Monday, 4 April 2022

Mr. T.V. Balasubramanian Vs M/s. Kushal Traders & Anr. - As to whether the transfer in question 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 per Section 53 of the Code.

NCLT Chennai-1 (26.02.2021) in Mr. T.V. Balasubramanian Vs M/s. Kushal Traders & Anr. [MA/745/ 2019 in CP (IB)/1037/ 2018] held that;

  • Hon’ble Supreme Court has dealt in detail as to how the Resolution Professional is required to approach the transaction as preferential before filing an Application before this Tribunal impugning the said transactions as between the parties as a “Preferential Transaction” in the matter of Anuj Jain, Interim Resolution Professional for Jaypee Infratech Ltd. –Vs- Axis Bank Ltd.

  • As to whether the transfer in question 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 per Section 53 of the Code. 

  • If answer to this question is in the affirmative, the transaction under examination shall be deemed to be of preference within a relevant time, provided it does not fall within the exclusion provided by sub-section (3) of Section 43.


Excerpts of the order;

# 1. Under consideration is an Application which has been filed by the Resolution professional of the Corporate Debtor viz., M/s. Sholingur Textiles Limited under Section 43 (1) of the Insolvency & Bankruptcy Code 2016 (IBC, 2016) alleging that the transactions as reflected in the Application are preferential in nature as between the 1st and 2nd Respondents and thereby seeking reliefs under Section 44 of IBC, 2016. The facts as can be culled out from the averments contained in the Application to the effect that this Tribunal had initiated the Corporate Insolvency Resolution Process (CIRP) of the Corporate Debtor on 04.02.2019 in the main CP (IB)/1037/2018 and also appointed the Interim Resolution Professional (IRP) being the Applicant. 

 

# 2. The Applicant was subsequently confirmed as the Resolution Professional (RP) by the Committee of Creditors of the Corporate Debtor (CD) under the relevant provisions of the Act on 07.03.2019. 

 

# 3. It is also seen that paper publications were duly effected calling claims from the Creditors in Form ‘A’ in accordance with the provisions of IBC, 2016. The gravamen of the charge as against the 1st and 2nd Respondents in this Application is that the 2nd Respondent being the Director, whose powers stood suspended acting on behalf of the Corporate Debtor had executed a Sale Deed purportedly agreeing to transfer land to an extent of 99,456 sq.ft. belonging to the Corporate Debtor valued at Rs.1,69,07,520/- by virtue of Sale Deed executed between the parties on 04.07.2018 and Registered as Doc. No. 1812/2018 on the file of the Office of the Sub – Registrar, SH128, Shankar Nagar, Sholinghur. The land is stated to have been situated as dealt within the Sale Deed dated 04.07.2018 at Pandyanallur Village, comprising of 68 vacant residential plots in the Survey Numbers contained in the schedule as given in the Sale Deed. The consideration for the sale is stated to be Rs.1,69,07,520/- to be adjusted against the dues payable by the Corporate Debtor to the 1st Respondent / Operational Creditor. 

 

# 4. It is further averred that the amount of operational debt due and owed by the Corporate Debtor to the 1st Respondent to the tune of Rs.1,69,07,520/- was thus settled by executing the said Sale Deed, the transfer as well the settlement as evidenced by the accounting entries being done on the same day on 04.07.2018. 

 

# 5. Taking into consideration the transactions as between the parties, it is averred in the Application based on the documents that comprehensive conjoint reading of the documents will show as follows

a) On 01.04.2018, the CD was due and owing a sum of Rs.1,92,39,541/- to the 1st Respondent. 

b) On 13.04.2018 and 04.05.2018 a sum of Rs.23,00,000 was paid by way of DD / bank remittance by the CD. 

c) On 04.07.2019, the land belonging to the CD was sold by the 2nd Respondent in favour of the 1st Respondent Operational Creditor for a recorded sum of Rs.1,69,07,520. 

d) On the very same day the said sum of Rs.1,69,07,520/- was credited to the account of the 1st Respondent thus extinguishing the liability in full which stood as due and outstanding on the said date. 

