S. 44 IBC NCLT Doesn't Have The Power To Suo-Moto Classify A Transaction As A 'Preferential Transaction': NCLAT

In a recent decision, the National Company Law Appellate Law Tribunal (NCLAT) has held that  NCLT does not have the power to suo-moto classify a transaction as a Preferential Transaction in Section 44 of the Insolvency and Bankruptcy Code, 2016. A Division Bench of Justices M. Venugopal [Member Judicial] and Dr. Ashok Kumar Mishra [Member Technical] allowed the appeal challenging the order of the NCLT wherein the Adjudicating Authority had classified a transaction as 'Preferential Transaction.' The Bench remanded the matter back to the NCLT for deciding afresh in the light of the observations made in the order.

The Appellants, represented by Advocate Anando Mukherjee, had entered a Memorandum of Understanding (MoU) with the Corporate Debtor and advanced a sum of Rs. 42,61,33,333/- for the future supply of goods. Due to the non-fulfillment of the terms of the MoU, the Appellant and the Corporate Debtor mutually decided to convert the sum advanced into an unsecured loan. Accordingly, the MoU was replaced with a loan agreement.

Upon learning that CIRP had been initiated against the Corporate Debtor, the appellant submitted its claims to the Resolution Professional (RP) as a Financial Creditor. The RP, however, had classified the Appellants as Operational Creditors because the sum had been advanced for the future supply of goods. The Appellants preferred an application against the decision of the RP before the NCLT. The NCLT observed that by executing the loan agreement, the Corporate Debtor had converted operational debt into financial debt, intending to put the Appellant in a beneficial position and suo-moto classified the transaction as Preferential Transaction in terms of Section 43(2)(a).

The Tribunal observed that on a plain reading of Section 43 of the Insolvency and Bankruptcy Code, 2016, it is made out that an RP or the Liquidator, as the case may be, must be of the opinion that a Corporate Debtor has given preference to a creditor in a transaction and must make an Avoidance Application to the Adjudicating Authority for the avoidance of such preferential transaction.

In the instant case, since neither the RP had formed any opinion that the Corporate Debtor had given preference nor any Avoidance Application had been made to the Adjudicating Authority against the transaction in question, it was not open for the NCLT to classify the transaction as preferential. In Section 44, NCLT does not have the power or authority to classify a transaction as a Preferential Transaction suo-moto.

It noted that the Adjudicating Authority had exceeded its jurisdiction in the impugned order while recording the finding. The appellant herein is a related party beyond the scope of the petition filed in the Tribunal. It added,

"The Resolution Professional has not filed any application for the preferential transaction as required under Section 43(1). Hence, apparently while going through the petition and hearing of Ld. Counsels for both the parties, it is very much clear that the Adjudicating Authority on its own has recorded it a related party which is beyond the provisions contend in the Code either explicitly or implicitly."

It referred to the case of Godrej Industries Limited and Anr. Vs. Commissioner of Central Excise Mumbai and Anr. and Reserve Bank of India Vs. Jindal Steel and Power Limited. It further noted that the Resolution Professional, a statutory functionary, has not applied for initiation of proceedings under Section 43 of the Code regarding preferential transactions and the Adjudicating Authority has passed the order. In such a situation, supplementing it with fresh reason through affidavit or otherwise was held not acceptable within the purview of IBC, 2016.

Case Title: Sahara India v. Shir Nandkisho Vishnupant Deshpande and Anr.

Advocates for the Appellant: Anando Mukherjee Adv., Kumar Anurag Singh Adv., Zain A. Khan Adv.

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