The Ruling in Pooja Bahry Case
NTL Electronics India Ltd. – the Corporate Debtor was admitted into CIRP by order dated August 27, 2019 of the Hon’ble NCLT, Delhi Bench and Ms. Pooja Barhy was appointed as RP by the Committee of Creditors (‘CoC’). The RP appointed a transaction auditor to conduct the audit of the CD for the period April 01, 2016 to August 27, 2019 (‘the look back period). Pursuant to the findings in the report of the transaction auditor regarding certain transactions undertaken by the CD, an avoidance application was filed by the RP pursuant to the consent of the CoC.
The transactions that amounted to Rs. 6.37 crores mainly pertained to payments by the CD to certain parties (related and unrelated) that were claimed to be repayment of unsecured loans.
The Hon’ble NCLT held that the transactions entered into by the CD with the respondents were preferential transactions and directed that the respondents refund the amount. Aggrieved by the said order, appeals were filed by the respondents before the Hon’ble NCLAT.
Questions that arose for consideration of NCLAT were:
Whether intention is essential in identifying a transaction as preferential?
Whether a transaction undertaken under pressure of lenders will be considered as a preferential transaction?
What will be considered an ‘ordinary course of business’?
Whether a composite application can be filed for various avoidance transactions? The deliberation of NCLAT are discussed below:
1. Whether intention is essential in identifying a transaction as preferential?
During the course of the appeal, the NCLAT was called upon to determine whether a transaction will be termed as preferential even though the same was not carried out with the intention of giving preference to a particular creditor. The NCLAT placed heavy reliance on the view taken by the SC in Anuj Jain, IRP for Jaypee Infratech Limited v.. Axis Bank Ltd. & Ors. (‘Anuj Jain’), and held that if the elements laid down in section 43 (2) coupled with the timeframe as mentioned in section 43 (4) are satisfied a legal fiction comes into play. Once the legal fiction comes into play, the relevant transaction entered into by the CD will be deemed as a preferential transaction irrespective of whether the transaction was in fact intended or even anticipated to be so.
2. Whether a transaction undertaken under pressure of lenders will be considered as a preferential transaction?
Another submission made by the Appellants was that the said transactions under the pressure of notice and threat of initiating proceeding under Section 138 of the Negotiable and Instrument Act, the and hence cannot be termed as preferential transactions. It was the submission of the appellants that a preferential transaction is voluntary and a transaction that is carried out under pressure and threat cannot be called as such. The NCLAT stated that the proviso to section 43
3. Provides that ‘any transfer made in pursuance of the order of a court shall not, preclude such transfer to be deemed as giving of preference by the corporate debtor.’
The intention of the legislature is clearly brought out by the said proviso. Where the law mandates that a transfer made in pursuance of order of Court cannot be an exception to such a transfer being labelled ‘preferential’ there is no room for considering any transaction made in pursuance to a notice/ demand/ threat issued by a lender. The intent of the CD is not relevant since section 43 creates a legal fiction. Whether the transaction is voluntary or not has no relevance while coming to the conclusion that the same is a preferential translation. 3. What will be considered an ‘ordinary course of business’? It was the contention of the appellants that the transactions that the RP has allegedly termed as preferential were in fact only repayment of loans taken by the CD from the some of the appellants and were hence carried out in the ordinary course of business of the CD and were hence covered under the exception laid down in section 43 of the Code. In order to determine what constitutes an ‘ordinary course of business’ the NCLAT placed reliance on the UNCITRAL Legislative Guide and the judgement of the SC in the Anuj Jain matter. As per para 165 of the UNCITRAL Legislative Guide the term ordinary course of business must be used in order to determine what constitutes routine conduct of business and allows a business to make routine payments and enter into routine contracts, without subjecting those transactions to possible avoidance in insolvency. Such routine payments can include the payment of rent, utilities such as electricity and telephone and possibly also payment for trade supplies. The SC in the matter of Anuj Jain has used the Mischief Rule of interpretation of statues in determining what constitutes an ‘ordinary course of business’ and stated that while deciding whether or not a particular transaction would come in the scope of ‘ordinary course of business’, the object and purpose of section 43 of the Code and the legislative scheme and the intention of the legislature be kept in mind. The word “or” as used in 43(3) should be read as “and” so as to be conjunctive of the two expressions i.e., “corporate debtor” and “transferee”, that is, a preference shall not include the transfer made in the ordinary course of the business or financial affairs of the corporate debtor and the transferee. As held by the High Court of Australia in the judgement of Downs Distributing Co. Pty Ltd. v. Associated Blue Star Store Pty. Ltd.[9], “It means that the transaction must fall into place as part of the undistinguished common flow of business done, that it should form part of the ordinary course of business as carried on, calling for no remark and arising out of no special or particular situation” The NCLAT, stating application of the Anuj Jain ratio in this case, concluded that the CD in question was engaged in the business of manufacturing and electronics component and projects and hence taking financial assistance from related and non-related parties cannot be held to be in ordinary course of business of the CD. The NCLAT was of the view that the words ‘ordinary course of business’ and ‘financial affairs’as stated in sub-section 3 of section 43 be read ‘ejusdem generis’ and their meaning cannot be extended to subsume within it all financial transactions done by the Corporate Debtor. NCLAT remarked that, “Money arranged from relatives and other parties by the Corporate Debtor thus cannot be held to be part of ordinary course of business or part of financial affairs”. However, the author is of the humble opinion that businesses are often involved in taking financial assistance from unrelated as well as related parties. Hence, such activities are normal in business. What might render it “not ordinary” and “preferential” is that certain creditors are given priority over other creditors so as to accord them benefits which they otherwise are not entitled to. Hence, giving and receiving of financial assistance may be a part of ordinary course, but making preferential repayments may make it not ordinary. The facts in Anuj Jain were different as it was about creating mortgage on properties for the benefit of the holding company, where the financial health of the subsidiary itself was dwindling – this, certainly, puts a question mark on the “ordinary” nature of the transaction. However, from the facts appearing in the instant NCLAT order, it is not clear whether the CD was making disorderly/preferential repayments, and it appears that the Hon’ble NCLAT has based its decision solely on classification of “taking financial assistance” as not in ordinary course of business. Given that SC has upheld the NCLAT ruling, the aforesaid observations made by NCLAT might appear to be conclusive. However, in the humble opinion of the author, the issue might be specific to the facts of the instant case, and the applicability of such observations to other cases may be subject to particular facts and circumstances.
4. Whether a composite application can be filed for various avoidance transactions?
The appellants also contended that a composite application was filed by the RP under section the relevant provisions of the Code for various types of avoidance transactions raising allegations against several party under different provisions of the Code was not maintainable in view of the law laid down by the SC in the matter of Anuj Jain. The NCLAT clarified that the SC has in the matter of Anuj Jain emphasised that ingredients of section 43, 45 etc. are different and an RP must take the said requirement into consideration while making an application to the NCLT. A composite application where the allegations and averments are separately made, under different heads, does not suffer from any infirmity. Concluding remarks: Avoidance transactions are often disguised as simple gullible transactions in the garb of ‘ordinary course of business’ and often the question as to whether or not a transaction is preferential/ fraudulent has to be determined by the adjudicating authorities on the basis of facts. In the instant case, the SC upheld the ruling of NCLAT which has heavily relied on Anuj Jain case and the principles enunciated by the SC therein. However, it may be noted from a reading of the order and limited facts there, it appears that the facts of the instant case are different from the precedent applied. Further, the interpretation of ‘ordinary course” may be subject to further discussion as there are more judicial precedents. However, the ruling reinforces the principles enunciated in Anuj Jain case.
