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2018 (5) TMI 1937 - Tri - Insolvency and BankruptcyDirection that the transaction entered into by the promoters and Directors of the Corporate Debtor creating mortgage of 858 acres of immovable properly owned and in possession of the Corporate Debtor to secure the debt of related party - fraudulent and wrongful transactions within the meaning of Section 66 of I B Code - Whether Interim Resolution Professional has authority to file this application? - HELD THAT - Sub-section (1) of sec. 25 casts a duty upon the Resolution Professional to preserve and protect the assets of the Corporate Debtor including the continued business operations of the Corporate Debtor. For this purpose clause (J) of sub-section (2) of sec. 25 casts a duty upon the resolution professional to apply for the avoidance of any such transaction before the Adjudicating Authority by chapter III of the code. Thus in view of the provisions of the Code and the orders passed by the Hon ble Supreme Court the applicant has a duty to file an application for avoidance of any such transaction before the Adjudicating Authority in accordance with chapter III of the code and therefore contention of the applicant that the RP has no locus standi to file the present application is without any basis. The contentions raised by the respondent number 15 that the applicant does not have jurisdiction to Act as Resolution Professional deserves to be rejected - the issue decided in negative in favour of the applicant Resolution Professional. Whether impugned transactions have been carried out with intent to defraud creditors of the corporate debtor or for any fraudulent purpose and is covered under section 66 of the Code? - Whether impugned transactions are preferential transactions covered u/s 43(2)(a) of the code or undervalued transaction covered under section 45 of the Insolvency in Bankruptcy Code 2016? - Whether look-hack period available for the impugned transactions as per provision of section 46(1)(i) is one year or two years? - HELD THAT - The statutory requirement under sub-section (1) of section 43 of IBC requires that RP has to form an opinion and this opinion can only be formed by perusing the records available with him. Under the Code the Resolution Professional is not required to give a judgment for initiating action under section 43. In case if the resolution Professional has formed an opinion that the corporate debtor has at the relevant time given a preference in such transactions and such manner as laid down in sub-section (2) to any persons as referred in sub-section (4) then he shall apply to the Adjudicating Authority for avoidance of preferential transactions referred to in section 44 of the code. Thus statutory requirement to take the decision is on the Adjudicating Authority not on the Resolution Professional. The opinion formed by the Resolution Professional can be based on the records available with him. The subsidiary and its holding company is defined as the related party given the provision of section 5(24) of Insolvency and Bankruptcy Code. Admittedly corporate debtor Jaypee Infratech Ltd. JAL is a subsidiary of Jaiprakash Associates Ltd. (JAL.) - It is clear that for transactions of a related party look back period is two years preceding the insolvency commencement date. Admittedly in this case the insolvency commencement dale is 9th August 2017. Therefore the two years look back period as provided in the code commences from 10th August 2015. It appears that approval of JLF was not taken for the impugned transactions. It is important to point out that the corporate debtor was facing financial crunch and its account was declared as NPA Joint Lenders Forum a core committee of lenders was constituted under the directions of RBI and meeting of JLF was also held during 2015-2017. In the circumstances why approval of JLF was not taken for the impugned transactions whereby unencumbered land of the corporate debtor was mortgaged to create security for the debt of JAL i.e. a holding company of the corporate debtor. The subject of transfer must be property or an interest in such property of the corporate debtor. The expression of the corporate debtor may be interpreted so as to refer to assets that qualify to be included in the liquidation estate under section 36. What forms part of the liquidation estate in terms of section 36 is to be distributed in terms of section 53. Therefore if any action on the part of the corporate debtor has the effect of affecting the availability marketability or value of the any of (he ingredients of liquidation estate must be covered by the section. Whether creation of security interest or collateral may come within the purview of preferential transaction is to be observed ? - HELD THAT - It is an undisputed fact that a secured creditor is better placed than an unsecured creditor in insolvency/liquidation proceedings. Therefore when a security is being offered to a creditor he is being placed in a better position than other creditors. However that does not necessarily result in preference. Grant of security interest per se. is not preference but may be proved to be a preference on fulfilment of conditions. In this case it is undisputed that after the release of earlier mortgage deeds fresh deed has been executed in favour of the creditors of JAL which happens lo be holding company of the corporate debtor. Holding company and subsidiary company are separate legal entities. After the release of earlier mortgage and creation of fresh mortgage cannot be treated as a continuation of the earlier mortgage - it is clear that the said act appears to have been committed to defraud the creditors of the Corporate Debtor which are certainly preferential transactions covered u/s. 43(2)(a) of the Code. Therefore this issue is also decided in positive in favour of Resolution Professional. The impugned transaction are preferential transactions as defined in the sub-section (2)(a) of Section 43 of insolvency and bankruptcy code 2016. We have found that corporate debtor Jaypee Infratech Ltd. (JIL) has by way of mortgage of unencumbered land created security interest in favour of lenders of the Jaiprakash Associates Ltd. (JAL) which happens to be the holding company of JIL