NCLT Mumbai Rules: No Need To Prove Fraudulent Intent For Preferential Transaction Under Section 43 Of IBC

NCLT Mumbai Rules: No Need To Prove Fraudulent Intent For Preferential Transaction Under Section 43 Of IBC

The Mumbai Bench-I of the National Company Law Tribunal, presided over by Justice Shri V.G. Bisht and Prabhat Kumar, has ruled that fraudulent intent is not a prerequisite for a preferential transaction under Section 43 of the Insolvency and Bankruptcy Code, 2016.

The bench held that: “Corporate Debtor has paid the amount towards the antecedent debt during the look-back period to the named respondents, and the said payments have put the respondents in a more favorable position than they would have been in the case of the distribution of assets in terms of Section 53 of the Code. Accordingly, these transactions squarely fall within the deeming fiction provided in Section 43(2) of the Code.”

The Resolution Professional, Mr. Ankur Kumar (Applicant), representing M/s Mahavir Roads and Infrastructure Private Limited (Corporate Debtor), filed several applications seeking relief against respondents for transactions under Section 43 of the Insolvency and Bankruptcy Code, 2016 (IBC). The Corporate Insolvency Resolution Process (CIRP) of Mahavir Roads & Infrastructure Pvt. Ltd. began on February 21, 2019, initiated by the applicant, appointed by the Committee of Creditors (COC), in accordance with relevant sections and regulations.

The contention arose regarding transactions between the corporate debtor and its related parties during the years 2017–2018 and 2018–2019, potentially constituting preferential transactions under Section 43 of the Code. The resolution professional argued that these transactions, amid the corporate debtor's financial distress, favored related parties over creditors.

In response, the respondents countered that the transactions formed part of routine business operations and did not qualify as preferential under Section 43. They asserted that certain adjustments overlooked by the transaction audit report accurately reflected the corporate debtor's financial status. Moreover, they argued that these transactions were duly documented in the corporate debtor's financial statements, with amounts owed and payable to the respondents, indicating their customary business nature.

The respondents contended that these transactions, undertaken to alleviate financial strain, did not fall within the purview of Section 43 of the IBC.

The NCLT referenced Section 43 of the IBC, governing preferential transactions, and clarified that fraudulent intent is not a prerequisite for a transaction to be deemed preferential. Citing the NCLAT decision in GVR Consulting Services Limited v. Pooja Bahry, it was noted that Section 43 establishes a deemed fiction, wherein a corporate debtor is considered to have provided a preference under certain conditions, irrespective of actual intent.

In examining the case, the NCLT determined that the corporate debtor had made payments toward antecedent debts to the respondents during the look-back period. These payments placed the respondents in a more advantageous position compared to what they would have received under asset distribution as per Section 53 of the IBC. Consequently, the NCLT concluded that these transactions fell within the statutory fiction outlined in Section 43(2).

Furthermore, the NCLT underscored Section 43(3), which exempts transactions conducted in the ordinary course of business from falling under Section 43. However, it stressed that for this exemption to apply, the transaction must be ordinary for both the corporate debtor and the recipient of the preference. The NCLT determined that it was not customary for the recipients to demand repayment during the corporate debtor's financial distress, particularly as they were related parties.

Based on its findings, the NCLT ruled that certain transactions exhibited preferential characteristics. It instructed the parties involved to refund the preferentially received funds to the corporate debtor within 30 days.