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TMI Blog2023 (4) TMI 1137X X X X Extracts X X X X X X X X Extracts X X X X ..... r had created security interest by way of mortgage in favour of lenders of third party that is JAL on the unencumbered land of the Corporate Debtor which transaction were sought to be avoided by RP by filing an application. The Adjudicating Authority has declared the said transaction as preferential transaction. Taking financial assistance from related and non-related parties which transactions are subject of enquiry in the present Appeal can not be held to be ordinary course of business of the Corporate Debtor. The expression ordinary course of business or financial affairs of the Corporate Debtor has to be read ejusdem generis . The expression financial affairs of the Corporate Debtor cannot be given an extended meaning as contended by Learned Counsel for the Appellants that all financial transactions done by the Corporate Debtor is covered within expression financial affairs hence the loan taken by the corporate debtor from different related and non-related parties is part of the financial affairs cannot be accepted - Undistinguished common flow of the business of the Corporate Debtor does not contemplate any such or particular situation where the Corporate Debtor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsolvency) No. 405 of 2022 Company Appeal (AT) (Insolvency) No. 369 of 2022 Company Appeal (AT) (Insolvency) No. 412 of 2022 - - - Dated:- 24-4-2023 - GVR Consulting Services Pvt. Ltd., GVR Electronics Pvt. Ltd. Versus Pooja Bahry (Earstwhile Resolution Professional of NTL Electronics India Pvt. Ltd.), Praveen Gupta, Arun Gupta, Udal Singh Dyna Rasayan Ydyog Pvt. Ltd. Versus Pooja Bahry , NTL Electronics India Ltd. Praveen Gupta, Arun Gupta , Keshika Exports Pvt. Ltd. Versus Pooja Bahry (Earstwhile Resolution Professional of NTL Electronics India Ltd.) [ Justice Ashok Bhushan ] Chairperson And [ Barun Mitra ] Member ( Technical ) For the Appellants : Mr. Abhijeet Sinha, Ms. Aditi Sharma, Advocates For the Respondents : Ms. Pooja Mahajan, Advocate with Ms. Pooja Bahry (erstwhile RP). Ms. Mehak Nayak, Advocate Mr. Milan Singh Negi, Mr. Nikhil Jha, Advocates for R-2-4. For the Appellant: Mr. Abhijeet Sinha, Mr. Gurcharan Singh Advocates. For the Respondents : Ms. Pooja Mahajan, Advocate with Ms. Pooja Bahry (erstwhile RP). Mr. Gurcharan Singh, Ms. Mehak Nayak, Advocates For the Appellant : Mr. Gaurav Mitra, Mr. Milan Singh Negi, Mr. Nikhil Jha, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Keshika Exports Pvt. Ltd. who were Respondent No. 1, 2 and 5 to the I.A. No. 5768 of 2020. Praveen Gupta and Arun Gupta were managing directors of the Corporate Debtor till the commencement of the Corporate Insolvency Resolution Process (CIRP in short) and wherein the control of the Corporate Debtor and day to day actions for the entire period of the transaction. Keshika Exports Pvt Ltd Appellant No. 3 was related party to the Corporate Debtor. The antecedent liability of the corporate debtor towards Respondent No. 1 Mr. Praveen Gupta was discharged making payment from 19.12.2017 to 02.03.2019 totaling to Rs. 1,97,50,000/- with respect to Appellant No. 2 Arun Gupta towards antecedent liability of the corporate debtor was discharged by making payment from 06.09.2017 to 05.12.2017 totaling Rs. 90,00,000/-. With regard to Appellant No. 3-Keshika Exports Pvt. Ltd., antecedent liability of the corporate debtor towards Appellant No. 3 was discharged on 31.08.2018 of amount of Rs. 2,49,338/-. 5. We may notice brief facts giving rise to these Appeals. (i) CIRP against the Corporate Debtor commenced by Order dated 27.08.2019. On 16.09.2019 and 27.09.2019 public announcement was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 405 of 2022 as well as Company Appeal (AT) Ins. No. 369 of 2022 are not related party to the Corporate Debtor and the transactions which have been held to be preferential transactions by the Adjudicating Authority were transactions which were entered into ordinary course of business of the Corporate Debtor. The Appellants had extended loan facility to the Corporate Debtor and the antecedent liability towards the Appellants is admitted; The Corporate Debtor on various dates occurring into look back period repaid the amount of loan. The loan was taken by the Corporate Debtor from the appellants for the purposes of running the corporate debtor as a going concern and the amount which was received from the Appellant was utilized by the corporate debtor for running its business and meeting its liabilities. The repayments by the Corporate Debtor was in ordinary course of business and were towards financial affairs of the corporate debtor which are clearly exempted from the preferential transactions within the meaning of Section 43 of the Code. It is further submitted that composite application filed by the RP under Section 43, 44, 45, 46, 66, 67 and 60(5) of the Code raising allegations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the CoC in the meeting dated 13th August, 2020. In the avoidance application, ingredients of Section 43, 45, 50 and 66 were separately dealt with and pleaded. There was no overlapping in the pleadings of different nature of allegations. As per provision of Section 43, the transaction in question were preferential transaction. Ingredients of Section 43 were present. The payments made in favour of the related parties and non-related parties had effect of putting the Appellants in a more beneficial position than they would have been in the event of distribution of assets of the corporate debtor in accordance with Section 53 of the Code. Payments made to the Appellants did not fall under any of the exceptions under Section 43(3) of the Code. Giving of loan to the Corporate Debtor was not part of ordinary course of business. Learned Counsel for the RP relied upon the Judgement of the Hon ble Supreme Court in Anuj Jain (supra). In support of her submission, she submitted that present transactions do not fall in ordinary course of business. The Adjudicating Authority has rightly declared the transaction as preferential transactions. 