Party Who Benefits From Preferential Transaction Can Only Be Directed To Contribute To Corporate Debtor: NCLT Delhi
The National Company Law Appellate Tribunal (“NCLAT”), New Delhi Bench, comprising of Justice Ashok Bhushan (Chairperson) and Shri Barun Mitra (Technical Member), while adjudicating an appeal filed in Mr. Saptarshi Nath & Anr. v Kapil Dev Taneja, has held that under Section 44(1)(d) of IBC a direction to contribute to the assets of the Corporate Debtor can be only given to a...
The National Company Law Appellate Tribunal (“NCLAT”), New Delhi Bench, comprising of Justice Ashok Bhushan (Chairperson) and Shri Barun Mitra (Technical Member), while adjudicating an appeal filed in Mr. Saptarshi Nath & Anr. v Kapil Dev Taneja, has held that under Section 44(1)(d) of IBC a direction to contribute to the assets of the Corporate Debtor can be only given to a person who has received benefits from the Corporate Debtor. The Bench concluded that in a preferential transaction where a third party received benefit from the Corporate Debtor, the Erstwhile Management/Director cannot be directed by NCLT under Section 44(1)(d) to contribute to the assets of the Corporate Debtor.
Background Facts
M/s. Exit 10 Marketing Private Limited (“Corporate Debtor”) was admitted into the Corporate Insolvency Resolution Process (“CIRP”) by the NCLT. The Transaction Audit Report revealed that the Corporate Debtor had done preferential transactions and certain creditors had benefitted from the same. However, no details of the assets transferred to creditors were given in Transaction Audit Report.
The Resolution Professional filed application for avoidance of transactions and arrayed the Erstwhile Directors of Corporate Debtor as respondents. Whereas the benefit from concerned preferential transaction was received by a creditor and not Erstwhile Directors.
The Resolution Professional prayed for a direction to Erstwhile Directors to pay Rs. 20,09,821.50/- in terms of Section 44(1)(d) of IBC to the Corporate Debtor. On 12.09.2022, the NCLT held that the Erstwhile Directors had entered into preferential transactions and directed them to contribute Rs. 20,09,821.50/- towards the assets of the Corporate Debtor.
The Erstwhile Directors filed an appeal before the NCLAT against the order dated 12.09.2022.
Issue
After transactions having been held to be preferential, whether the direction of contribution by the Erstwhile Directors could have been issued under Section 44(1)(d) of IBC?
NCLAT Verdict
The Bench observed that Section 44(1)(d) of IBC contemplates a direction requiring any person to pay such sums in respect of benefits received by him from the Corporate Debtor as the NCLT may direct. Essential conditions need to be fulfilled for issuing direction under Section 44(1)(d) are, (i) The Adjudicating Authority may require any person to pay; and (ii) Such sums in respect of benefits received by him from the Corporate Debtor.
The Order under Section 44(1)(d) of IBC is aimed to direct those who have received benefits from the preferential transactions to reverse the benefits to the Corporate Debtor.
It was observed that under Section 66 of IBC the NCLT may ask any person, who were knowingly parties to the carrying on fraudulent trading or wrongful trading, liable to make such contribution to the Corporate Debtor as the NCLT may deem fit. Accordingly, it is under Section 66 that the NCLT is empowered to direct the Erstwhile Management/Directors to make contribution to the assets of the Corporate Debtor to any preferential transaction.
However, since the NCLT had neither invoked nor returned any finding on Section 66 of IBC to be able to issue any direction as contemplated under the same. The NCLT had only issued direction under Section 44(1)(d) of IBC.
The Bench concluded that under Section 44(1)(d) of IBC, a direction can be passed to contribute to the assets of the Corporate Debtor only in favour of a person who has received benefits from the Corporate Debtor. Since the Erstwhile Directors had not received any benefit from the preferential transaction, no order could have been passed against them under Section 44(1)(d) to make contribution.
“As observed above, Section 44(1)(d) contemplates a direction requiring any person to pay such sums in respect of benefits received by him from the Corporate Debtor. Thus direction can be given to a person who has received benefits from the Corporate Debtor. In the present case, it was creditors of the Corporate Debtor who have received the benefits by way of assets of the Corporate Debtor, any direction very well could have been issued by the Adjudicating Authority against the creditors whose name are mentioned in the Journal Voucher dated 31st March, 2023 but in the Application which was filed by the Resolution Professional none of the creditors were party to the application nor there was any such prayer. Direction under Section 44 (1)(d) to the Appellants to contribute, is not sustainable within the meaning of Section 44(1)(d) of the Code.”
The Bench set aside the NCLT’s order for being unsustainable and allowed the appeal.
Case title: Mr. Saptarshi Nath & Anr. v Kapil Dev Taneja
Case No.: Company Appeal (AT) (Insolvency) No. 1356 of 2022
Counsel For Appellant: Ms. Mani Gupta, Mr. Aman Choudhary, Ms. Saumya Upadhyay, Advocates.
Counsel for Respondent: Mr. Ankur Mittal, Ms. Yashika Sharma, Mr. Bhaskar Pandey, Advocates.