2021 (9) TMI 30 - AT - Insolvency and Bankruptcy

Preferential transaction or not - sale agreement for transferring the land belonging to the Corporate Debtor to the Appellant towards partial settlement of the debt owed to the Appellant - Section 43 of the IBC 2016 - HELD THAT - If the Adjudicating Authority is of the opinion that the said transaction is preferential in nature and is within the period of one year preceding the Insolvency commencement date, the said transaction can be declared as void and reverse the effect of such transaction in accordance with Section 45 sub-section (1) of the I B Code and in accordance with the Chapter III of the I B Code, 2016. In the present case, from the documents it is crystal clear that the Appellant is not a related party and the transaction is preceding one year from the date of admission of the application by the Adjudicating Authority on 04.02.2019. The sale agreement dated 22.06.2018 and the Application was admitted on 04.02.2019, is well within one year preceding the admission of Application - Further, the Resolution Professional need to see whether the property belongs to the Corporate Debtor or not? In the present case, admittedly the property belongs to the Corporate Debtor as evident from the sale agreement and there is no dispute with regard to the same. The vital point is whether the transaction is preferential one and whether the said transaction is beneficial to such creditor (Appellant herein) by discriminating the distribution of assets as per Section 53 of the I B Code in case of liquidation. The Ld. Adjudicating Authority at Para 23 drawn a table where the claims have been lodged and the waterfall mechanism need to be adopted in the case of liquidation. From the perusal of the table, the Operational Creditor stands at Serial No.7 under the waterfall mechanism. In the case of liquidation, the criteria as enumerated under Section 53 need to be followed. If the said principle is followed, the Appellant stands at Serial No.7. Certainly, it amounts to preferential treatment over other Creditors and the distribution of liquidation assets namely (a) Insolvency Resolution Process Costs, Liquidation Costs and the debts which shall rank equally between and among the following namely viz. workmen s dues, debts owed to secured creditors, wages to employees, debts to unsecured creditors, dues to the Central Government, State Governments etc. This Tribunal is of the view that the said transaction is a preferential transaction and not in the ordinary course of business - the said transaction entered between the Appellant and the Corporate Debtor by way of sale agreement dated 26.06.2018 certainly prejudice the interest of other Creditors who have precedence in relation to the claim being settled ahead of the Appellant or even in relation to other Operational Creditors who are similarly placed like the Appellant . Appeal dismissed.

Summary

Issues Involved:
1. Whether the sale agreement dated 22.06.2018 between the Appellant and the Corporate Debtor constitutes a preferential transaction under Section 43 of the Insolvency and Bankruptcy Code (IBC), 2016.

Detailed Analysis:

Issue 1: Preferential Transaction under Section 43 of IBC, 2016

Appellant's Submissions:
The Appellant, an Operational Creditor, supplied cotton worth ?5,95,05,918/- to the Corporate Debtor. To partially settle this debt, a sale agreement was executed on 22.06.2018, transferring land valued at ?88,54,790/- to the Appellant. The Appellant argued that this transaction was a legitimate business deal, free from any collusion or fraud, and should be considered as made in the ordinary course of business under Clause (a) of Sub-Section (3) of Section 43 of the IBC, 2016. The Appellant also contended that the Adjudicating Authority failed to recognize the legitimacy of the business relationship and the absence of any encumbrances on the transferred property.

Respondent's Application:
The Resolution Professional filed an application on 03.07.2019 to set aside the sale agreement, arguing that it was a preferential transaction under Section 43 of the IBC, 2016. The Adjudicating Authority allowed this application, setting aside the sale agreement and imposing a cost of ?50,000/- on the Appellant.

Tribunal's Analysis:
The Tribunal considered whether the transaction was preferential under Section 43(1) of the IBC, 2016. It relied on the Supreme Court's judgment in Anuj Jain, Interim Resolution Professional for Jaypee Infratech Ltd. v. Axis Bank Ltd., which outlined the steps for determining preferential transactions. The Tribunal noted that the Appellant was not a related party and the transaction occurred within one year preceding the insolvency commencement date, satisfying the criteria under Section 43(4)(b).

The Tribunal further examined whether the transaction was in the ordinary course of business. It concluded that the sale agreement did not fall within the ordinary course of business or financial affairs of the Corporate Debtor. The transaction was deemed preferential as it put the Appellant in a beneficial position over other creditors, violating the distribution mechanism under Section 53 of the IBC, 2016.

Findings:
The Tribunal upheld the Adjudicating Authority's decision to set aside the sale agreement, confirming it as a preferential transaction. However, the Tribunal exempted the Appellant from paying the ?50,000/- cost imposed by the Adjudicating Authority.

Conclusion:
The Appeal was dismissed, and the sale agreement dated 22.06.2018 was set aside as a preferential transaction under Section 43 of the IBC, 2016. The Tribunal found no illegality in the Adjudicating Authority's order but exempted the Appellant from the cost imposed.