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TMI Blog2023 (1) TMI 921X X X X Extracts X X X X X X X X Extracts X X X X ..... s incurred thereby and to provide that the NCLT can pass order holding such persons liable to make such contributions to the assets of the corporate debtor as it may deem fit. No power has been conferred on NCLT to pass such orders against other organizations/legal entities (other than corporate debtors) with whom such business was carried out against any person responsible in such other organizations/legal entities for carrying on business with corporate debtor. Regulation certified preferential or other transaction All the insolvency and bankruptcy Board of India (Insolvency resolution process for corporate persons) regulations 2016 stipulates strict time limits for formation of requisite action by the resolution professional by any transaction to be hit Sections 43, 45, 50 and 66 for making determination thereof under the intimation to the Board and also for applying to NCLT for appropriate relief - IBC contains adequate measures to make appropriate application by liquidator or resolution professional or by creditor or member or partner of corporate debtor for avoiding certain transaction under appropriate provisions of sections 43, 45, 47, and 50. It is clear from the lan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing manifestly arbitrary and unconstitutional, unless to save if from unconstitutionality and in consonance with the scheme and object of IBC, scope thereof is enlarged by this Hon ble Court by expanding the powers and jurisdiction of the NCLT by enabling it to declare fraudulent business transactions as void under Section 66 independent as void under Section 66 independent of Sections 43, 45, 47, 49 and 50. (b) This is an application under Article 226 of Constitution of India for issuance of a writ of Mandamus and/or in the nature thereof to issue appropriate orders or direction, directing the respondent to forthwith take steps to declare section 66(1) of the Insolvency and Bankruptcy Code, 2016 as ultra vires on the vice of Article 14 of the Constitution of India for being, manifestly arbitrary and unconstitutional, unless to save if from unconstitutionality and in consonance with the scheme and object of IBC, scope thereof is enlarged by this Hon ble Court by expanding the powers and jurisdiction of the NCLT by enabling it to entertain application under Section 66(1) on its merits even if filed by any creditor or contributory of the Corporate Debtor; (c) This is also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jurisdiction of the NCLT. (2) The petitioner contended the frauds of gigantic proportion are being played by the corporate to defraud the gullible creditors to siphon off public money. He contended that introduction of Insolvency Bankruptcy Code (IBC) itself is in public interest. According to him, grant of the prayer made by him would serve public interest and would enable maximum recoveries under IBC for the creditors of a corporate debtor. (3) The petitioner further submitted that there is urgent need of passing appropriate directions as prayed for by him in the interest of justice. The prayers if granted would strengthen the framework for insolvency bankruptcy and would cause immense benefit to the creditors at large who would be able to make higher recoveries. (4) The petitioner also submitted that to the best of his knowledge, the issue raised herein has never been raised in any petition, pending or disposed of, before any court. (5) The petitioner submitted that although broadly Section 339(1) of the Companies Act, 2013/Section 542 of the Companies Act, 1956 may appear to be pari materia to Section 66(1), there is clear distinction in the application of the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t any persons who were knowingly parties to the carrying on of the business in the manner aforesaid shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the Court may direct. On the hearing of an application under this sub-section, the Official Liquidator or the liquidator, as the case may be, may himself give evidence or call witness. 339. Liability for fraudulent conduct of business (1) if in the course of the winding-up of a company, it appears that any business of the company has been carried on with intent to defraud creditors of the company or any other persons or for any fraudulent purpose, the Tribunal, on the application of the Official Liquidator or any creditor or contributory of the company, may, if it thinks it proper so to do, declare that any person, who is or has been a director, manager, or officer of the company or any persons who were knowingly parties to the carrying on of the business in the manner aforesaid shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taking limitation of liability for all or in of the debts or any other liability of the company and the court may direct. However, under Section 66(1) of IBC, the NCLT can pass an order holding such person liable to make contribution to the assets of the corporate debtor or it may deem fit. The legislature has carefully made this distinction in Section 66(1) of the IBC that this section may also apply during corporate insolvency resolution process and need not be only during liquidation. If no resolution plan is received under IBC or in any event has provided in IBC, corporate debtor would be subject to liquidation and the assets of the corporate debtor would be distributed amongst the creditors in the manner provided in IBC. (8) In the context of companies Act, 2013 in Usha Ananthasubramanian vs. Union of India (2020) 4 SCC 122 , the Hon ble Supreme Court was pleased to consider the extent of application of section 339(1) and was pleased to observe as under: 7) Section 337 refers to penalty for frauds by an officer of the company in which mis-management has taken place. Likewise, Section 339 refers to any business of the company which has been carried on with intent to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on an examination of its affairs, after winding-up. While Section 542 seeks to relieve the company of the liabilities incurred by fraudulent trading making those responsible for the fraud personally answerable, the purpose of Section 531 is to recover assets which should have belonged to the company but for fraudulent preference. Fraud is a common ingredient for both, whereas the proceedings under Section 543 are designed to recoup losses sustained by a breach of duty which may fall short of fraud. (10) In Prashant Properties Limited vs. SPS Steels Rolling Mills Ltd MANU/WB/2456/2019 in the context of Section 66 of IBC, the Calcutta High Court was pleased to observe as under: 29. Even if Section 66 of the IBC applied to past transactions, unlike Sections 44, 48 and 51 IBC (under which the NCLT, as Adjudicating Authority, can avoid past transactions), under Section 66, the NCLT cannot avoid past transactions, even if fraudulent, but under Section 66(2) can only direct the Director/partner of the Corporate Debtor, and not other parties to the transaction, to make contribution to assets of the Corporate Debtor . 64. Upon hearing both sides, it is seen that S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to whether a transaction is of giving preference at a relevant time, is entirely different. Hence, it would be expected of any resolution professional to keep such requirements in view while making a motion to the adjudicating authority. (12) In the matter of Deepak Parasuraman vs. Sripriya Kumar vide an order dated 21.09.2021 in Company Appeal (AT) (Insolvency) No.349 of 2020, the NCALT was pleased to confirm an order passed by NCLT allowing the application filed by resolution professional under Section 43 and 46 read with section 60(5) of IBC. (13) As evident from the aforesaid precedence Section 339 or Companies Act, 2013 and pari material, the provisions of section 542 of Companies Act, 1956 was aimed at conferring jurisdiction in the course of winding up of company to proceed against the persons responsible for fraudulent conduct of the business of the company. Both these provisions were aimed at making such persons personally liable for such fraudulent trading to recouping losses incurred thereby and to relief the company of the liabilities incurred by fraudulent trading. That Section 66(1) also directed towards making such persons personally liable for such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under Section 45(2) of the IBC; (iii) transactions defrauding creditors under Section 49 of the IBC; and (iv) extortionate transactions under Section 50 of the IBC. The IBC recognizes that for the success of an insolvency regime, the real nature of the transactions has to be unearthed in order to prevent any person from taking undue benefit of its provisions to the detriment of the rights of legitimate creditors. (16) Thus, the IBC specially empowers NCLT to consider application to declare certain transaction namely preferential, undervalued or extortionate credit transaction as void and to pass appropriate orders under Section 44 (orders in case of preferential transaction) Section 48 (orders in case of undervalued transaction) Section 51 (orders of adjudicating authority in respect of extortionate credit transaction). Such orders are aimed at reversing adverse effect by the concerned transaction inter-alia requiring the person who benefits from any such transaction to pay back any gain he may have made as a result of the transaction, if an application for avoidance of such transaction is made. (a) By a liquidator or resolution professional under section 43 (in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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