NCLT Kochi Holds Similar Pre- and Post-CIRP Pricing Negates Undervaluation Allegation

The Kochi Bench of the National Company Law Tribunal (NCLT) on 8 May dismissed an application filed by the Resolution Professional of Pelican Biotech and Chemicals Labs Private Limited seeking avoidance of alleged undervalued transactions.

Judicial Member Vinay Goel held that continuity of pricing between pre-CIRP and CIRP periods can be a relevant factor in assessing allegations of undervaluation under the Insolvency and Bankruptcy Code, 2016. He observed:

“The Adjudicating Authority is therefore of the considered view that the continuity of pricing between pre-CIRP and CIRP periods, coupled with the absence of any material deviation in the rate at which the same related party was being supplied goods, is a relevant and significant factor in assessing the allegation of undervaluation.”

The Corporate Debtor entered the corporate insolvency resolution process in May 2024. During the CIRP, a transaction audit report prepared by Sidharth Gupta & Company identified alleged undervalued transactions worth Rs. 5.56 lakh. The Resolution Professional alleged that the suspended directors sold goods to a related party, Pelican Kenterra Private Limited, at Rs. 300 per unit, while the same product was sold to third parties at around Rs. 862 per unit.

He contended that the transactions fell within the look-back period under Section 46 of the Insolvency and Bankruptcy Code, 2016 and conferred undue benefit on the related party at the expense of the Corporate Debtor and its creditors. He therefore sought a declaration that the transactions were undervalued under Section 45 of the Code and sought directions for compensation for the alleged loss.

The respondents opposed the application, arguing that it was not maintainable as it was filed 164 days beyond the timeline prescribed under Regulation 35A of the CIRP Regulations, without any application seeking condonation of delay.

The Tribunal rejected this objection, relying on the NCLAT ruling in Aditya Kumar Tibrewal v. Om Prakash Pandey, and held that procedural timelines under Regulation 35A cannot defeat substantive rights under the IBC. It held:

“…this Adjudicating Authority is of the considered view that Regulation 35A, though prescribing timelines for the Resolution Professional to form an opinion and take necessary steps in respect of avoidance transactions, is procedural in nature and cannot be construed as mandatory so as to render an application non-maintainable solely on account of delay. Consequently, mere non-adherence to the timelines prescribed under Regulation 35A cannot, by itself, defeat the maintainability of an application under Section 45 read with Section 60(5) of the Insolvency and Bankruptcy Code, 2016.”

The Bench observed that Regulation 35A is intended to ensure timely identification and reporting of avoidance transactions, and not to defeat substantive rights under the IBC.

It also rejected the respondents' contention that Pelican Kenterra Private Limited was a necessary party, holding that the reliefs were directed against the suspended management and concerned restoration of value to the Corporate Debtor, without any adjudication affecting independent rights of that entity. It stated:

“The reliefs sought in the application are primarily directed against the Respondents, being the erstwhile management of the Corporate Debtor, in relation to the alleged undervalued transactions and consequential restoration of value to the Corporate Debtor. No substantive relief has been sought against the said entity, nor is any adjudication proposed directly affecting its independent rights.”

On merits, the Tribunal noted that the Resolution Professional had continued transactions with the same related party during CIRP at prices broadly similar to the pre-CIRP period. It further added:

“It is also relevant to note that the Resolution Professional, while conducting the CIRP, is expected to act in a commercially reasonable and prudent manner to ensure continuity of business and preservation of the value of the Corporate Debtor as a going concern.”

It concluded that the continuation of transactions at similar pricing during CIRP indicated a consistent and commercially viable arrangement, rather than an artificial undervaluation.

Accordingly, the NCLT dismissed the application.

For Applicant: Advocate Georgie Johny

For Respondents: Advocate Akhil Suresh