 

# 6. It is the allegation of the Applicant that a sum of Rs.1,69,07,520/- was settled by the Corporate Debtor represented by the 2nd Respondent by executing the Sale Deed dated 04.07.2018 and that the said transaction having been carried out within a period of 12 months prior to the CIRP commencement dated being 04.02.2019 and the property transaction having been effected preferentially to an Operational Creditor in relation to an antecedent operational debt as defined within the scope of Section 43 (2) of IBC, 2016, thereby putting the 1st Respondent in an advantageous position. Preference has been given and that the preferential transactions as carried out between the parties and the property involved thereunder are liable to be vested back to the Corporate Debtor under Section 44 as it stood prior to such transaction being carried out as between the parties. The transaction is hence voidable under Section 45 of the IBC, 2016 as it has been done in collusion between the 1st and the 2nd Respondents herein which defeats the rights of the Creditors in effect by passing the pari passu Rule and also attempting to effect the transfer by defrauding the other Creditors. 

 

# 7. Taking into consideration the above transactions, the following reliefs have been sought by the Applicant / RP :- 

1. Declare the said transfer, executed by way of Sale Deed dated 04-JUL-2018 registered as Document bearing No. 1812 of 2018 on the file of Office of the Sub – Registrar, SH128, Shankar Nagar, Sholingur, Tamil Nadu 631102 as evidenced by the copy of the said document found in Annexure 2, executed on behalf of the CD by the 2nd Respondent, as granting preference to the 1st Respondent and thus being in contravention to Section 45 (1) of the Code. 

2. Set aside the said transfer, executed by way of the aforesaid Sale Deed dated 04-JUL-2018 registered as Document bearing No. 1812 of 2018 in favour of the 1st Respondent, as aforesaid and require the property (ies) so transferred to vest in the Corporate Debtor and thus restore position as it existed before such transfer as if the transaction (s) has not been entered into. 

3. Declare that the 1st Respondent has no right, title or interest in the subject matter property, consequently. 

4. Direct the 1st Respondent to surrender all the original documents pertaining to the said transfer including the original document found in Annexure 2, held Preferential as aforesaid, to the Resolution Professional, Applicant herein. 

5. Direct the Sub – Registrar, SH128, Shankar Nagar, Sholingur, Tamil Nadu 631102 to cancel the said document being Sale Deed dated 04-JUL-2018 registered as Document bearing No.1812 of 218 on his file and record the cancellation as an entry in the records including the corresponding record of encumbrances.

6. Pass such further orders, as this Hon’ble Adjudicating Authority may deem fit and proper in the circumstances of the case and render justice. 

 

# 8. The 1st Respondent has filed the reply. Perusal of the reply shows that the Application is sought to be challenged on the following grounds, viz., 

a) Prior to the Application being filed before this Tribunal, the Resolution Professional has not put the 1st Respondent on notice in relation to the transaction and sought for explanation thereby in effect violating the principles of natural justice as it seeks to condemn the 1st Respondent without hearing that the present Application has been filed on the presumption that the Respondents were aware of the proceedings pending before this Tribunal and despite the same the transactions as alleged is stated to have been carried on in violation of the provisions of the Code and that the transaction has been done knowingly to frustrate the consequences emanating from the initiation of the Insolvency proceedings, which is not correct. 

b) No material has been placed on record to demonstrate that the transaction impugned has been entered into in violation of the provisions of the IBC, 2016 with the hidden intent to violate the provisions of the Code (IBC, 2016) which does not prohibit the activity of the nature undertaken by the 1st Respondent as at that time the transaction took place an order of moratorium was not in place as declared by this Tribunal under Section 14 the IBC, 2016 thereby prohibiting the transaction of the nature as alleged in the Application and sought to be impugned. 

c) The conditions as prescribed under Section 43 of the Code has not been fulfilled and unless the conditions as prescribed therein is fulfilled the transaction cannot be classified as a transaction as a preferential transaction as sought to be given the colour as such by the Resolution Professional / Applicant. 