without any consideration - The said mortgage of immovable properties i.e. of the unencumbered land of the incorporate debtor has been made without any consideration to the corporate debtor. Therefore the said transaction is covered under the umbrella of Sec. 45(1) of the Code and will be treated as an undervalued transaction as defined under section 45 of the Code. The impugned mortgage of unencumbered land parcels of the Corporate Debtor in favour of lenders of the JAL to create a security interest are transactions between the Corporate Debtor lenders of JAL and JAL who happens to be an Operational Creditor of the Corporate Debtor - It is true that the collateral security is common practice in loan transactions. It is tin record that in this case the Corporate Debtor was under liquidity crunch and its accounts were declared NPA by LIC and other creditors. The Joint Lender Forum was formed to deal with the situation. But the Corporate Debtor entered into the transaction even without taking prior approval of Joint Lender Forum and mortgaged its unencumbered land in favour of the lenders of the JAL. It is clear that the impugned preferential transactions are also undervalued transactions and covered under section 45(1) of the Code. It is also clear that these transactions are undertaken during the relevant period of 2 years from the date of initiation of Corporate Insolvency Process as provided under section 46(1)(ii) of the Code. Therefore this issue is also decided in positive in favour of applicant Resolution Professional and against the Corporate -Debtor - it is clear that the mortgage of land of JIL in favour of tenders of JAL amounts to transfer of interest in property of JIL for the benefit of its creditor i.e. JAL and putting it in a beneficial position vis-a-vis other creditors is a preferential transactions U/s 43(2)(a) (b). The transactions were executed within the look back period of two years before the commencement of Insolvency proceeding and is therefore covered U/s 43(4)(a). Further transaction cannot be treated is in ordinary course of business or financial affairs of Corporate Debtor and is not excluded U/s 43(3) - the company application filed by the Resolution Applicant deserves to be allowed. Application allowed.
Issues Involved:
1. Authority of Interim Resolution Professional (IRP) to file the application. 2. Whether the impugned transactions were carried out with intent to defraud creditors or for any fraudulent purpose under Section 66 of the Code. 3. Whether the impugned transactions are preferential transactions under Section 43(2)(a) or undervalued transactions under Section 45 of the Insolvency and Bankruptcy Code (IBC) 2016. 4. Look-back period applicable for the impugned transactions under Section 46(1)(i). Detailed Analysis: Issue No. 1: Authority of Interim Resolution Professional to file the application The respondents contended that the applicant had no locus standi to file the application. However, the Tribunal clarified that the Supreme Court's orders allowed the IRP to proceed with finalizing the Resolution Plan and to take necessary steps required for the same. The IRP is mandated by Regulation 39(2) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process of Corporate Persons) Regulation 2016, to submit all details of transactions falling under sections 43, 45, 50, and 66 of the Code to the Committee of Creditors. The duties of the IRP under Section 25 include filing applications for avoidance of transactions under Chapter III of the Code. Hence, the Tribunal concluded that the IRP had the authority to file the application. Issue No. 2: Transactions carried out with intent to defraud creditors or for any fraudulent purpose under Section 66 of the Code The Tribunal found that the Corporate Debtor mortgaged 858 acres of unencumbered land to secure the debt of its related party, Jaiprakash Associates Ltd. (JAL), without any consideration or counter guarantee, during a period when it was facing severe liquidity crunch and its account was declared as NPA. The Tribunal noted that the Directors of the Corporate Debtor were aware of the financial stress and failed to exercise due diligence, thereby defrauding the creditors. The Tribunal held that the transactions were carried out with the intent to defraud the creditors of the Corporate Debtor, making them fraudulent and wrongful under Section 66 of the Code. Issue No. 3: Preferential transactions under Section 43(2)(a) or undervalued transactions under Section 45 of the IBC 2016 The Tribunal determined that the transactions were preferential as they involved the transfer of interest in the property of the Corporate Debtor for the benefit of JAL, a creditor, putting JAL in a beneficial position than it would have been in the event of a distribution of assets under Section 53 of the Code. The Tribunal also found that the transactions were undervalued as they were made without any consideration or economic gain to the Corporate Debtor. The impugned transactions were executed within the look-back period of two years preceding the insolvency commencement date, making them preferential and undervalued under Sections 43 and 45 of the Code. Issue No. 4: Look-back period applicable for the impugned transactions under Section 46(1)(i) The Tribunal clarified that for transactions involving a related party, the look-back period is two years preceding the insolvency commencement date. The insolvency commencement date was 9th August 2017, making the relevant look-back period start from 10th August 2015. The Tribunal rejected the argument that the IBC provisions do not apply retrospectively, as the Code itself provides a retrospective effect for the look-back period. Conclusion: The Tribunal declared the impugned transactions as fraudulent, preferential, and undervalued under Sections 66, 43, and 45 of the IBC, respectively. It ordered the release and discharge of the security interest created by the Corporate Debtor in favor of the lenders of JAL and deemed the properties mortgaged by way of preferential and undervalued transactions to be vested in the Corporate Debtor. The detailed schedule of the properties involved in the impugned transactions was provided in the judgment.
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