2023 (8) TMI 356 - AT - Insolvency and Bankruptcy

Preferential Transactions - Validity of impugned order - error in accepting the conclusions in Forensic Report - Delegation of Powers of the Resolution Professional or not - HELD THAT - It is brought to the fore that the Corporate Debtor had transferred Sums from its Bank Account to the Appellants / Respondents with a view to Discharge its Antecedent Operational Debt and by virtue of the Payments so made the Appellants / Creditors were placed in a higher Beneficial Pedestal than that of the Financial Creditors when Distribution of Assets are made as per Section 53 of the Code. In the instant case the Transactions that took place between the period from 27.12.2019 and 12.04.2021 were rightly taken into account and undoubtedly the period specified in Section 43 (4) (a) of the Code is fulfilled considering the fact that the Insolvency beginning date was 21.12.2021 and the Transactions were held between the Related Parties / Appellants / Respondents being the Former Directors of the Corporate Debtor. No wonder the lookback period of two years squarely applies to the facts of the instant case. Although on behalf of the Appellants / Respondents a stand was taken (Before the Adjudicating Authority) that the Transactions were made in the Ordinary Course of their Business and the amounts withdrawn from the Corporate Debtor s Account etc. and usurping the same in respect of the Antecedent Debt cannot tantamount to carrying on business in an ordinary manner of the Corporate Debtor or in the Financial Affairs of the Respondents. Looking at from any angle the impugned transactions are not exempted transactions as per Section 43 (3) of the Code in the considered opinion of this Tribunal - In the present case the NPA was made on 23.02.2021 and the transactions pointed out by the Appellants / Respondents were before the earlier Date of the NPA is not omitted. As far as the present case is concerned on account of the Preferential Transactions the Individual and the Companies were gained at the cost of Creditors and in Law the Appellant Nos. 1 3 and 5 / Respondent No. 1 3 and 5 and Paptrade India Pvt. Ltd. / Company (6th Respondent in IA (IBC) / 206 / KOB / 2022 are in Preferential Transaction. The impugned order passed by the Adjudicating Authority / Tribunal in directing the 1st Appellant / 1st Respondent to pay an amount of Rs.3, 96, 04, 622/- the 2nd Appellant / 3rd Respondent to pay an amount of Rs.30, 39, 400/- and the 3rd Appellant / 5th Respondent to pay a Sum of Rs.37, 86, 943/- and the Paptrade India Pvt. Ltd. (6th Respondent in IA (IBC) / 206 / KOB / 2022) to pay a Sum of Rs.47, 13, 869/- within a month from the date of Order failing which the amounts will carry 12% Simple Interest till the date of Realisation is free from any Legal Infirmities. Accordingly the Appeal sans merits and it fails. Appeal dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

• Whether the transactions conducted by the corporate debtor were preferential transactions under Section 43 of the Insolvency and Bankruptcy Code, 2016 (I&B Code).
• Whether the Resolution Professional (RP) properly determined and applied the legal framework in identifying these transactions as preferential.
• Whether the transactions were conducted in the ordinary course of business and thus excluded from being deemed preferential under Section 43(3) of the I&B Code.
• Whether the application was filed within the prescribed timeline as per Regulation 35A of the Corporate Insolvency Resolution Process (CIRP) Regulations, 2016.
• Whether the Adjudicating Authority's order directing repayment of amounts to the corporate debtor was legally justified.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Preferential Transactions

• Legal Framework: Section 43 of the I&B Code defines preferential transactions as those which put a creditor in a more advantageous position than others. The burden of proof lies on the beneficiary to disprove the presumption of preference.
• Court's Interpretation: The Tribunal found that the transactions were preferential as they were made to related parties within the look-back period, thereby placing them in a beneficial position over other creditors.
• Evidence and Findings: The forensic audit report indicated that substantial amounts were transferred to certain respondents, which were deemed preferential.
• Application of Law to Facts: The Tribunal applied Section 43 to determine that the transactions were preferential, as they occurred within the specified look-back period and involved related parties.
• Competing Arguments: The appellants argued that the transactions were in the ordinary course of business and thus not preferential. However, the Tribunal found this argument unconvincing.
• Conclusion: The transactions were deemed preferential, and the appellants were directed to repay the amounts.

Issue 2: Determination by Resolution Professional

• Legal Framework: Regulation 35A of the CIRP Regulations requires the RP to form an opinion on preferential transactions within a specified timeline.
• Court's Interpretation: The Tribunal held that the RP had properly determined the transactions as preferential, relying on the forensic audit report and other evidence.
• Evidence and Findings: The RP's application was based on a forensic audit report, which the Tribunal found sufficient for determining preferential transactions.
• Application of Law to Facts: The Tribunal found that the RP had adequately applied the legal framework to the facts of the case.
• Competing Arguments: The appellants contended that the RP did not independently determine the transactions as preferential. The Tribunal rejected this argument, finding the RP's actions appropriate.
• Conclusion: The Tribunal upheld the RP's determination of preferential transactions.

Issue 3: Ordinary Course of Business

• Legal Framework: Section 43(3) of the I&B Code excludes transactions made in the ordinary course of business from being deemed preferential.
• Court's Interpretation: The Tribunal found that the transactions were not in the ordinary course of business, as they involved significant amounts transferred to related parties.
• Evidence and Findings: The Tribunal relied on the forensic audit report, which did not support the appellants' claim of ordinary business transactions.
• Application of Law to Facts: The Tribunal applied Section 43(3) and found that the transactions did not qualify as ordinary business transactions.
• Competing Arguments: The appellants argued that the transactions were ordinary business activities. The Tribunal disagreed, citing the nature and timing of the transactions.
• Conclusion: The transactions were not in the ordinary course of business and were therefore preferential.

Issue 4: Timeliness of Application

• Legal Framework: Regulation 35A of the CIRP Regulations sets a timeline for filing applications regarding preferential transactions.
• Court's Interpretation: The Tribunal noted that while there was a delay in filing, the regulation is directory, not mandatory.
• Evidence and Findings: The application was filed beyond the prescribed timeline, but the Tribunal found this did not invalidate the application.
• Application of Law to Facts: The Tribunal held that the delay did not affect the validity of the RP's determination of preferential transactions.
• Competing Arguments: The appellants argued that the delay rendered the application invalid. The Tribunal rejected this argument, emphasizing the directory nature of the regulation.
• Conclusion: The application was valid despite the delay.

3. SIGNIFICANT HOLDINGS

• Verbatim Quotes: "The transactions were made between related parties within the look-back period, thereby placing them in a beneficial position over other creditors."
• Core Principles Established: Transactions with related parties within the look-back period can be deemed preferential unless proven otherwise. The directory nature of Regulation 35A allows for some flexibility in filing timelines.
• Final Determinations: The Tribunal upheld the Adjudicating Authority's order directing the appellants to repay the preferential amounts, with interest if not paid within the stipulated time.

In conclusion, the Tribunal dismissed the appeal, affirming the Adjudicating Authority's decision and emphasizing the importance of adhering to the legal framework governing preferential transactions.