Fraudulent Intent Not Required To Establish Preferential Transaction Under IBC: NCLT Delhi

The National Company Law Tribunal (NCLT) at Delhi recently held that fraudulent intent need not be established to show that a transaction was preferential under Section 43 of the Insolvency and Bankruptcy Code (IBC).

The bench comprising President Justice Anupinder Singh Grewal and Technical Member Ravindra Chaturvedi ruled:

“It is pertinent to note that under Section 43(2), there is no need to prove any fraudulent intent for a transaction to be held preferential. Section 43 operates by virtue of a deeming fiction: once the ingredients set out in clauses (a) and (b) of sub-section (2) are established, the transaction is liable to be treated as a preferential transaction with attendant consequences, irrespective of whether it was in fact intended or even anticipated to be so.”

Section 43 deals with preferential transactions. Broadly, it applies when a corporate debtor transfers its property towards an antecedent financial or operational debt and the transfer places the creditor in a more beneficial position than it would have occupied in a distribution of assets under Section 53 of the IBC.

The case concerned Pellet Energy Systems, whose Corporate Insolvency Resolution Process (CIRP) commenced on July 20, 2018, following a Section 7 petition filed by Oriental Bank of Commerce, now merged with Punjab National Bank.

During the CIRP, AMK & Co. was appointed as transaction auditor to identify transactions covered by provisions relating to preferential, undervalued, extortionate, and fraudulent transactions.

The transaction audit identified two payments as preferential transactions. The first was repayment of ₹2 lakh to unsecured creditor Manish Kumar Tripathi during FY 2018-19. The second was payment of ₹11.50 lakh to Adarsh Enterprises during FY 2017-18 towards pre-existing outstanding dues.

C.A. Manjit Anjna, who took over the avoidance application as the assignee of the Corporate Debtor's not readily realizable assets, sought a declaration that the two payments totalling ₹13.50 lakh were preferential transactions and should be reversed.

The suspended director, Bharat Sharma, argued that the payments were made in the ordinary course of business and raised objections over delay and non-joinder. The court found no material or documentary evidence to support this defence for the two payments.

Referring to Rajesh Toshniwal & Anr. v. Kamal Nayan Jain, the bench held that the Section 43(3)(a) exclusion did not apply. It also found that both payments fell within the one-year look-back period. The ₹2 lakh payment to Tripathi was towards an antecedent financial debt and gave him a more beneficial position under Section 53.

The ₹11.50 lakh payment to Adarsh Enterprises was similarly found to have been made towards an antecedent operational debt. The court held that the payment placed the vendor in a more beneficial position than it would have occupied in a distribution of assets under Section 53.

Section 44 sets out the consequences of a preferential transaction. It allows the adjudicating authority, among other things, to direct the person who received the benefit to pay the corresponding amount to the liquidator or resolution professional.

The court accordingly declared both payments preferential under Section 43. It directed Tripathi, along with the two suspended directors, to jointly and severally pay ₹2 lakh to the assignee

Adarsh Enterprises was similarly directed, along with the two suspended directors, to jointly and severally pay ₹11.50 lakh to the assignee