Intent Irrelevant Once Conditions Of Preferential Transaction Are Met: NCLAT Reiterates

The National Company Law Appellate Tribunal (NCLAT) at New Delhi has reiterated that a preferential transaction (Section 43 of the Insolvency and Bankruptcy Code) works on a statutory deeming fiction. Once the necessary ingredients are met, intent or motive does not matter. The burden shifts to the directors and beneficiaries to show that the transactions were in the ordinary course of business.

A bench of Judicial Member Justice Mohd. Faiz Alam Khan and Technical Member Naresh Salecha dismissed an appeal filed by the suspended directors of Toshniwal Enterprises Controls Limited.

"Thus having regard to the deeming fiction provided in Section 43 of the Code this transaction would be deemed to be a preferential transaction and the onus shifts to the appellants to show as to how this transaction and others were done in ordinary course of business," it said

Relying on GVR Consulting Services Pvt. Ltd. and Ors. vs Pooja Bahry and Ors., it added, "the intent of the Corporate Debtor is not relevant under Section 43 of the Code, since Section 43 envisages statutory fiction"

The tribunal upheld an order of the NCLT, Kolkata Bench, directing recovery of amounts transferred to related parties during the look-back period. This included payments made to a proprietorship run by the deceased father of one of the directors.

The findings came from a transaction audit carried out during the company's insolvency process. The audit, conducted by S. Poddar & Co., flagged several transfers to related parties within the prescribed period. Acting on the audit, the resolution professional moved the NCLT under Sections 43, 44, 66 and 60(5) of the Code seeking reversal of preferential and fraudulent transactions. The NCLT allowed most of the prayers and ordered recovery. The suspended directors took the matter in appeal.

Before the NCLAT, the directors argued that the audit was assumption-based and prepared without full records. They said the resolution professional failed to retrieve documents seized by the police. They also claimed liability could not be fixed on them as legal heirs of a deceased proprietor.

The tribunal rejected these arguments. It noted that the suspended directors had repeatedly failed to cooperate during the insolvency process and had not provided records despite clear directions. In that context, it held that they could not complain about the audit being done with limited material. It said bank statements are reliable documentary evidence for identifying preferential transactions.

The tribunal observed, “Since, the Suspended Directors of the CD including the appellants were at fault, in not providing the documents/financial statement of the CD to the IRP/RP, they cannot take this defense that the material available with the Transactiont Auditors was not sufficient.”

On Section 43, the Tribunal said that once transfers to related parties within the look-back period are shown, the statutory presumption applies. The onus then shifts to the directors.

It recorded, “Once it was established that money has been transferred to related entities a reciprocal onus had tilted towards the appellants who were the Directors of the CD at that point of time to explain as to why these transactions may not be treated as preferential transactions.”

The tribunal found that no explanation was given to show that the transactions were in the ordinary course of business.

It also upheld the direction against the appellants as legal representatives of the deceased proprietor. The Tribunal held that Section 44 allows recovery from any person who has benefited from a preferential transaction.

It noted that the deceased proprietor was also a director at the relevant time and that both had benefited from the transfers.

On calculation errors, the tribunal said minor or typographical mistakes in the prayer clause do not invalidate the order and can be corrected at the appellate stage.

Finding no infirmity in the NCLT's conclusions, the Appellate Tribunal dismissed the appeal.

For Appellant: Senior Advocate Ajit Kumar Sinha, with Advocate S.K. Sharma.

For Respondents: Advocates Shaunak Mitra, Saikat Sarkar, Tanushree Paul and Ishan Choudhary Roy for Respondent No. 1. Liquidator Kamal Nayan Jain for Respondent No. 1. Advocates Rajesh Kumar Gautam, Deepanjal Choudhary and Azal Ackram for Respondent Nos. 2 and 3.