d) Even on facts it is contended that since the Corporate Debtor was in need of raw materials to run its operations and was not having the liquidity to even pay wages to its workmen and faced with the consequences of the unit of the Corporate Debtor being closed and since the same would have proved disastrous at the relevant point, transaction was undertaken in the course of business activities and to run the day to day affairs of the Corporate Debtor. 

e) There is no preference in the transaction as between the Corporate Debtor and the 1st Respondent as the payment due to the 1st Respondent was settled in due course of business activities of the 1st Respondent which was in subsistence from 01.04.2018. 

f) Further it is contended that no benefit has been received by the 1st Respondent as a recipient viz., the 1st Respondent has received only as per its entitlement by virtue of the transaction and by transferring the parcel of land, the Corporate Debtor had only settled its liability against Respondent No.1 and did not extend any undue benefit to it. No material has been shown by the Resolution Professional that the consideration for the value as shown in the Sale Deed is less than the real value which was transferred by the Corporate Debtor. 

g) Finally, it is stated that the transaction is neither preferential nor voidable since it was undertaken in the ordinary course of business that the transaction does not suffer from any vice as has been alleged by the Applicant nor the same has been undertaken in collusion with Respondent No.1 and in the circumstances dismiss the present Application with exemplary cost. 

 

# 9. It is seen from the record of proceedings that when this matter was taken up for consideration by this Tribunal, despite notices having been served to R2, there is no representation on the part of the R2 and the Applicant and the Respondents were directed to comply with certain directions as per order dated 20.01.2020. Pursuant to the same it is seen that the 1st Respondent is a proprietorship firm represented by its proprietor Mr.Sunil Trilokchand Jain, however no documents as such has been filed by the 1st Respondent. 

 

# 10. In relation to the Applicant on its part a memo has been filed dated 20th December 2019 bringing to the notice of this Tribunal the particulars of the claim. Thereafter the matter was listed on 22.09.2020 as in between due to Covid-19 Pandemic being prevalent the matter was not able to be listed. 

 

# 11. On 22.12.2020, this Tribunal taking into consideration the absence of the Respondents either in person or through its Counsels issued an order that this Tribunal would be constrained to proceed with the matter in the absence of the Respondent if they are not present for enquiry on 03.02.2021. 

 

# 12. On the hearing date of 03.02.2021 none was present on the part of the Respondents. In the circumstances, this Tribunal heard the submissions of Learned Counsel for the Applicant. This Tribunal has carefully considered the rival pleadings filed in this matter as well as the documents filed by the Applicant in support of the averments contained in the Application. 

 

# 13. Perusal of the Application shows as alleged in the Application, a Sale Deed has been entered into dated 04.07.2018 between the 1st Respondent being a Proprietorship firm represented by its Proprietor Mr. Sunil Trilok Chand with the Corporate Debtor represented by its Director Mr. Santosh Kumar Kanodia, the Respondent No.2 herein. The initial recital portion mentions clearly that there is an outstanding amount payable by the Corporate  Debtor to the 1st Respondent, to the extent of Rs.1,69,39,541/- and that since the Corporate Debtor had expressed its inability to settle the dues owing to unfavourable market conditions and the Corporate Debtor also being in possession of an unencumbered land had offered the same for a consideration of Rs.1,69,39,541/- with a view to settle the dues of the 1st Respondent. The extent of land as given therein is to the extent of 99,456 sq.ft. The schedule to the Sale Deed consists the following details viz., 

 

# 14. The Sale Deed as entered into between the parties viz., the 1st Respondent and 2nd Respondent is not being assailed by either of the Respondents and in the circumstances this Tribunal is not required to exercise its endeavours in relation to the admissibility of the same as averred in the Application or that of the CIRP which was initiated on 04.02.2019 by this Tribunal and the Applicant is the RP and hence competent to file this Application on behalf of the Corporate Debtor. 

 

# 15. The Account Statement filed along with the Application also reflects from the ledger of the Corporate Debtor that the consideration towards the sale of land has been reflected therein to the extent of Rs.1,69,07,520/- and the date given thereof is 04.07.2018. 

