NCLT Mumbai-1 (2024.05.22) in Mr. Ankur Kumar Vs. Mr. Jitendra Kikavat & others [I.A. 2020 of 2020 In C.P.(IB) No. 2300/MB/2018] held that;
“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, subsection (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 deeming fiction, ‘deeming fiction’ come into play on fulfilment of the requirement even if in fact it may not be so. In sub-section (3) of Section 43, certain exception has been provided. Thus those transactions which fall as exception under Sub- Section (3) can be taken out of sub-section 2 of Section 43, rest shall be covered by deeming fiction”.
In the present case, it can not be said that it is in ordinary course of business of the recipient of the preference to realise their debts, particularly when the Corporate Debtor, a related party, is under financial stress.
However, we are of considered view that the net amounts received during the look back period shall only be said to be resulting into preference.
Further, in relation to Karan J Kikavat Respondent in IA 1402/2020, the Applicant has explained that the amount withdrawn by this person was adjusted against the various Earnest Money Deposit (EMD) and tender fees paid by him on behalf of Corporate Debtor and all the EMD’s are still outstanding in the books of accounts of Corporate Debtor, hence, this appropriation was in nature of reimbursements, and do not result into preference having been given to this person.
Excerpts of the order;
# 1. The Application(s) IA 1402/2020, 1443/2020, and IA 2020/2020 are filed by the Resolution Professional, Mr. Ankur Kumar, of M/s Mahavir Roads and Infrastructure Private Limited (Corporate Debtor) on 18.07.2020 seeking reliefs against the Respondents named in each of
Applications for transactions in terms of section 43 of Insolvency & Bankruptcy Code, 2016 (“Code”).
# 2. It is submitted that the Corporate Insolvency Resolution Process ("CIRP") of Mahavir Roads & Infrastructure Pvt. Ltd. (Corporate Debtor') was commenced by an Order of this Bench vide order no. CP (I&B) 2300/NCLT/MB/2018 dated 21 February 2019, pursuant to insolvency petition filed by the Financial Creditor under Section 7 of the Code, wherein the Applicant was appointed as the Interim Resolution Professional, and was later on appointed as Resolution Professional of Corporate Debtor by the Committee of Creditors ("COC").
2.1. The Applicant states that in compliance with section 13, section 15 and other applicable sections of the Code read with Regulation 6 of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations. 2016 (CIRP Regulations'), a public announcement was made on 13th March 2019 inviting claims from the Creditors of the Corporate Debtors. The last date for submission of claims was with the Interim Resolution Professional was 26 March 2019.
2.2. The Applicant states that third COC meeting was held on 15 October 019 wherein M/s. BKA & Company, Chartered Accountants was appointed to undertake transaction audit of the Corporate Debtor for the period from 01 April 2017 to 12 March 2019. Thereafter. M/s. BKA & Company had provided the draft transaction report highlighting the transactions under section 43 and section 66 of the Code. The Applicant had placed the said draft report before the COC in the fifth COC meeting held on 19 December 2019 and seventh COC meeting held on 04 February 2020, and informed the members that there are certain transactions as mentioned below which may fall into category of preferential transactions and hence after receipt of final report necessary application will be filed with NCLT under Regulation 35A of the CIRP Regulations.
2.3. The list of related parties of the Corporate Debtor is detailed herein below for ready reference(as per Annual accounts of the corporate debtor): -
2.4. Thus, in the present case, upon scrutinizing the transactions entered into by the Corporate Debtor during the relevant time and on the basis of report of Transaction audit carried out by M/s BKA & Co. Chartered Accountants, the following is the summary of the preferential transactions entered between the Corporate Debtor with its related parties i.e. the suspended directors of the Corporate Debtor during the year 2017-2018 & 2018-2019 i.e. two years prior to commencement of the CIRP of the Corporate Debtor are supposed to fall within the ambit of Section 43 of the Code:
Transactions in IA 1402/2020
Transactions in IA 1443/2020
Transactions in IA 2020/2020
2.5. The Applicant further submits that sub regulation 35A of the IBBI (Insolvency Resolution Process of Corporate Persons) Regulations. 2016 requires the Resolution professional to form an opinion whether the Corporate Debtor has been subjected to any transaction covered under section 43. 45. 50 or 66 of the Code. Section 43 of the chapter III deals with the preferential transactions and Section 44 casts duty upon the Resolution Professional to apply to the Adjudicating Authority under section 43(1) of the Code, in respect of preferential transactions carried out by the Corporate Debtor under sub-section (4) of section 43 of the Code.
2.6. The Applicant states that related party of the Corporate Debtor i.e. the directors of the Corporate Debtor were well aware of the fact that the Corporate Debtor was in default to various Creditors. Therefore, the directors of the Corporate Debtor were fully aware that the Corporate Debtor was in the twilight zone and insolvency was imminent. The suspended directors of the Corporate Debtor ought to have exercise due diligence in minimizing the potential loss to its Creditors. However, evidently. directors of the Corporate Debtor despite being fully aware of the dues payable to the creditors of the Corporate Debtor entered in to transactions, which prima facie are transactions to give benefit to its related parties. The said amounts could have been retained by the Corporate Debtor to generate cash that would have been sufficient to repay dues to the Creditors of the Corporate Debtor.
