Preferential Transaction Under Section 43 Of IBC, Fraudulent Intent Need Not To Be Proved : NCLT Mumbai

The bench held that:

“…….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.”

Brief Facts:

The matter pertained to several applications filed by the Resolution Professional, Mr. Ankur Kumar (“Applicant”), of M/s Mahavir Roads and Infrastructure Private Limited ("Corporate Debtor"). These applications sought reliefs against Respondents for transactions under Section 43 of the Insolvency & Bankruptcy Code, 2016 ("IBC"). The Corporate Insolvency Resolution Process ("CIRP") of Mahavir Roads & Infrastructure Pvt. Ltd. commenced by an order dated 21 February 2019. The Applicant, appointed as the Resolution Professional by the Committee of Creditors ("COC"), initiated the process in compliance with relevant sections and regulations.

It was contended that transactions between the Corporate Debtor and its related parties during the years 2017-2018 & 2018-2019, were potentially preferential transactions under Section 43 of the Code. The Resolution Professional argued that these transactions, considering the financial distress of the Corporate Debtor, were conducted to benefit related parties rather than creditors.

In response, the Respondents argued that the transactions were part of normal business operations and not preferential under Section 43. They claimed that certain adjustments overlooked by the Transaction Audit Report reflect the true status of the Corporate Debtor's accounts. Additionally, they contended that the transactions were duly reflected in the Corporate Debtor's financial statements, and the amounts were due and payable to the respondents, confirming their normal course of business nature.

They argued that these transactions, initiated to address the financial strain, do not fall under Section 43 of the IBC.

Observations by the NCLT:

The NCLT referred to Section 43 of the IBC which governs preferential transactions. It held that no fraudulent intent needs to be proven for a transaction to be deemed preferential. Referring to the NCLAT decision in GVR Consulting Services Limited vs. Pooja Bahry, it held that there is deemed fiction under Section 43 where a corporate debtor shall be deemed to have given a preference if certain conditions are met, regardless of actual intent.

The NCLT found that the Corporate Debtor made payments towards antecedent debts to the Respondents during the look-back period. These payments placed the Respondents in a more favourable position compared to what they would have received in the event of asset distribution as per Section 53 of the IBC. Therefore, it held that these transactions fell squarely within the statutory fiction of Section 43(2).

Additionally, the NCLT highlighted Section 43(3), which exempts transactions conducted in the ordinary course of business from falling under Section 43. However, it emphasized that for such an exemption to apply, the transaction must be ordinary for both the Corporate Debtor and the recipient of the preference. The NCLT held that it was not ordinary for the recipients to demand repayment during the Corporate Debtor's financial distress, especially when they were related parties.

Therefore, NCLT held that certain transactions were preferential in nature. It directed the parties involved to refund the money received preferentially to the Corporate Debtor within 30 days.

Case Title: Mr. Ankur Kumar vs Mr Jitendra Kikavat & others and connected matters

Case Number: I.A. 2020 OF 2020 and connected matters

Advocate for the Applicant: Mr. Nahush Shah, Advocate

Advocate for the Respondent: None

Date of Judgment: 22.05.2024

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