months and hence, the application was non-maintainable.
It was further argued that if it was true that the Appellant faced non-cooperation from the Respondents, then it raised questions on the authenticity of the audit conducted by the TA and the reliance placed on it.
Observations of the Tribunal:
The primary issues to be ascertained were whether the application filed regarding transactions under Sections 43 and 66 were non-maintainable because they did not align with Regulations 35A and further whether the transactions conducted by the Respondent were not in the ordinary course of business.
Regarding the first issue, it was noted that as per Regulation 35A, the application has to be filed on or before the 135thday of the ICD. In the present case, there was a gap of nearly 8 months.
Further, the formation of opinion has to be completed on or before the 75th day of the ICD, and the determination of the opinion on or before the 115th day of the ICD. In the present case, these timelines were not adhered to by the RP.
It was noted that the RP was not provided with any documents from the suspended management. The ex-management was uncooperative. This was why the RP was compelled to file an application under Section 19. Moreover, the work in preparing the report was hindered due to the Covid-19 pandemic. Hence, it was held that the delay in submitting applications under Sections 43 and 66 was with sufficient cause and not due to laxity or leniency.
The Tribunal opined that the RP has to make an opinion and determination by applying his mind to the suspicious avoidance transactions. In this regard, the Appellate Authority opined that the appointment of TA was an expression of the belief of RP about suspicious transactions. Thus, the contention of the Appellant that it was within the time that an opinion was formed was accepted.
The bench further remarked that there is always a possibility of delay in deciding as there are factors involved which are outside the control of the RP. In the present case, the delay was due to the non-cooperation of the ex-management.
It was ruled that the timeline in Regulations 35A was not mandatory and that the requirement to approach NCLT on or before the 135th day of the ICD is only directory in nature. Further, the fact that there was a delay in the determination of opinion cannot by itself be a ground for the non-maintainability of the petition.
Moving on to the second issue, it was noted that the relevant look-back period for the related parties is 2 years.
The transaction by which the ex-director of the Corporate Debtor repaid the mortgage loan taken from his father from Union Bank of India was held to be a personal transaction and a related party transaction.
Another transaction was the Corporate Debtor transferred money to Respondent No.2 for her medical needs, however, it was not emergent as the bills were nearly one year after the transfer of funds. It was held to be a preferential transaction.
The Bench noted that the transactions in the present case put the ex-directors in a more beneficial position than it would have been placed in the event of the distribution of assets of the Corporate Debtor under Section 53 and hence, these transactions could not be said to be done in the ordinary course of business.
The purpose of Section 43 was enunciated which is to determine and nullify the preferential transactions undertaken by the parties at the relevant time to withdraw money from a distressed corporate debtor when it is on the verge of the commencement of the CIRP.
The Appellate Tribunal opined that there were sufficient reasons to believe that the funds of the Corporate Debtor were wrongfully diverted and misused which affected the financial health and hence amounted to fraudulent practice.
The decision of the Tribunal:
Based on the aforementioned findings, the order of the NCLT was set aside. Accordingly, the appeal was allowed.
Case Title: Jagdish Kumar Paulkar v. Vinod Agarwal &Ors.
Coram: Justice Ashok Bhushan, Mr. Barun Mitra (Technical Member)
Case No: Company Appeal (AT) (Insolvency) No. 483 of 2022
Advocate for the Appellant: Adv. Mr. Aishvarya Vikram
Advocates for Respondents: Advs. Mr. Abhinav Shrivastava, Ms. Ritu Reniwal
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