2.7. The Applicant, therefore submits that if the above said transactions are viewed after piercing the corporate veil, it would be found that the said transactions were preferential transaction within the meaning of sub-section (4) of section 43 of the Code.
2.8. That Section 43 (4) of the Code provides that a Corporate Debtor shall be deemed to have given preference if it is given to a related party. In the instant case, the Corporate Debtor has benefitted its related parties. The Applicant states that sub-section (1) of Section 25 of the Code casts a duty upon the Resolution Professional to preserve and protect the assets of the corporate debtor, including the continued business operations of the Corporate Debtor. For this purpose, clause (j) of sub-section (2) of section 25 casts duty upon the Resolution Professional to apply before the Adjudicating Authority for the avoidance of any such transaction in accordance with Chapter III of the Code.
# 3. The Respondents have filed an affidavit in reply dated 15.09.2021 stating that various adjustment entries were passed by the Corporate Debtor in its normal course of business and the same have been completely overlooked by in the Transaction Audit Report dated 31.05.2020. Thereby no reflecting the true status of the books of accounts of the Corporate Debtor.
3.1. It is submitted that the said Report is solely based on bank transactions which do not explain the purpose of the transactions. Further the same are duly reflected in the notes of accounts of the Corporate Debtor for the year ending 31 March 2020. It is pertinent to note that as per the notes of accounts of the Corporate Debtor forthe year ending 31st March 2020, the amounts are is in fact due and payable to Respondents which is also confirmed by the Applicant herein. It is submitted that said Transaction have not caused any prejudice to the lender of the Corporate Debtor and were done in the normal course of business of the Corporate Debtor and therefore will not be covered under Section 43 of the Code. It is further submitted that during the period from 1st April, 2014, the Corporate Debtor was under financial crunch and the cycle of recovery from trade receivables was completely disturbed. It is during this time, that the Respondents gave unsecured loans to meet the financial crunch of the Corporate Debtor and the Corporate Debtor returned the said amounts after receiving funds from the debtors, hence the transactions are not covered under section 43 of the Code.
# 4. Heard Learned Counsel and perused the materials available on record. 4.1. Section 43 of the Code deals with preferential transactions and relevant time. Section 43 of the Code is as follows:
“43 : Preferential transactions and relevant time.-
(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 subsection
(2) to any persons as referred to in subsection (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 or 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 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.
(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.”
4.2. The Hon’ble NCLAT in the case of GVR Consulting Services Limited vs. Pooja Bahry 2023 SCC Online NCLAT 220 at para 23 states that “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, subsection (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 deeming fiction, ‘deeming fiction’ come into play on fulfilment of the requirement even if in fact it may not be so. In sub-section (3) of Section 43, certain exception has been provided. Thus those transactions which fall as exception under Sub- Section (3) can be taken out of sub-section 2 of Section 43, rest shall be covered by deeming fiction”.
4.3. In the present cases, the Corporate Debtor has paid the amount towards the antecedent debt during the look back period to the named Respondents and the said payments have put the Respondents in favourable position than what they would have been in case of distribution of assets in terms of section 53 of the Code. Accordingly, these transactions squarely falls within the deeming fiction provided in section 43(2) of the Code. The Section 43(3) of the Code, inter-alia, provides that the transactions undertaken in ordinary course of business shall remain out of the scope of section 43 of the Code. Further, the transaction should be in ordinary course of business of both the parties i.e. the Corporate Debtor as well as recipient of the preference. In the present case, it can not be said that it is in ordinary course of business of the recipient of the preference to realise their debts, particularly when the Corporate Debtor, a related party, is under financial stress. Hence, we do not find the explanation of the Respondent acceptable in the present case. However, we are of considered view that the net amounts received during the look back period shall only be said to be resulting into preference. Further, in relation to Karan J Kikavat Respondent in IA 1402/2020, the Applicant has explained that the amount withdrawn by this person was adjusted against the various Earnest Money Deposit (EMD) and tender fees paid by him on behalf of Corporate Debtor and all the EMD’s are still outstanding in the books of accounts of Corporate Debtor, hence, this appropriation was in nature of reimbursements, and do not result into preference having been given to this person.
4.4. In view of the foregoing, the following transactions are held to be preferential in nature, and we consider to direct these parties to refund the money received in preference to the Corporate Debtor within 30 days.
S. No. IA No. Name of Respondent Amount
1. 1402/2020 Beena Kikavat 41,502/-
2. 1402/2020 Akshita Kikavat 1,70,000/-
3. 1402/2020 Vasantlal Kikavat 8,60,200
5. 1402/2020 Pawan Kikavat 27,25,857/-
6. 1443/2020 Mahavir Link Associates 1,31,01,406/-
7. 1443/2020 P.K. Traders 86,51,068/-
8. 1443/2020 Mahavir Stone Supplying Company 3,20,63,845/-
9. 2020/2020 Jitendra Kikavat 1,39,14,085/-
10 2020/2020 Pankaj Kikavat 24,366,667/-
4.5. In view of foregoing, IA 1402/2020 is partly allowed, and IA 1443/ 2020 and IA 2020/2020 are allowed.
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