 

# 16. In order to ascertain the transaction as to whether it is falling under the provisions of Section 43 of IBC, 2016 as a preferential transaction, the Hon’ble Supreme Court has dealt in detail as to how the Resolution Professional is required to approach the transaction as preferential before filing an Application before this Tribunal impugning the said transactions as between the parties as a “Preferential Transaction” in the matter of Anuj Jain, Interim Resolution Professional for Jaypee Infratech Ltd. –Vs- Axis Bank Ltd., Etc. Etc. in Civil Appeal Nos.8512-8527 of 2019 with Civil Appeal Nos.6777-6797 of 2019 and Civil Appeal Nos.9357-77 

 

# 17. After a detailed discussion by the Hon’ble Supreme Court of India in relation to the provisions of Section 43 of IBC, 2016 the following has been culled out at Paragraph No.28.1 for the benefit of the Resolution Professional as well as for the benefit of this Authority to ascertain a transaction as preferential which reads as follows:- 

  • 28.1. Looking to the legal fictions created by Section 43 and looking to the duties and responsibilities per Section 25, in our view, for the purpose of application of Section 43 of the Code in any insolvency resolution process, what a resolution professional is ordinarily required to do could be illustrated as follows: 

  • 1. In the first place, the resolution professional shall have to take two major but distinct steps. One shall be of sifting through the entire cargo of transactions relating to the property or an interest thereof of the corporate debtor backwards from the date of commencement of insolvency and up to the preceding two years. The other distinct step shall be of identifying the persons involved in such transactions and of putting them in two categories; one being of the persons who fall within the definition of ‘related party’ in terms of Section 5(24) of the Code and another of the remaining persons. 

  • 2. In the next step, the resolution professional ought to identify as to in which of the said transactions of preceding two years, the beneficiary is a related party of the corporate debtor and in which the beneficiary is not a related party. It would lead to bifurcation of the identified transactions into two sub-sets: One concerning related party/parties and other concerning unrelated party/parties with each sub-set requiring different analysis. The sub-set concerning unrelated party/parties shall further be trimmed to include only the transactions of preceding one year from the date of commencement of insolvency. 

  • 3. Having thus obtained two sub-sets of transactions to scan, the steps thereafter would be to examine every transaction in each of these sub-sets to find: (i) as to whether the transaction is of transfer of property or an interest thereof of the corporate debtor; and (ii) as to whether the beneficiary involved in the transaction stands in the capacity of creditor or surety or guarantor qua the corporate debtor. These steps shall lead to shortlisting of such transactions which carry the potential of being preferential. 

  • 4. In the next step, the said shortlisted transactions would be scrutinised to find if the transfer in question is made for or on account of an antecedent financial debt or operational debt or other liability owed by the corporate debtor. The transactions which are so found would be answering to clause (a) of sub-section (2) of Section 43. 

  • 5. In yet further step, such of the scanned and scrutinised transactions that are found covered by clause (a) of sub-section (2) of Section 43 shall have to be examined on another touchstone as to whether the transfer in question 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 per Section 53 of the Code. If answer to this question is in the affirmative, the transaction under examination shall be deemed to be of preference within a relevant time, provided it does not fall within the exclusion provided by sub-section (3) of Section 43. 

  • 6. In the next and equally necessary step, the transaction which otherwise is to be of deemed preference, will have to pass through another filtration to find if it does not answer to either of the clauses (a) and (b) of sub-section (3) of Section 43. After the resolution professional has carried out the aforesaid volumetric as also gravimetric analysis of the transactions on the defined coordinates, he shall be required to apply to the Adjudicating Authority for necessary order/s in relation to the transaction/s that had passed through all the positive tests of sub-section (4) and sub-section (2) as also negative test of sub-section (3). 

 

# 18. Adverting to the steps as given above by the Hon’ble Supreme Court of India to ascertain whether the transaction is a preferential one or otherwise it is evident that the Applicant has not made any plea in relation to the 1st Respondent to be a related party other than stating that the Transaction is as between the Respondents who have colluded. 