10. We have considered the submissions of Learned C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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. (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. 13. Section 44 deals with Order in case of preferential transactions. 14. The Adjudicating Authority in the Impugned Order has noted in detail the facts and transactions which ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upta A/c 7,00,000 Repayment of unsecured loan of directors 22.02.2018 Unsecured Loan Praveen Gupta A/c 70,00,000 Repayment of unsecured loan of directors 27.03.2018 Unsecured Loan Praveen Gupta A/c 85,00,000 Repayment of unsecured loan of directors 19.07.2018 Unsecured Loan Praveen Gupta A/c 20,00,000 Repayment of unsecured loan of directors 26.10.2018 Unsecured Loan Praveen Gupta A/c 7,00,000 Repayment of unsecured loan of directors 02.03.2019 Unsecured Loan Praveen Gupta A/c 2,00,000 Repayment of unsecured loan of directors Total (B) 1,97,50,000 C. Keshika Exports Private Limited 31.08.2018 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 09.2018 GVR Consulting Services Ltd. 25,00,000 Repayment of unsecured loan 25.09.2018 GVR Consulting Services Ltd. 15,00,000 Repayment of unsecured loan 12.10.2018 GVR Consulting Services Ltd. 25,00,000 Repayment of unsecured loan Total (F) 1,00,00,000 Total (D+E+F) 3,56,29,987 Grand Total (A+B+C+D+E+F) 6,37,29,325 15. There is no dispute between the parties that repayment to related parties and repayment to the non-related parties were within the lookout period. 16. The avoidance transaction in Insolvency Proceedings has been dealt with in the legislative schemes under several enactments relating to subject. We may have a look over the legislative scheme with regard to avoidance transaction prior to enforcement of IBC t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourse of its business or in favour of a purchaser or encumbrancer in good faith and for valuable consideration, if made within a period of one year before the presentation of a petition for winding up by the Tribunal or the passing of a resolution for voluntary winding up of the company, shall be void against the liquidator. 19. Learned Counsel for the Appellant has also referred to Uncitral Legislative Guide on Insolvency Law where under Part II, F, Avoidance Proceedings have been dealt with. Paragraphs 151, 152 and 153 are as follows: 151. It is a generally accepted principle of insolvency law that collective action is more efficient in maximizing the assets available to creditors than a system that leaves creditors free to pursue their individual remedies and that it requires all like creditors to receive the same treatment. Provisions dealing with avoidance powers are designed to support these collective goals, ensuring that creditors receive a fair allocation of an insolvent debtor s assets consistent with established priorities and preserving the integrity of the insolvency estate. Avoidance provisions may also have a deterrent effect, discouraging creditors from p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as follows: (d) Ordinary course of business 164. Many insolvency laws use the concept of the ordinary course of business in defining their avoidance criteria, so that an extraordinary payment, as noted above, may be subject to avoidance. The concept has wider relevance to an insolvency regime as it may also be used, for example, to draw a distinction between the exercise of powers regarding the use and disposition of assets during the insolvency proceedings in the ordinary course of business and in other circumstances, both in terms of who may exercise such powers and the protections that are required (see above, paras. 75 and 76). 165. States define the ordinary course of business with varying emphasis on different elements. However, in most jurisdictions a common purpose of the definition is to determine what constitutes routine conduct of business and allow a business to make routine payments and enter into routine contracts, without subjecting those transactions to possible avoidance in insolvency. Those routine payments might include the payment of rent, utilities such as electricity and telephone and possibly also payment for trade supplies. 21. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by giving one member of a class more than they would otherwise legally be entitled to receive. 