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2019 (4) TMI 1208 - Tri - Insolvency and BankruptcyCorporate Debtor - applicability of section 43, look back period - related party transaction - section 5(24) of the I B Code - preferential transaction - undervalued transactions - initiation of Corporate Insolvency Resolution Process - HELD THAT - On perusal of the definition of the Related Party as given in Section 5(24)(i) of the Code, it is clear that body corporate, which is a holding company, the subsidiary or an Associate Company of Corporate Debtor, or a subsidiary of a holding company to which the Corporate Debtor is also a subsidiary, is covered u/s.5(24)(i)of I B Code as a related party. In the present case, the impugned transactions are with the holding company of the Corporate Debtor. Thus, the transaction can be said to be with a related party of the Corporate Debtor. Further, the look-back period as provided u/s.43(4)(a) will be two years preceding the insolvency commencement date. In this case, the insolvency commencement date is 27.6.2017. Therefore, only the transaction made between 28.6.2015 to 27.6.2017 will fall within the look-back period, as provided under section 43(4)(a) of the Code. The look-back period in the present case, as per the provisions of section 43(4)(a), would start from 28.6.2018. Therefore, the transactions carried on during the period 01.04.2015 to 26.6.2015 will be out of the purview of the Preferential Transactions. The Bottling agreement as entered into between the holding company and the Corporate Debtor is not produced on record by either side. As per the submission of the Applicant, the change in business model took place in F.Y. 2015-16 and without any specific date, it would be an obvious assumption that the transaction of change in business model took effect on 01.04.2015. Therefore, the transaction of change in the business model of the corporate Debtor falls beyond the look-back period and cannot be challenged as a preferential transaction under section 43 of the I B Code. Undervalued transaction - HELD THAT - In the present case, on perusal of the forensic audit report, we found it written in the report that as per the agreement of the Corporate Debtor with MS Biotech Pvt. Ltd., the operating cost of the Corporate Debtor electricity, labour, security, etc. is to be borne by the MS Biotech Pvt. Ltd. however it is not the actual practice followed and the operating cost is born by the Corporate Debtor itself - The impugned transaction took place in the ordinary course of business of the Corporate Debtor and therefore exempted from being undervalued transaction. Sub-lease Agreement - HELD THAT - Where the company is facing a financial crunch, the management of the company, in their commercial wisdom, would make all possible efforts to generate funds from whatever resources the company possess. The Corporate Debtor had a licence to operate its unit at an enhanced capacity but lacked the required funds to operate and utilise its resource optimally. In such a scenario, if the management of the company decides to sub-lease its extra and idle resource, which the company is neither utilising or can utilise in future due to the paucity of funds, it cannot be said as a transaction to defraud the creditors. It is a transaction in the ordinary course of business of the Corporate Debtor and cannot be held as undervalued, preferential or a transaction defrauding creditors - the relief sought by the Applicant against the sub-lease agreement is not maintainable and rejected. Machinery transferred - HELD THAT - It is clear that the impugned assets were transferred to the holding company with an intent to protect the value of the assets. However, there is no consideration received by the Corporate Debtor against the said transfer, and the assets were not sold but only transferred to the holding company for its utilisation. Had the assets not being transferred, there was a risk of them getting wasted and spoiled. It is not disputed that the ownership of the assets is still with the Corporate Debtor and they are part of the liquidation estate of the Corporate Debtor - the assets of the Corporate Debtor shall be returned and restored to the Corporate Debtor by the holding company within one month from the date of this order. Application disposed off.
Issues Involved:
1. Preferential Transaction 2. Undervalued Transaction 3. Sub-lease Agreement 4. Machinery Transferred Issue-wise Detailed Analysis: Preferential Transaction The Resolution Professional alleged that the change in the business model from manufacturing and selling Indian-made foreign liquor to bottling job work resulted in the transfer of ?43.85 crores to the holding company, Tilaknagar Industries Ltd., during 2015-16 and 2016-17. This was claimed to be a preferential transaction as it benefited one creditor over others and was not intimated to creditors for approval. The Respondents argued that the change in the business model occurred on 1.4.2015, outside the two-year look-back period preceding the initiation of the Corporate Insolvency Resolution Process (CIRP) on 27.6.2017. The Tribunal concluded that the transaction fell outside the look-back period and was in the ordinary course of business, thus not qualifying as a preferential transaction under Section 43 of the Insolvency and Bankruptcy Code (I&B Code). Undervalued Transaction The Applicant claimed that the Corporate Debtor engaged in undervalued transactions by charging ?65 per case for bottling services, which was lower than the rate charged by another job worker, Soaring Spirits Pvt Ltd. The forensic audit report highlighted that this resulted in a revenue reduction for the Corporate Debtor. However, the Tribunal noted that the transaction took place in the ordinary course of business and thus did not meet the criteria for an undervalued transaction under Section 45(2) of the I&B Code. The Liquidator failed to provide sufficient evidence or identify the transferee/counterparty of the alleged undervalued transaction. Sub-lease Agreement The Applicant sought to nullify the sub-lease agreement with MS Biotech Pvt. Ltd., arguing that it was prejudicial to creditors' interests and not approved by them. The Respondents countered that the sub-lease was necessary due to the Corporate Debtor's financial difficulties and inability to utilize its enhanced production facilities. The Tribunal found that the sub-lease agreement was a commercial decision made in the ordinary course of business to generate funds and was not intended to defraud creditors. Thus, the relief sought by the Applicant was not maintainable. Machinery Transferred The Applicant requested the return of machinery worth ?11.35 crores transferred to the Shrirampur unit of the holding company, arguing it was a preferential transaction. The Respondents explained that the transfer was a commercial decision made years before the CIRP initiation to prevent the assets from rusting and being wasted. The Tribunal noted that the assets were not sold but transferred for better utilization and remained part of the Corporate Debtor's liquidation estate. The holding company agreed to return the machinery, and the Tribunal directed the assets to be restored to the Corporate Debtor within one month. Conclusion The Tribunal dismissed the claims of preferential and undervalued transactions, finding them to be in the ordinary course of business and outside the relevant look-back periods. The sub-lease agreement was upheld as a necessary commercial decision, and the machinery transfer was ordered to be reversed to the Corporate Debtor. The application was disposed of accordingly.
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