 

# 19. Coming to Step 2, in the absence of the 1st Respondent being the related party to the Corporate Debtor the sunset phase provided under the provisions of IBC, 2016 is of one year prior to the date of initiation of the CIRP. 

 

# 20. Proceeding to Step No.3, it is evident from the Sale Deed that vesting of the property belonging to the Corporate Debtor is sought to be created to the 1st Respondent and that it is also evident from the recitals to the Sale Deed as well as the Statement of Accounts being Ledger Accounts of the Corporate Debtor annexed along with the Application which is not disputed by the 1st Respondent that the 1st Respondent stands in the capacity of an Operational Creditor as defined under the provisions of IBC, 2016. 

 

# 21. In relation to Step No.4, it is also evident that the transaction which is sought to be impugned by the Applicant is in relation to the antecedent Operational Debt owed by the Corporate Debtor to the Operational Creditor. 

 

# 22. Coming to Step No.5 as prescribed by the Hon’ble Supreme Court of India and extracted above in relation to examination of the transaction on the touch stone as to whether the transfer in question has the effect of putting such Creditor in a beneficial position then it would have been in the distribution of assets as per Section 53 of the Code it is seen from the memo as filed by the Applicant dated 20.12.2019 taking into consideration the claims lodged with the Applicant / RP by various categories of Creditors the following position emerges as given by way of tabulation by the Applicant:- 

 

Category 

Amount 

Category Total (Rs.) 

Secured Financial Creditors 

59,86,33,405 


Unsecured Financial Creditors 

2,37,10,120 


Total of Financial Creditors


62,23,43,525 

Employees and Workmen 

2,17,48,279 


Trade Creditors 

5,18,71,198


Statutory Creditors

33,91,657


Total of Operational Creditors 


7,70,11,134 

Other Claimants 



Total admitted Claims 


69,93,54,659 

 

# 23. Taking into consideration the waterfall mechanism, in relation to the claim as lodged above and also taking into consideration the liquidation value of the Corporate Debtor as assessed by a valuer to the extent of Rs.20,69,00,000/-, under the waterfall mechanism as prescribed under Section 53 of IBC 2016 in relation to the settlement of claims, the Applicant has given the following tabulation which reads as under:- 

 

Position under Section 53(1)

Category 

Amount as admitted or quantified

Application of Liquidation value of Rs.20,69,00,000

(a) 

CIRP costs provisional 

55,05,300

55,05,300

(b) (i)

Workmen dues for 24 months

2,11,23,139 

68,64,128 

(b) (ii) 

Secured Creditors

59,86,33,405

19,45,30,572 

(c)

Employee dues for 12 months

(d) 

Financial Debts of Unsecured Creditors 

2,37,10,120

(e ) 

Statutory Creditors 

33,91,657 

(f) 

Operational Creditors

5,24,96,338 

 

# 24. Thus it is seen that despite Secured Financial Creditors who gain precedence over the Operational Creditors over the category under which the 1st Respondent falls, a preference seems to have been given to the 1st Respondent thereby prejudicing the interest of the other Creditors who either have precedence in relation to the claim being settled much ahead of the 1st Respondent or even in relation to the other Operational Creditors who are similarly placed like the 1st Respondent. 

 

# 25. In relation to the sixth step as prescribed by the Hon’ble Supreme Court of India as to whether it will pass through the filtrations to find if it does not answer to either clauses (a) and (b) of Sub Section 3 of Section 43, the Hon’ble Supreme Court of India has given a vital guideline as to how the same is required to be analysed by the RP and in effect how this Tribunal is required to consider an Application of a nature similar to the present one as given in Paragraph 25.6 and 25.6.1. of the Judgement in Anuj Jain’s case (supra). 

