2022 (3) TMI 997 - AT - Insolvency and Bankruptcy

Fraudulent transaction or not - seeking necessary directions for cancellation of the transaction of sale of Plant and Machinery of Corporate Debtor to Respondent No.3 - HELD THAT - Section 46(2) empowers the Adjudicating Authority to require an independent expert to assess evidence relating to the value of the transactions. The power under Section 46(2) is enabling power and the expression used may require indicates that it is not necessary that for all applications filed under Section 46(1) there has to be mandatory expert appointed by the Adjudicating Authority - we are not persuaded to accept the submissions of the counsel for the Appellant that it was mandatory for the Adjudicating Authority to require an independent expert to assess evidence relating to the value of the transactions. Thus, no error has been committed by the Adjudicating Authority in accepting the case of the Resolution Professional that transaction was undervalued. The scheme of Section 49 indicates that where the corporate debtor has entered into an undervalued transaction and the Adjudicating Authority is satisfied that such transaction was deliberately entered into by such corporate debtor for keeping assets of the corporate debtor beyond the reach of any person who is entitled to make a claim against the corporate debtor or in order to adversely affect the interests of such a person in relation to the claim, the Adjudicating Authority is required to make an order- (i) restoring the position as it existed before such transaction as if the transaction had not been entered into; and (ii) protecting the interests of persons who are victims of such transactions - the provision as contemplated in Section 49(b)(ii) protecting the interests of persons who are victims of such transactions obviously does not relate to the Appellant who was party to the transaction. Appellant cannot in any manner be said to be victim of such transaction. Hence, there is no question of protecting his interests by the Adjudicating Authority in exercise of powers under Section 49(b)(ii). The Appellant was in fact the beneficiary of the undervalued transaction and he cannot claim himself to be victim of the transaction. The Appeal is dismissed.

Summary

Issues:
1. Appeal against the judgment and order of the Adjudicating Authority regarding a transaction of Plant and Machinery of the Corporate Debtor being declared fraudulent.
2. Challenge to the cancellation of the transaction and seeking necessary directions.

Analysis:
1. The Appeal was filed against the judgment and order of the Adjudicating Authority regarding a transaction of Plant and Machinery of the Corporate Debtor. The Resolution Professional filed an Application praying for the declaration of the transaction as fraudulent and cancellation of the sale of Plant and Machinery to Respondent No.3. The Final Audit Report highlighted irregularities, preferential transactions, and undervalued transactions with intent to defraud creditors. The Adjudicating Authority allowed the Application, declaring the sale as cancelled and directing the possession of the Plant and Machinery to be handed over to the Resolution Professional. The suspended Directors were held liable to bear the liability of the Corporate Debtor and refund the amount raised from the sale to the purchaser Respondent No.3.

2. The Appellant challenged the order, claiming to be a bonafide purchaser for value and that the transaction should not have been declared undervalued or cancelled. The Appellant argued that no independent expert was appointed to assess evidence as required under Section 46(2) of the IB Code, and the interest of the Appellant as a victim of the transaction should have been protected under Section 49(b)(ii). The Resolution Professional contended that the transaction was undervalued, well within the relevant period, and the Appellant failed to provide evidence to support the transaction's legitimacy.

3. The Tribunal examined the submissions and records. It noted that the transaction was undervalued based on the significant difference between the book value and the actual purchase price. The Adjudicating Authority was not obligated to appoint an independent expert under Section 46(2) for every case. Regarding the Appellant's claim under Section 49(b)(ii) to protect the interests of victims, the Tribunal clarified that the Appellant, as a party to the transaction, could not be considered a victim and was, in fact, a beneficiary. The Tribunal upheld the direction for Respondent Nos. 1 and 2 to compensate and refund the amount to Respondent No.3.

4. Ultimately, the Tribunal found no merit in the Appeal and dismissed it, affirming the decision of the Adjudicating Authority. The judgment highlighted the importance of addressing undervalued transactions, protecting creditors' interests, and holding responsible parties accountable for fraudulent activities within the insolvency framework.