Preferential transactions and relevant time [ Section 43 & 44 ] - Insolvency Resolution And Liquidation For Corporate Persons - IBC

Preferential transactions and relevant time Section 43 and section 44 of the IBC deal with preferential transactions. Section 43 of the IBC states that where the liquidator or the RP is of the opinion that the corporate debtor has, at the relevant time given preference in any transaction to any person, then he shall apply to the adjudicating authority for one or more orders set out in section 44 of the IBC. Where the liquidator or the resolution professional, as the case may be, is of the opinion that the corporate debtor has at a relevant time given a preference in such transactions and in such manner as laid down in section 43(2) to any persons as referred to in section 44(4) , he shall apply to the Adjudicating Authority for avoidance of preferential transactions and for, one or more of the orders referred to in section 44 . What is the preference [ Section 43(2) ] A corporate debtor shall be deemed to have given a preference, if- (a) there is a transfer of property or an interest thereof of the corporate debtor for the benefit of a creditor or a surety or a guarantor for or on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor; and (b) the transfer under clause (a) has the effect of putting such creditor or a surety or a guarantor in a beneficial position than it would have been in the event of a distribution of assets being made in accordance with section 53 of IBC. Following transfer not include in the preference [ Section 43(3) ] For the purposes of section 43(2), a preference shall not include the following transfers- (a) transfer made in the ordinary course of the business or financial affairs of the corporate debtor or the transferee; (b) any transfer creating a security interest in property acquired by the corporate debtor to the extent that - (i) such security interest secures new value and was given at the time of or after the signing of a security agreement that contains a description of such property as security interest, and was used by corporate debtor to acquire such property; and (ii) such transfer was registered with an information utility on or before thirty days after the corporate debtor receives possession of such property: Provided that any transfer made in pursuance of the order of a court shall not, preclude such transfer to be deemed as giving of preference by the corporate debtor. Explanation .-For the purpose of sub-section (3) of this section, new value means money or its worth in goods, services, or new credit, or release by the transferee of property previously transferred to such transferee in a transaction that is neither void nor voidable by the liquidator or the resolution professional under this Code, including proceeds of such property, but does not include a financial debt or operational debt substituted for existing financial debt or operational debt. Relevant Time for Preference [ Section 43(4) ] A preference shall be deemed to be given at a relevant time, if- (a) It is given to a related party (other than by reason only of being an employee), during the period of two years preceding the insolvency commencement date; or (b) a preference is given to a person other than a related party during the period of one year preceding the insolvency commencement date. Order in case of preferential transactions [ Section 44 ] (1) The Adjudicating Authority, may, on an application made by the resolution professional or liquidator under section 43(1) , by an order : (a) require any property transferred in connection with the giving of the preference to be vested in the corporate debtor; (b) require any property to be so vested if it represents the application either of the proceeds of sale of property so transferred or of money so transferred; (c) release or discharge (in whole or in part) of any security interest created by the corporate debtor; (d) require any person to pay such sums in respect of benefits received by him from the corporate debtor, such sums to the liquidator or the resolution professional, as the Adjudicating Authority may direct; (e) direct any guarantor, whose financial debts or operational debts owed to any person were released or discharged (in whole or in part) by the giving of the preference, to be under such new or revived financial debts or operational debts to that person as the Adjudicating Authority deems appropriate; (f) direct for providing security or charge on any property for the discharge of any financial debt or operational debt under the order, and such security or charge to have the same priority as a security or charge released or discharged wholly or in part by the giving of the preference; and (g) direct for providing the extent to which any person whose property is so vested in the corporate debtor, or on whom financial debts or operational debts are imposed by the order, are to be proved in the liquidation or the corporate insolvency resolution process for financial debts or operational debts which arose from, or were released or discharged wholly or in part by the giving of the preference: Provided that an order under this section shall not- (a) affect any interest in property which was acquired from a person other than the corporate debtor or any interest derived from such interest and was acquired in good faith and for value; (b) require a person, who received a benefit from the preferential transaction in good faith and for value to pay a sum to the liquidator or the resolution professional. Explanation I.- For the purpose of this section, it is clarified that where a person, who has acquired an interest in property from another person other than the corporate debtor, or who has received a benefit from the preference or such another person to whom the corporate debtor gave the preference, - (i) had sufficient information of the initiation or commencement of insolvency resolution process of the corporate debtor; (ii) is a related party, it shall be presumed that the interest was acquired or the benefit was received otherwise than in good faith unless the contrary is shown. Explanation II.