23. Hon ble Supreme Court had occasion to elaborately consider the scope and ambit of preferential transaction in IBC in Anuj Jain Vs. Axis Bank Limited Ors (supra). Before we come to the treatment of law by the Supreme Court in Anuj Jain , a look into the legislative scheme from Provincial Insolvency Act, 1920 till the IBC Code indicate that legislative requirements under the different enactments were not identical and ingredients for avoidance of a transaction under the different enactments has been separately dealt. The Companies Act, 1956 dealt with fraudulent transaction. In the IBC, preferential transaction and fraudulent transaction has been separately dealt, ingredients to prove are different for preferential transaction. There is no need to prove any fraudulent intent for a preferential transaction. When we look into the scheme of Section 43 of the Code, sub-section (2), a clear statutory provision is that a corporate debtor shall be deemed to have given a preference if conditions as mentioned in paragraph a and b are fulfilled. When a provision provides for deemi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon ble Supreme Court had occasion to examine the concept of preferential transaction and exposition of law as contained in IBC. Hon ble Supreme Court has also in its Judgement noticed paragraph 177 to 179 of Uncitral Legislative Guide as has been noticed in foregoing paragraph of the Judgment. The distinctive feature of the Companies Act, 2013 and the IBC have been noted in paragraph 20.4 and following has been laid down by the Hon ble Supreme in paragraph 20.4: 20.4. Noteworthy distinctive features, in the scheme of the Companies Act, 2013 and Insolvency and Bankruptcy Code, 2016, as regards preferences in relation to the corporate personalities, are that while Section 328 of the Act of 2013 deals with fraudulent preference and Section 329 thereof deals with transfers not in good faith but, on the other hand, in the Code, separate provisions are made as regards the transactions intended at defrauding the creditors (Section 49 IBC) as also for fraudulent trading or wrongful trading (Section 66 IBC). The provisions contained in Section 43 of the Code, however, indicate the intention of legislature that when a transaction falls within the coordinates defined therein, the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Section 43, the transaction, of transfer of property or an interest thereof of the corporate debtor, ought to be for the benefit36 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 as per clause (b) thereof, such transfer ought to be of the effect of putting such creditor or surety or guarantor in beneficial position than it would have been in the event of distribution of assets under Section 53. 21.2. However, merely giving of the preference and putting the beneficiary in a better position is not enough. For a preference to become an offending one for the purpose of Section 43 of the Code, another essential and rather prime requirement is to be satisfied that such event, of giving preference, ought to have happened within and during the specified time, referred to as relevant time . The relevant time is reckoned, as per sub-section (4) of Section 43 of the Code, in two ways: (a) if the preference is given to a related party (other than an employee), the relevant time is a period of two years preceding the insolvency commencement date; and (b) if the prefer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count 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; and (iii) preference is given, either during the period of two years preceding the insolvency commencement date when the beneficiary is a related party (other than an employee), or during the period of one year preceding the insolvency commencement date when the beneficiary is an unrelated party. 28. Hon ble Supreme Court has categorically held in the above case that if the requirement made in sub-section (2) of Section 43 are satisfied legal fiction comes into play. In paragraph 22.3, Hon ble Supreme Court has held that when the deeming provisions come into existence the transaction entered into between the corporate debtor would be regarded as preferential transaction with attendant consequences irrespective whether the transaction was in fact intended or even anticipated to be so. In paragraph 22.3, following has been laid down: 19.3. On a conspectus of the principles so enunciat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ether such transfer is not an excluded transaction in terms of sub-section (3) of Section 43? 30. Hon ble Supreme Court has analyzed the facts of that case and returned a finding in paragraph 25.4 that Corporate Debtor by giving preference by way of mortgage transaction for the benefit of related party falls within preferential transaction. In paragraph 25.4, following was held: 25.4. In the scenario taken into comprehension hereinabove, there is nothing to doubt that the corporate debtor JIL has given a preference by way of the mortgage transactions in question for the benefit of its related person JAL (who has been the creditor as also surety for JIL) for and on account of antecedent financial debts, operational debts and other liabilities owed to such related person. In the given fact situation, it is plain and clear that the transactions in question meet with all the requirements of clause (a) of sub-section (2) of Section 43. 