2020 (3) TMI 1208 - AT - Insolvency and Bankruptcy

CIRP Proceedings - scope of preferential transactions - It was submitted that the corporate debtor paid a sum of ₹ 2,50,00,000 towards part payment of principal amount to the appellant on October 29, 2016 which is more than one year before the commencement date of initiation of the corporate insolvency resolution process , therefore, it cannot be termed to be preferential transactions . - HELD THAT - Section 43 of the I and B Code deals with preferential transactions , it is clear that if there is a transfer of property or an interest thereof of the corporate debtor for the benefit of a creditor or a surety or a guarantor for or on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor is transferred, then it comes within the meaning of preferential transactions . The preferential transactions has the effect of putting such creditor or a surety or a guarantor in a beneficial position than it would have been in the event of a distribution of assets being made in accordance with section 53 - As per sub-section (3) of section 43, transfer made in the ordinary course of the business or financial affairs of the corporate debtor or the transferee be not included within the meaning of preferential transactions . Whether in such case, the transactions, in question, can be claimed to be a transfer made in the ordinary course of business? - HELD THAT - It is not the case of the appellants that apart from the appellants, all other creditors were paid their dues during the ordinary course of business. It is only in the case of the appellants that the amounts were released and repaid just before a period of one year from the date of the insolvency commencement date, i. e., July 18, 2017 - This apart, as it is not in dispute that the promoters of the corporate debtor hold 99.4 per cent. shareholding in Excello Fin Lea Ltd. and 50 per cent. shareholding in Tirumala Balaji Alloys P. Ltd. and rest of the 50 per cent. shareholding of the Tirumala Balaji Alloys P. Ltd. is with the relatives of the promoters of the corporate debtor , i. e., Rungta Family , we are of the view that all the transactions made during the period of two years preceding date of the insolvency commencement date, i. e., July 18, 2017 come within the meaning of preferential transactions . The impugned order dated August 6, 2018 passed by the Adjudicating Authority, Mumbai Bench, Mumbai is upheld - appeal dismissed.

Summary

Issues Involved:
1. Determination of whether the transactions in question are "preferential transactions" under Section 43 of the Insolvency and Bankruptcy Code, 2016 ("I and B Code").
2. Examination of whether the transactions were made in the ordinary course of business.
3. Analysis of the relationship between the corporate debtor and the appellants to determine if they are "related parties."

Issue-wise Detailed Analysis:

1. Determination of Preferential Transactions:
The resolution professional filed a miscellaneous application under Sections 43 and 44 of the I and B Code against the appellants for the refund of substantial amounts, claiming these were "preferential transactions." The Adjudicating Authority (NCLT, Mumbai Bench) agreed and directed the appellants to restore the transferred amounts with interest. The appellants argued that the transactions were regular loan repayments and did not constitute preferential treatment. However, the resolution professional contended that the transactions favored related parties and occurred within the two-year look-back period specified in Section 43(4) of the I and B Code.

2. Examination of Ordinary Course of Business:
The appellants claimed the transactions were in the usual course of business, citing loans extended to the corporate debtor and repayments made. They referenced a previous decision by the Appellate Tribunal in Anup Kumar, Resolution Professional of Shivkala Developers P. Ltd. v. BDR Builder and Developers P. Ltd. to support their position. However, the Adjudicating Authority noted that the repayments were made selectively to the appellants and not to all creditors, which deviated from the ordinary course of business. The Tribunal emphasized that the repayments were made just before the initiation of the corporate insolvency resolution process, indicating preferential treatment.

3. Analysis of Related Party Transactions:
The resolution professional argued that the appellants, Excello Fin Lea Ltd. and Tirumala Balaji Alloys P. Ltd., were related parties to the corporate debtor, as defined under Section 5(24) of the I and B Code. The promoters of the corporate debtor held significant shareholdings in both appellant companies. The Tribunal found that the transactions with these related parties occurred within the two-year period preceding the insolvency commencement date, thus qualifying as preferential transactions under Section 43(4)(a).

Conclusion:
The Tribunal concluded that the transactions in question were indeed preferential, as they provided undue advantage to the appellants over other creditors. The selective repayments to related parties within the specified look-back period violated the principles of equitable distribution of assets during insolvency. Consequently, the appeals were dismissed, and the appellants were ordered to refund the amounts with interest.

Final Judgment:
The Tribunal upheld the Adjudicating Authority's order, dismissing both appeals and confirming that the transactions were preferential and not made in the ordinary course of business. The appellants were directed to restore the transferred amounts with interest to the corporate debtor within 30 days.