2019 (8) TMI 140 - AT - Insolvency and Bankruptcy

Validity of transactions - transactions entered into by the promoters and Directors of the Corporate Debtor creating mortgage of 858 acres of immovable property owned by it and in possession of the Corporate Debtor , to secure debt of related party - whether fraudulent and wrongful transactions within the meaning of Section 66 of the I B Code ? - HELD THAT - From bare perusal of Section 66, it is clear that if during the Corporate Insolvency Resolution Process or Liquidation Process , it is found that any business of the Corporate Debtor has been carried on with intent to defraud creditors of the Corporate Debtor or for any fraudulent purpose, the Adjudicating Authority is empowered to pass appropriate order under Section 67. In the present case, we have noticed that the transactions in question i.e. mortgage(s) were made in favour of the Banks and Financial Institutions by the Corporate Debtor ( Jaypee Infratech Limited ) in the ordinary course of business of the Corporate Debtor . The Appellants- Banks and Financial Institutions have given loans to the holding Company namely- Jaiprakash Associates Limited . The Corporate Debtor being one of the group company, like a guarantor, executed mortgage deed(s) in favour of the Appellants- Banks and Financial Institutions . We have seen that none of the transactions were preferential transaction or undervalued transaction - Further, as we have held that the transactions were made in the ordinary course of business in absence of any contrary evidence to show that they were made to defraud the creditors of the Corporate Debtor or for any fraudulent purpose, on mere allegation made by the Resolution Professional , it was not open to the Adjudicating Authority to hold that mortgage deeds, in question, were made by way of transactions which come within the meaning of fraudulent trading or wrongful trading under Section 66. It is not in dispute that all the Appellants had granted loan to Jaiprakash Associates Limited . Majority of Banks (Appellants) functioned as joint venture. For the said reason, the Corporate Debtor executed mortgaged deeds in favour of the Appellants. Such transactions having made in ordinary course of business, the allegation against the Banks and Financial Institutions (Appellants) are not justified. The Adjudicating Authority having failed to notice the aforesaid relevant facts and as it misread the provisions of Sections 43, 45 66 of the I B Code and on the basis of wrong presumption and error of fact held that transactions in question amount to preferential transactions (Section 43); undervalued transactions (Section 45) and for fraudulent purpose to defraud the creditors of the Corporate Debtor (Section 66), the impugned order cannot be upheld - appeal allowed.

Summary

Issues Involved:
1. Whether the transactions in question constitute 'preferential transactions' under Section 43 of the Insolvency and Bankruptcy Code (I&B Code).
2. Whether the transactions are 'undervalued transactions' under Section 45 of the I&B Code.
3. Whether the transactions amount to 'fraudulent trading or wrongful trading' under Section 66 of the I&B Code.

Issue-wise Detailed Analysis:

1. Preferential Transactions:

The Appellants argued that the Adjudicating Authority ignored the nature and character of a mortgage, which is a transfer of interest in specific immovable property to secure payment of money advanced by way of loan, as defined under Section 58 of the Transfer of Property Act, 1882. They contended that the mortgage debt constitutes a 'financial debt' within the meaning of Section 5(8) of the I&B Code and is covered by the definition of 'debt' under Section 3(11) of the I&B Code. Thus, the transactions cannot be termed 'preferential transactions' within the meaning of Section 43 of the I&B Code.

The Tribunal noted that Section 43(2)(a) of the I&B Code deems a corporate debtor to have given a preference if there is a transfer of property or interest thereof for the benefit of a creditor, surety, or guarantor for or on account of an antecedent financial debt or operational debt. However, in this case, the interest on the property of the corporate debtor was created in favor of the Appellants for financial debt given to Jaiprakash Associates Ltd., not the corporate debtor. Therefore, Section 43(2)(a) is not attracted, and the transactions cannot be annulled as 'preferential transactions.'

2. Undervalued Transactions:

The Appellants argued that the transactions do not fall under 'undervalued transactions' as per Section 45 of the I&B Code. The Tribunal noted that for a transaction to be considered 'undervalued,' it must involve the transfer of assets by the corporate debtor for a consideration significantly less than the value of the consideration provided by the corporate debtor, and such transaction must not take place in the ordinary course of business.

In this case, the transactions involved mortgages made in favor of the Appellants for loans given to Jaiprakash Associates Ltd., not the corporate debtor. Therefore, Section 45 is not applicable as the transactions are not related to any payment due from the corporate debtor.

3. Fraudulent Trading or Wrongful Trading:

The Appellants argued that the transactions were made in the ordinary course of business and do not amount to 'fraudulent trading or wrongful trading' under Section 66 of the I&B Code. The Tribunal noted that Section 66 applies if the business of the corporate debtor has been carried on with intent to defraud creditors or for any fraudulent purpose. However, the transactions in question were made in the ordinary course of business, and there was no evidence to show that they were made to defraud the creditors of the corporate debtor or for any fraudulent purpose.

The Tribunal concluded that the Adjudicating Authority erred in holding that the transactions amounted to 'preferential transactions,' 'undervalued transactions,' or 'fraudulent trading or wrongful trading.' Therefore, the impugned order was set aside, and the Appellants were entitled to exercise their rights under the I&B Code.

Conclusion:

The appeals were allowed, and the impugned order dated 16th May 2018 was set aside concerning the Appellants. The Tribunal clarified that it made no observations regarding the Promoters or Directors in the absence of any appeal preferred on their behalf. No costs were awarded.