Proceedings Before Calcutta High Court No Bar To Examining Preferential Transactions: NCLT Kolkata

The Kolkata Bench of the National Company Law Tribunal (NCLT) on 12 June held that the mere pendency of proceedings before the Calcutta High Court does not prevent it from examining whether a transaction amounts to a preferential transaction under Section 43 of the Insolvency and Bankruptcy Code, 2016.

Judicial Member Bidisha Banerjee and Technical Member Siddharth Mishra allowed an avoidance application filed by the Resolution Professional of McNally Bharat Engineering Company Ltd and declared the impugned transactions as preferential, directing refund of Rs. 24.25 crore to the insolvency estate. The Bench held:

“UCO Bank's defence that the matter is sub judice before the Hon'ble Calcutta High Court does not, in itself, disentitle this Tribunal from examining whether a preferential transaction within the meaning of Section 43 has been effected. Where a preferential transfer is discernible on the record, NCLT is empowered to grant relief under Section 44 to restore the estate. Notwithstanding the pendency of related proceedings in another forum, this Tribunal must protect the integrity of the insolvency estate and the statutory distribution mechanism.”

McNally Bharat Engineering Company Ltd entered Corporate Insolvency Resolution Process (CIRP) on 29 April 2022. A transaction audit report dated 9 January 2023 flagged two impugned transactions.

First, UCO Bank appropriated Rs. 9.07 crore from an income tax refund of Rs. 39.63 crore credited on 3 September 2021. Second, the corporate debtor adjusted Rs. 15.18 crore of receivables in favour of three joint venture entities: McNally Trolex JV, McNally AML JV and McNally Trolex Kilburn JV.

The Tribunal held that these transactions fell within the look-back period under Section 43, as they occurred during FY 2020–21 and FY 2021–22, and it found no evidence that the adjustments took place in the ordinary course of business. It further held that although the joint venture entities occupied a dual position as both creditors and debtors of the corporate debtor, this status did not prevent the application of Section 43 where the transactions resulted in preferential treatment over other creditors.

The Bench accepted the transaction auditor's finding that Rs. 15.18 crore of sales receivables stood adjusted in favour of the JV entities, thereby placing them in a preferential position. It rejected UCO Bank's argument that the issue remained sub judice before the Calcutta High Court and held that such pendency did not restrict its jurisdiction to examine preferential transactions under the IBC.

The Tribunal reiterated that statutory provisions under Sections 43 and 44 empower it to undo preferential transactions and restore value to the insolvency estate, and it held that contractual or inter se arrangements cannot override this mandate.

Accordingly, the NCLT directed UCO Bank to refund Rs. 9.07 crore and directed the JV entities to repay Rs. 15.18 crore, along with interest at 9% per annum.