- A person shall be deemed to have sufficient information or opportunity to avail such information if a public announcement regarding the corporate insolvency resolution process has been made under section 13. Relevant Case Laws Mohan Lal Jain, in the capacity of Liquidator of Kaliber Associates Pvt. Ltd. Vs. Lalit Modi Ors. - NCLAT Dated 16.12.2020 Allegations of preferential transaction as also fraudulent trading/wrongful trading carried on by the CD during the insolvency resolution can be inquired into by the AA. K.L. Jute Products Pvt. Ltd. Vs. Tirupti Jute Industries Ltd. Ors. - NCLAT Dated 20.02.2020 Section 43 of the Code is applicable during the pendency of resolution process or liquidation proceedings, if there are genuine, reasonable grievances relating to preferential transactions at a relevant time. A liquidator by filing an application can seek one or other order from the AA as per section 44 of the Code. Anuj Jain Vs. Axis Bank Ltd. Ors. - SC Dated 26.02.2020 (a) Preferential Transactions: A CD shall be deemed to have given a preference at a relevant time if: (i) there is a transfer of property or the interest thereof of the CD for the benefit of a creditor or surety or guarantor for or on account of an antecedent financial debt or operational debt or other liability; (ii) such transfer has the effect of putting such creditor or surety or guarantor in a beneficial position than it would have been in the event of distribution of assets in accordance with section 53 of the Code; and (iii) preference is given, either during the period of two years/one year preceding the ICD when the beneficiary is a related/an unrelated party. However, such deemed preference may not be an offending preference, if it falls into any or both exclusions provided by section 43(3). Section 43(3)(a) exempts transfers made in ordinary course of business of the CD or the transferee. This calls for purposive interpretation. The expression or , appearing as disjunctive between the expressions corporate de btor and transferee , ought to be read as and . Therefore, a preference shall not include the transfer made in the ordinary course of the business of the CD and the transferee. (b) Duties and responsibilities of RP: The RP shall (i) sift through all transactions relating to the property/interest of the CD backwards from the ICD and up to the preceding two years; (ii) identify persons involved in the transactions and put them in two categories: (1) related party under section 5(24) and (2) remaining persons; (iii) identify which of the said transactions of preceding two years, the beneficiary is a related party of the CD and in which the beneficiary is not a related party. The sub-set relating to unrelated parties shall be trimmed to include only the transactions preceding one year from the ICD; (iv) examine every transaction in each of these sub-sets to find out whether (1) the transaction is of transfer of property of the CD or its interest in it; and (2) beneficiary involved in the transaction stands in the capacity of creditor/surety/ guarantor; (v) scrutinise the shortlisted transactions to find, if the transfer is for or on account of antecedent financial debt/operational debt/other liability of the CD; (vi) examine the scanned and scrutinised transactions to find, if the transfer has the effect of putting such creditor/surety/ guarantor in beneficial position, then it would have been in the event of distribution of assets under section 53. If answer is in the affirmative, the transaction shall be deemed to be of preferential, provided it does not fall within the exclusion under section 43(3); and then (vii) apply to the AA for necessary orders, after carrying out the aforesaid volumetric and gravimetric analysis of the transactions. (c) Undervalued and fraudulent transactions: As the transactions are held as preferential, it is not necessary to examine whether these are undervalued and/or fraudulent. In preferential transaction, the question of intent is not involved and by virtue of legal fiction, upon existence of the given ingredients, a transaction is deemed to be of giving preference at a relevant time, while undervalued transaction requires different enquiry under sections45 and 46 where the AA is required to examine the intent, if such transactions were to defraud the creditors. The AA needs to examine the aspect of preferential, undervalued and fraudulent separately and distinctively. Venus Recruiters Pvt. Ltd. Vs. Union of India Ors. - HC, New Delhi Dated 26.11.2020 In the context of CIRP, it was observed that: Avoidance applications cannot survive beyond the conclusion of the CIRP. It is meant to give benefit to the creditors of the CD and not to the CD in its new avatar, after the approval of the resolution plan. The NCLT has the jurisdiction to deal with all applications and petitions in relation to insolvency resolution and liquidation for corporate persons . After the approval of the resolution plan and the new management has taken over the CD, no proceedings remain pending before the NCLT, except issues relating to the resolution plan itself, as permitted under section 60. It has no jurisdiction to entertain and decide avoidance applications, in respect of a CD which is now under a new management unless provision is made in the final resolution plan. The RP cannot continue to act on behalf of the CD under the title of `Former RP , once the plan is approved and the new management takes over. His continuation beyond the closure of the CIRP would in effect mean an interference in the conduct and management of the company. The successful resolution applicant cannot file an avoidance application, as it is neither for the benefit of the resolution applicant nor for the CD after the resolution is complete. Section 26 of the Code cannot be read in a manner to mean that an application for avoidance of transactions under section 25(2)(j) of the IBC can survive after the CIRP. Once the CIRP process itself comes to an end, an application for avoidance of transactions cannot be adjudicated. If the CoC or the RP are of the view that there are any transactions which are objectionable in nature, the order in respect thereof would have to be passed prior to the approval of the resolution plan. ICICI Bank Ltd. Vs. Mr. Shailendra Ajmera Another -NCLAT Dated 21.09.2019 In this case, the RP filed an application under section 43(1) of the IBC seeking reversal of the amounts debited before the ICD from the account of the CD maintained with the appellant bank, which were alleged to have been utilized towards the payment of dues of the bank in respect of a letter of credit. The AA allowed the application, holding that the amount debited by the appellant bank for the payment of its dues was a preference transaction in view of section 43(1) of the IBC. The AA s order was challenged by the appellant bank before the NCLAT. The NCLAT allowed the appeal and set aside the impugned order on the ground that all the transactions in question were made in the ordinary course of business of the bank, as per the request of the CD. The NCLAT further held that as all the transactions in question had taken place either on or after the ICD, they could not be challenged as preferential transactions in view of section 43(4) of the IBC. Tirumala Balaji Alloys Private Limited Vs. Sumit Binani - NCLAT Dated 13.11.2019 The AA directed the appellants to restore the entire transferred amount along with 12 percent interest till date of realization on an application of the RP in respect of preferential transactions. While rejecting an appeal against the said direction, the NCLAT held: as it is not in dispute that the promoters of the Corporate Debtor hold 99.4% shareholding in Excello Fin Lea Limited and 50% shareholding in Tirumala Balaji Alloys Pvt. Ltd. and rest of the 50% shareholding of the Tirumala Balaji Alloys Pvt. Ltd. is with the relatives of the promoters of the Corporate Debtor i.e. Rungta Family , we are of the view that all the transactions made during the period of two years preceding date of Insolvency Commencement Date i.e., 18 th July, 2017 come within the meaning of preferential transactions .