'Not an Ordinary Business Transaction': NCLAT Upholds Order Treating ₹19.66 Lakh Paid To Director As Preferential

The National Company Law Appellate Tribunal (NCLAT) at Delhi has recently upheld an order holding that payments of Rs.19.66 lakh made to a suspended director of a company were preferential transactions under Section 43 of the Insolvency and Bankruptcy Code.

Dismissing two appeals filed by Jasvinder Singh Makan, the tribunal said repayment of unsecured loans to a director during financial distress cannot be treated as a routine business transaction.

"Repayment of unsecured loans to a director at a time, when the Corporate Debtor was facing financial difficulty, and when a secured financial creditor had substantial outstanding dues, cannot be regarded as a routine business transaction. By receiving these payments, the Appellant clearly obtained a benefit which he would not have received in the same manner in the event of liquidation under Section 53 of the Code. We therefore are of the view that such transactions cannot be classified as ordinary business transaction" the bench of Justice N. Seshasayee and Technical Members Arun Baroka and Indevar Pandey observed.

The case arose during the Corporate Insolvency Resolution Process of M.K. Printech Pvt. Ltd., which was admitted under a Section 9 plea on September 20, 2022.

The resolution professional moved the NCLT, Delhi, alleging that Rs. 19.66 lakh was repaid to Makan within the two-year look-back period applicable to related parties. The NCLT directed him to contribute Rs. 19.66 lakh to the company's assets.

Makan argued the payments were not preferential. He said funds were deposited by a family concern, G.K. Sales, into a common loan account maintained with Canara Bank, through which EMIs towards his loan were automatically deducted. He claimed the funds originated from his own resources and not from the corporate debtor. He relied on the “ordinary course of business” exemption under Section 43(3).

The liquidator opposed this. He said the repayments reduced the corporate debtor's liability towards a related party. He argued that once the amounts were routed through the company's account and used to discharge its liability to the director, the effect of the transaction was preferential, regardless of how the funds were sourced. He said this placed the director in a better position than other creditors, including secured lenders.

Rejecting the defence, the NCLAT said the director failed to produce documents to show the transactions were ordinary business dealings. It held that once amounts were credited to and routed through the corporate debtor's account and used to reduce its liability towards a related party, the transaction falls within the ambit of Section 43.

On the procedural issue, the tribunal noted that although Makan was set ex parte on one hearing date, he had filed a detailed reply, which was considered on its merits. His plea of miscommunication regarding the next date of hearing did not amount to a violation of natural justice.

Finding no illegality in the NCLT's orders, the appellate tribunal dismissed both appeals.