  • 25.6. The result of discussion in the foregoing paragraphs is that the transfers in question could be considered outside the purview of sub-section (2) of Section 43 of the Code only if it could be shown that same were made in the ‘ordinary course of business or financial affairs’ of the corporate debtor JIL and the transferees. Even if transferees submit that such transfers had been in the ordinary course of their business, the question would still remain if the transfers were made in the ordinary course of business or financial affairs of the corporate debtor JIL so as to fall within the exception provided by clause (a) of sub-section (3) of Section 43 of the Code. 

  • 25.6.1. 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. As regards the meaning and essence of the expression ‘ordinary course of business’, reference made by the appellants to the decision of the High Court of Australia in Downs Distributing Co (supra), could be usefully recounted as under:- “As was pointed out in Burns v. McFarlane the issues in sub-s. 2(b) of s. 95 of the Bankruptcy Act 1924-1933 are “(1) good faith; (2) valuable consideration; and (3) ordinary course of business.” This last expression it was said “does not require an investigation of the course pursued in any particular trade or vocation and it does not refer to what is normal or usual in the business of the debtor or that of the creditor.” It is an additional requirement and is cumulative upon good faith and valuable consideration. It is, therefore, not so much a question of fairness and absence of symptoms of bankruptcy as of the everyday usual or normal character of the transaction. The provision does not require that the transaction shall be in the course of any particular trade, vocation or business. It speaks of the course of business in general. But it does suppose that according to the ordinary and common flow of transactions in affairs of business there is a course, an ordinary course. It means that the transaction must fall into place as part of the undistinguished common flow of business done, that it should form part of the ordinary course of business as carried on, calling for no remark and arising out of no special or particular situation.” 

 

# 26. An analysis of the above paragraphs clearly brings forth to light that in relation to both the Corporate Debtor as well as the 1st Respondent the transaction must be in the ordinary course of business or financial affairs of the Corporate Debtor. The 1st Respondent has made the above as one of the grounds for assailing the Application. 

 

# 27. We are of the view that taking into consideration the Sale Deed and the recitals contained therein the transaction cannot be considered to be in the ordinary course of business or in relation to the financial affairs of the Corporate Debtor. 

 

# 28. In view of all the six steps as formulated by the Hon’ble Supreme Court of India in relation to consideration of the transaction as a preferential transaction have been satisfied from the facts and circumstances of the case, we are of the view that the transaction indeed falls within the provisions of Section 43 of the IBC, 2016 and the transaction cannot be considered to be excepted from the ambit of transactions as provided under the said Section itself. 

 

29. The 1st Respondent also not being the related party, it is also seen that the transaction under consideration in this Application has been carried as between the parties within one year period being the prescribed period for an unrelated party i.e., the 1st Respondent. 

 

# 30. In the circumstances, this Application is required to be allowed as filed by the Resolution Professional by granting the reliefs as sought extracted supra in paragraph No.7. 

 

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NCLAT Chennai (27.08.2021) in M/s. Kushal Traders Vs. Mr. T.V. Balasubramanian RP of Sholingur Textiles Ltd. [Company Appeal (AT) (CH) (INS) No. 189 of 2021] upheld the orders of NCLT Chennai.

 

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Hon’ble Supreme Court (31.01.2022) in M/s. Kushal Traders Vs. Mr. T.V. Balasubramanian (Civil Appeal No. 149 of 2022) dismissed the appeal with the following orders;

  • “Having heard learned counsel for the appellant and having perused the material placed on record, we are clearly of the view that the transactions in question, whereby the land of the corporate debtor was sought to be transferred to the appellant- operational creditor in lieu of the debt owed by the corporate debtor, were clearly answering to the description of preferential transactions within the meaning of Section 43 of the Insolvency and Bankruptcy Code, 2016. Hence, no case for interference is made out. In view of the above, the appeal stands dismissed. 

  • All the pending applications stand disposed of.”

 

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The sole purpose of this post is to create awareness on the "IBC - Case Law" and to provide synopsis of the concerned case law, must not be used as a guide for taking or recommending any action or decision. A reader must refer to the full citation of the order & do one's own research and seek professional advice if he intends to take any action or decision in the matters covered in this post.