31. The Hon ble Supreme Court had also occasion to consider the concept of ordinary course of business in paragraph 28, 28.1, 28.2 and 28.3. Observations made by the Hon ble Supreme Court in 28.3 and 28.5 are relevant which are to the follow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inary course of business or financial affairs of the transferee that is lenders of JAL would itself be decisive for exclusion, almost every transfer made to the transferees like the lender-banks/financial institutions would be taken out of the net, which would practically result in frustrating the provision itself. Thus while finding out whether a transaction is ordinary course of business, the object and purpose of Section 43 and the legislative scheme have to be kept in mind. In paragraph 28.5 in sub-section (3) of Section 43 the expression or , appearing as disjunctive between the expressions corporate debtor and transferee ought to be read as and . Relying on a judgement of the High Court of Australia in Downs Distributing Company following has been observed in paragraph 28.6.1: 28.6.1. Thus, the enquiry now boils down to the question as to whether the impugned transfers were made in the ordinary course of business or financial affairs of the corporate debtor JIL. It remains trite that an activity could be regarded as business if there is a course of dealings, which are either actually continued or contemplated to be continued with a profit motive.43 As regards the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or particular situation , as rightly expressed in Downs Distributing Co. Though we may assume that the transactions in question were entered in the ordinary course of business of bankers and financial institutions like the present respondents but on the given set of facts, we have not an iota of doubt that the impugned transactions do not fall within the ordinary course of business of the corporate debtor JIL. As noticed, the corporate debtor has been promoted as a special purpose vehicle by JAL for construction and operation of Yamuna Expressway and for development of the parcels of land along with the expressway for residential, commercial and other use. It is difficult to even surmise that the business of JIL, of ensuring execution of the works assigned to its holding company and for execution of housing/building projects, in its ordinary course, had inflated itself to the extent of routinely mortgaging its assets and/or inventories to secure the debts of its holding company. It had also not been the ordinary course of financial affairs of JIL that it would create encumbrances over its properties to secure the debts of its holding company. In other words, we are clearly of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e debtor from different related and non-related parties is part of the financial affairs cannot be accepted. The Judgement of the Hon ble Supreme Court in Anuj Jain (Supra), the emphasis has been given that transaction must fall into place as part of the undistinguished common flow of the business done. Undistinguished common flow of the business of the Corporate Debtor does not contemplate any such or particular situation where the Corporate Debtor s claim that its financial position became unstable due to market condition and had started arranging money from their relatives and other parties. Money arranged from relative and other parties by the Corporate Debtor thus cannot be held to be part of ordinary course of business or part of financial affairs. 38. The Adjudicating Authority has in detail considered the submissions of both the parties and has gone through and examined the transactions in question and has returned the finding that the transaction come under the preferential transaction and in paragraph 65 and 66 following directions were issued: 65. So far section 43 IBC 2016 is concerned, as we held transactions made with the respondent no. 1,2,4,5,6 and 7 come ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the submission, Learned Counsel for the Appellant has placed reliance on few judgements of the High Courts which need to be noticed. 41. The first judgment relied upon by Learned Counsel for the Appellant is judgement of the Gujarat High Court in Re Maneckchowk and Ahmedabad Co. Ltd . (1969) SCC OnLine Guj 22. In the above case, the Gujarat High Court was considering a petition under Section 391(2) of the Companies Act, 1956 for sanctioning a scheme and compromise between the creditors and members of the Maneckchowk and Ahmedabad Co Ltd. While considering the said petition, High Court had occasion to consider certain allegations regarding the fraudulent preferences given by the Company. Reference was made to one of the deed of mortgage executed by the Company in favour of the Central Board of Trustee for the Provident Fund which was alleged to be fraudulent preference. In paragraph 18 of the Judgment, following observations have been made: 18 If, therefore, it could be shown that the debtor acted under an apprehension that he would be prosecuted or under a threat of prosecution, the transfer of property by him could not be said to be a free volitional act of the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany has been guilty of giving a number of fraudulent preferences they could not be investigated except in a winding up proceedings and, therefore, the scheme is not a proper alternative to winding up, does not carry conviction. The charges created by the decrees in favour of the five aforementioned creditors, which certainly call for investigation, have been set aside without having taken recourse to the proceeding in winding up and two mortgages one in favour of the Union Bank of India and the other in favour of the Central Board of Trustees of Provident Fund have prima facie no tinge of fraudulent preference. Therefore, it is not possible to accept the - submission of Mr. Vakil that the fraudulent preferences given by the company would go unchallenged and uninvestigated if the scheme is sanctioned. 