2025 (3) TMI 437 - AT - IBC

Preferential transaction within the ambit of Section 43 of the I B Code 2016 - HELD THAT - Once the Appellants took a stand that the two transactions identified to be preferential transactions were actually carried during the ordinary course of business of the Corporate Debtor the burden of proof under Section 101 of Evidence Act to prove to the contrary had shifted upon the Appellants to show that the transactions identified in the Forensic Audit Report were not the transaction which will be falling under Section 43 of the I B Code. They having failed to do so the conclusion which has been arrived at by the learned Adjudicating Authority declaring the transactions as to be the preferential transactions and the consequentially directing Respondent No.1 Respondent No.2 and Respondent No.3 to the Company Petition to restore the amount of Rs.24, 29, 874/- Rs.25, 53, 233/-and Rs.11, 50, 000 respectively correct in law is contrary to what has been attempted to be argued by the learned counsel for the Appellant based upon the grounds taken by them in the Memorandum of Appeal to the effect that the findings which had been recorded are perverse and contrary to the record and based upon wrong appreciation of the statement and evidence which was place by the Respondent and particularly the Forensic Audit Report of 09.11.2020 and the additional Forensic Audit Report of 03.11.2021. The question of law which the learned counsel for the Appellants has attempted to argue before this Appellate Tribunal was from a very limited perspective that whether the learned Adjudicating Authority could have at all allowed the application under Section 43 without considering the objections filed by the Appellant and secondly whether in the absence of the material particulars being placed before the learned Adjudicating Authority it should have gone ahead to hold conclusively that the transactions were preferential transactions under Section 43 of the I B Code. In fact both the substantial questions which have been pressed upon by the Appellant runs contrary to the finding recorded by the learned Adjudicating Authority who did consider the inferences drawn from the Forensic - In fact in accordance with the findings recorded it is seen that the Appellants have utterly failed to discharge their responsibility to establish their defence that the said two transactions were conducted during the ordinary course of business. Having failed to do so they cannot take advantage of their own inaction that too particularly when the findings have been recorded by the learned Adjudicating Authority was based upon the unrebutted Forensic Audit Reports and the additional Forensic Audit Report. The second contention which has been raised by way of a substantial question was that certain materials were not considered by the Ld. Adjudicating Authority while ruling the said transactions to be a preferential transaction is contrary to the recording in the Impugned Order wherein the learned Adjudicating Authority while extracting the relevant portion from the Audit Reports has dealt in its Para 7 of the Order as to how the inferences on the preferential transactions have been drawn which have been detailed based on the contents in the Forensic Audit Reports - This read in consonance to the statements recorded by the learned Adjudicating Authority as extracted in the concluding paragraphs of the Impugned Order will show that the Ld. Adjudicating Authority has considered all material placed before it. Thus the second question too is answered against the Appellant. Conclusion - i) The transactions which have been detailed and determined by the Forensic Auditors in their report do not fall to be nor it was established to be falling under the exceptions as contemplated under Section 43(3) of I B Code 2016 and even on bare perusal of the observations made in Para 7 of the Impugned Order under challenge it can be seen that the Appellant has not even endeavoured to establish the defence he has mounted that it was a transaction made in normal course of business and that it would be falling under the exceptions contemplated under Section 43(3) of the I B Code 2016. ii) The Appellant cannot take the advantage of his own wrong by his failure to discharge his responsibilities as statutorily envisaged under Section 101 of the Evidence Act. iii) Since the Impugned Order is based upon a sound logical reasoning upon considering the statement and evidences on record the observations made therein does not suffer from any perversity or misappreciation of evidence by the learned Adjudicating Authority which would call for any interference. Appeal dismissed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal question considered was whether the identified transactions, as per the report of the Committee of Creditors dated 09.11.2020, constituted preferential transactions under Section 43 of the Insolvency and Bankruptcy Code, 2016 (I&B Code). The appeal arose from an order by the National Company Law Tribunal (NCLT), which directed the appellants to restore certain amounts deemed preferential transactions.

ISSUE-WISE DETAILED ANALYSIS

Relevant Legal Framework and Precedents

Section 43 of the I&B Code defines a preferential transaction as one where a corporate debtor transfers property or an interest thereof for the benefit of a creditor, surety, or guarantor for an antecedent financial or operational debt, placing them in a more favorable position than they would have been in a liquidation scenario under Section 53. The exceptions under Section 43(3) were also considered, which exclude transactions made in the ordinary course of business.

Court's Interpretation and Reasoning

The Tribunal interpreted Section 43 to require proof that the transactions provided a benefit to a creditor or guarantor beyond what would be available under a liquidation scenario. The burden of proof was on the appellants to demonstrate that the transactions fell within the exceptions of Section 43(3) as ordinary business transactions.

Key Evidence and Findings

The Tribunal relied on forensic audit reports indicating that certain transactions were preferential. The audit suggested that transactions totaling Rs.81.33 lakhs and Rs.78.81 lakhs were preferential and fraudulent, respectively. The appellants failed to provide sufficient evidence to counter the findings of the forensic audit.

Application of Law to Facts

The Tribunal applied the provisions of Section 43 to the facts, determining that the transactions in question were not conducted in the ordinary course of business. The appellants did not meet their burden to prove otherwise, as required by Section 101 of the Evidence Act.

Treatment of Competing Arguments

The appellants argued that the transactions were ordinary business activities and should not be considered preferential. However, the Tribunal found that the appellants failed to substantiate their claims with credible evidence or documentation, thus failing to rebut the forensic audit's conclusions.

Conclusions

The Tribunal concluded that the transactions were preferential under Section 43 of the I&B Code, and the appellants did not establish that they fell within the exceptions of Section 43(3). Consequently, the Tribunal upheld the NCLT's order requiring the appellants to restore the amounts to the corporate debtor.

SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning

The Tribunal noted: "The transactions, which have been detailed and determined by the Forensic Auditors in their report do not fall to be nor it was established to be falling under the exceptions as contemplated under Section 43(3) of I & B Code, 2016."

Core Principles Established

The decision reinforced the principle that the burden of proof lies with the party claiming a transaction falls within the ordinary course of business under Section 43(3). Failure to discharge this burden results in the transaction being deemed preferential.

Final Determinations on Each Issue

The Tribunal dismissed the appeal, affirming the NCLT's order that the transactions were preferential and directing the appellants to restore the specified amounts to the corporate debtor. The Tribunal found no merit in the appellants' arguments and concluded that the evidence supported the NCLT's findings.