Gloster Cables Ltd. Vs. Fort Gloster Industries Ltd. & Ors. - We have found that the legislature has used the different language in Section 43 and 45 of the Code because in Section 43, the RP or the liquidator has to form an opinion whereas in Section 45 the RP or the liquidator has to examine and then determine that the transaction in question were undervalued during the relevant period.

 NCLAT (2024.01.25) in Gloster Cables Ltd. Vs. Fort Gloster Industries Ltd. & Ors.. [Comp. App (AT) (Ins) No. 1343 of 2019] held that;

• We have found that the legislature has used the different language in Section 43 and 45 of the Code because in Section 43, the RP or the liquidator has to form an opinion whereas in Section 45 the RP or the liquidator has to examine and then determine that the transaction in question were undervalued during the relevant period.

• In the case of Anuj Jain (Supra) the Hon’ble Supreme Court has also held that 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. 

Excerpts of the order;

# 15. In rebuttal, Counsel for the Appellant has argued that his whole case is based upon the supplemental trademark agreement dated 15.07.2008, the validity of which has not been challenged by Respondents before the Adjudicating Authority and no finding has been recorded in this regard except that the agreement was executed during the subsistence of the order of stay of the BIFR. It is further submitted that even if the agreement was stated to be insufficiently stamped yet it is a curable defect and the proper stamped duty has been paid. It is also reiterated that in the 5th CoC meeting, the CoC was apprised that the forensic audit report found no preferential, undervalued, fraudulent or wrongful trading transactions. In the forensic audit report, no related party preferential or fraudulent transaction whatsoever was found, therefore, the RP had rightly not filed the application under Section 43, 45, 49, 50 and 66 of the Code but the Adjudicating Authority has committed an error in suo motu passing the order and declaring the transaction between the parties being hit by Section 43 and 44 of the Code.

 

# 16. We have heard Counsel for the parties and perused the record with their able assistance.

 

# 27. The next submission of the Appellant is that the Adjudicating Authority has committed an error in holding that the transaction relied upon by the Appellant is undervalued transaction and is hit by Section 45(2)(b) and that it is also against the provisions of Section 43(2)(a) being a preferential transaction as it has been done within a period of two years preceding of commencement of CIRP and has referred to Section 43, 45 and 46 of the Code which are reproduced as under:-

 

“Section 43: Preferential transactions and relevant time.

*43. (1) 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 sub-section (2) to any persons as referred to in sub-section (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.

(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.

(3) For the purposes of sub-section (2), a preference shall not include the following transfer-

(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.

(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.

 

Section 45: Avoidance of undervalued transactions.

45. (1) If the liquidator or the resolution professional, as the case may be, on an examination of the transactions of the corporate debtor referred to in sub-section (2) determines that certain transactions were made during the relevant period under section 46, which were undervalued, he shall make an application to the Adjudicating Authority to declare such transactions as void and reverse the effect of such transaction in accordance with this Chapter.

(2) A transaction shall be considered undervalued where the corporate debtor—

(a) makes a gift to a person; or

(b) enters into a transaction with a person which involves the transfer of one or more assets by the corporate debtor for a consideration the value of which is significantly less than the value of the consideration provided by the corporate debtor,

and such transaction has not taken place in the ordinary course of business of the corporate debtor.

 

Section 46. Relevant period for avoidable transactions.

(1) In an application for avoiding a transaction at undervalue, the liquidator or the resolution professional, as the case may be, shall demonstrate that—

(i) such transaction was made with any person within the period of one year preceding the insolvency commencement date; or

(ii) such transaction was made with a related party within the period of two years preceding the insolvency commencement date.

(2) The Adjudicating Authority may require an independent expert to assess evidence relating to the value of the transactions mentioned in this section”

 

# 28. It is submitted that it is an admitted case that no application has been filed by the RP for obtaining an order of the Adjudicating Authority under Section 43 and 45 and the order has been passed by the Adjudicating Authority suo motu. It is submitted that as per Section 43(1) the liquidator or the resolution professional, as the case may be, has to form an opinion that the corporate debtor has at a relevant time given a preference in such transactions and in such manner as laid down in sub-section (2) to any persons as referred to in sub-section (4) and then 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. Similarly, it is submitted that for the purpose of avoidance of undervalued transaction, it is for the liquidator or the RP to examine the transaction of the corporate debtor and determine that the transactions made during the relevant period under Section 46 were undervalued and then he shall make an application to the Adjudicating Authority to declare such transaction as void. In this regard, Counsel for the Appellant has placed reliance upon the judgment in the case of Anuj Jain (Supra) and referred to para 140 which is reproduced as under:-

• # 140.However, we are impelled to make one comment as regards the application made by IRP. It is noticed that in the present case, the IRP moved one composite application purportedly under Sections 43, 45 and 66 of the Code while alleging that the transactions in question were preferential as also undervalued and fraudulent. In our view, in the scheme of the Code, the parameters and the requisite enquiries as also the consequences in relation to these aspects are different and such difference is explicit in the related provisions. As noticed, the question of intent is not involved in Section 43 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. However, whether a transaction is undervalued requires a different enquiry as per Sections 45 and 46 of the Code and significantly, such application can also be made by the creditor under Section 47 of the Code. The consequences of undervaluation are contained in Sections 48 and 49. Per Section 49, if the undervalued transaction is referable to sub-section (2) of Section 45, the Adjudicating Authority may look at the intent to examine if such undervaluation was to defraud the creditors. On the other hand, the provisions of Section 66 related to fraudulent trading and wrongful trading entail the liabilities on the persons 105 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.

 

# 29. We have found that the legislature has used the different language in Section 43 and 45 of the Code because in Section 43, the RP or the liquidator has to form an opinion whereas in Section 45 the RP or the liquidator has to examine and then determine that the transaction in question were undervalued during the relevant period. In the case of Anuj Jain (Supra) the Hon’ble Supreme Court has also held that 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. It further said that it is expected of any resolution professional to keep such requirements in view while making a motion to the Adjudicating Authority But in any case the action could not have been taken under Section 43 and 45 without there being an application moved by the RP. In the present case, the CoC was apprised in its 5th meeting that the forensic audit report found no preferential, undervalued, fraudulent or wrongful trading transactions nor it has found any related party preferential or fraudulent transaction whatsoever, therefore, only on the basis that the trademark was hypothecated for a bigger amount and has been assigned for lesser amount would not be a criteria for the purpose of declaring it to be undervalued transaction without there being sufficient material before the Adjudicating Authority to pass such an order, therefore, in our considered opinion, the finding recorded in this regard is not in accordance with law and thus reversed.

 

30. In view of the aforesaid discussions, the present appeal is hereby allowed and the impugned order is set aside. No costs. 

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