43. From the above judgment, it is clear that the High Court has not given any concluded opinion with regard to fraudulent preference as was claimed in the said case and has observed that if the scheme is sanctioned the allegation may call for an investigation. The above judgement of the Gujarat High Court was followed by Bombay High Court in M/s Monark Enterprises Vs. Kishan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed counsel for Monark Enterprises filed a compilation of judgment and passages from various text books on the subject. I do not propose to deal with all the cases included in the compilation though I have considered all the cases cited by learned counsel for all the parties. I propose to refer to only one case to justify the approach of the court to the problem under consideration. (In re Maneck chowk and Ahmedabad Mfg. Co. Ltd.) [1970] 40 Comp Case, 819 at 847, D. A. Desai J. (as His Lordship then was) of the High Court of Gujarat summed up the legal principle applicable in such a situation in his own inimitable style, after referring to the judgment of the House of Lords in (Sharp Official Liquidator V. Jackson) [1899] A.C. 419. The High Court of Gujarat observed that, if the transaction was done not with a view to prefer one of the creditors but to save one's own skin, the transfer could not, in such circumstances, be treated as a fraudulent preference. After referring to a passage from Buckley on the Companies Acts, 13th edition (1957), the learned judge observed that the expression preference implied selection and selection implied freedom of choice. The learned judge ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aph 33 of the Bombay High Court. The intent of the Corporate Debtor is not relevant since the Section 43 envisages statutory fiction as has been noted above. Whether the Act is voluntary or not has no relevance while coming to the conclusion whether transaction is preferential or not. Learned Counsel for the Resolution Professional has rightly referred to Section 43, sub-section (3) proviso. We may notice that sub-section (3) of Section 43 provides for exception to preferential transaction and the proviso of Section 3 reads as under: 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. 46. When the law mandates that any transfer made in pursuance of order of Court can not preclude such transfer to be deemed to be giving a preference there is no occasion for not accepting any transaction made in pursuance to a notice or demand issued by the Lender or by threat extended by lender for initiating any legal proceeding as preferential transaction. The legislative scheme which is clarified by the above proviso clearly leads to the conclusion that any transaction under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re of the view that the decision of the Foreign Courts relied on by the Learned Counsel for the Appellant dealing with particular statutory scheme under consideration cannot extend any help while interpreting Section 43 when the clear interpretation has already been made by the Hon ble Supreme Court in Anuj Jain (supra) case. 50. Reliance on the Judgment of United States Court of Appeals in In re Fulghum Const. Corp. as well as Judgment of House of Lords in Barclays Bank Ltd. vs. Quistclose Investments Ltd. can have no relevance and are not helpful in the present case. 51. Learned Counsel for the Appellant has also referred to Judgment of the Hon ble Supreme Court in Canbank Financial Services Ltd. Vs. Custodian Ors. , 2004 8 SCC 355. The above judgement of the Hon ble Supreme Court was not dealing with the provision pertaining to fraudulent preference or preferential transactions and the Court was dealing with the Benami Transaction Provision Act, 1988 and the Provisions of the Transfer of Property Act, 1882 as well as Trust Act, 1882. Paragraph 15 and 16 of the Judgment which has been relied by Learned Counsel for the Appellant is not helpful in the present case. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trading and wrongful trading entail the liabilities on the persons responsible therefor. We are not elaborating on all these aspects for being not necessary as the transactions in question are already held preferential and hence, the order for their avoidance is required to be approved; but it appears expedient to observe that the arena and scope of the requisite enquiries, to find if the transaction is undervalued or is intended to defraud the creditors or had been of wrongful/fraudulent trading are entirely different. Specific material facts are required to be pleaded if a transaction is sought to be brought under the mischief sought to be remedied by Sections 45/46/47 or Section 66 of the Code. As noticed, the scope of enquiry in relation to the questions 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. 54. What has been emphasized by the Hon ble Supreme Court is that ingredients of Section 43, 45 and 66 are different and Resolution Professional is expected to keep such requirement i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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