NCLAT Delhi: Trademark Hypothecated For Higher Amount And Assignment For Lower Amount Can't Be Sole Criteria To Treat It As 'Undervalued Transaction'

Background Facts:

While the Resolution Plan submitted by Gloster Limited (Respondent 2) for Fort Gloster Industries Ltd. (Corporate Debtor) was pending approval, Gloster Cables Ltd. (Appellant) applied to NCLT Kolkata.

The Appellant prayed for an Order directing the exclusion of rights in the Trade Mark “Gloster” from the assets of the Corporate Debtor if any Resolution Plan is approved. The exclusion also included the exclusion of the Trade Mark "Gloster" from the Corporate name of the Corporate Debtor since the said Trade Mark 'Gloster' is not an asset of the Corporate Debtor.

Further, it also prayed for an Order clarifying that with the approval of the Corporate Insolvency Resolution Process ('CIRP'), no presumption may be drawn as to any authorization or right emerging from the aforesaid approval that gives the right to the Corporate Debtor, or the successful H1, to continue to use the Trade Mark 'Gloster' or the term "GLOSTER" as part of the Corporate Debtor's corporate name.

However, on 27.09.2019, NCLT Kolkata dismissed the application and observed that all deeds executed between the Corporate Debtor and the Appellant were void. It held so since the transaction relied upon by the Appellant is an undervalued transaction, being hit by Section 45(2)(b) of IBC, and the registration was done post the imposition of moratorium under Section 14 of IBC. Aggrieved by the said order, the Appellant has filed the appeal before NCLAT.

NCLAT Verdict:

The NCLAT Delhi allowed the application and held that the mere fact that the trademark was hypothecated for a higher amount and subsequently assigned for a lower amount would not be the sole criteria for deeming it an undervalued transaction.

The Appellate Tribunal noted as to the assignment of the trademark that the Appellant gained the title of the trademark through the execution of the supplemental Trademark Agreement on 15.07.2008. Further, as per this agreement, the Corporate Debtor transferred the registered trademark to the Appellant as the assignee. However, this transfer was contingent upon the condition that it would only take effect once the order dated 10.09.2001, issued by the Board of Industrial and Financial Reconstruction, is either vacated or discharged.

As far as the assignment of the Trademark of a Corporate Debtor on the undervalued transaction, the Appellate Tribunal placed reliance on the differing language in Sections 43 and 45 of IBC used by the Legislature. NCLAT observed that following Section 43 of IBC, the Resolution Professional ('RP') or the Liquidator has to form an opinion whereas in Section 45 the RP or the liquidator has to examine and then determine whether the transaction in question was undervalued during the relevant period.

NCLAT referred to the Supreme Court decision in Anuj Jain IRP for Jaypee Infratech Ltd. vs. Axis Bank Ltd., wherein it was 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 IBC. Further, it observed that it is expected of any RP to keep such requirements in view while making a motion to NCLT but in any case, the action could not have been taken under Sections 43 and 45 without there being an application moved by the RP.

NCLAT noted that presently, the CoC was informed that the forensic audit report revealed no instances of preferential, undervalued, fraudulent, or wrongful trading transactions. Additionally, the report did not identify any preferential or fraudulent transactions involving related parties. As a result, the mere fact that the trademark was hypothecated for a higher amount and subsequently assigned for a lower amount would not be the sole criteria for deeming it an undervalued transaction.

In conclusion, NCLAT reversed NCLT Kolkata's opinion holding the opinion to be not in accordance with the law.

Case Title: Gloster Cables Ltd. vs. Fort Gloster Industries Ltd. and Ors.

Case No.: Comp. App (AT) (Ins) No. 1343 of 2019 & I.A. No. 3823, 3824, 3825 & 3826 of 2019 & 470 of 2020 & 3655 of 2023

Counsel for Appellant: Mr. Abhinav Vashisht & Mr. Chandar Lal, Sr. Advocates along with Ms. Varsha Banerjee, Ms. Nancy Roy, Ms. Mahima Ahuja, Ms. Prakriti Varshney, Ms. Yashi Agrawal & Mr. Abhinav Bhalla.

Counsel for Respondents: Mr. Shaunak Mitra, Mr. PK Jhunjhunwalla, Mr. Anil Agarwalla & Ms. Neha Sharma, for R-1. Mr. Anand Varma & Mr. Ayush Gupta, for RP. Mr. Nishit Agrawal, Ms. Kanishka Mittal & Ms. Vanya Agrawal, for Intervenors.

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