‘Preferential Transaction’ in S. 43 IBC Explained by Supreme Court
- shrey singh
- Feb 28, 2020
- 5 min read
Preferential Transaction in S 43 IBC Explained: Supreme Court
Anuj Jain Interim Resolution Professional For Jaypee Infratech Limited
v.
Axis Bank Limited Etc.
CIVIL APPEAL NOS. 8512-8527 OF 2019
decided on 26th February, 2020
Bench
A.M.Khanwilkar and Dinesh Maheshwari, JJ
Facts
Jayprakash Associate Limited(JAL) is holding company of Jaypee Infratech Limited(JIL). JIL mortgaged its properties as collateral securities for the loans and advances made by the lender banks and financial institutions to JAL.
JIL went into insolvency and Corporate Insolvency Resolution Process(CIRP) was initiated and Interim Resolution Professional(IRP) was appointed.
JAL, during the CIRP, claimed to be financial creditors of the corporate debtor JIL on the strength of the mortgage created by the corporate debtor, as collateral security of the debt of its holding company JAL.
IRP rejected the claim of JAL as being preferential, undervalued and fraudulent, in terms of Sections 43, 45 and 66 of the Insolvency and Bankruptcy Code,2016(IBC).
Question of Law
Whether the transactions in question are preferential essentially within the meaning of Sections 43 IBC?
Held
The Court held that the transactions in question are hit by Section 43 IBC as the transaction meet with all the requirements of clause (a) of sub-section (2) of Section 43 i.e. the transfer of property or an interest thereof of the corporate debtor for the benefit of a creditor or a surety or a guarantor for or on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor. The Court further said that the impugned transactions had been of transfers for the benefit of JAL, who is a related party of the corporate debtor JIL and is its creditor and surety by virtue of antecedent operational debts as also other facilities extended by it; and the impugned transactions have the effect of putting JAL in a beneficial position than it would have been in the event of distribution of assets being made in accordance with Section 53 of the Code. Thus, the corporate debtor JIL has given a preference in the manner laid down in sub-section (2) of Section 43 of the Code.
Scrutiny of s. 43 IBC
Looking at the broad features of Section 43 of the Code, it is noticed that as per sub-section (1) thereof, when the liquidator or the resolution professional, as the case may be, is of the opinion that the corporate debtor as, at a relevant time, given a preference in such transactions and in such manner as specified in sub-section (2), to any person/persons as referred to in avoidance of preferential transactions and for one or more of the orders referred to in Section 44.
If twin conditions specified in sub-section (2) of Section 43 are satisfied, the transaction would be deemed to be of preference.
As per clause (a) of sub-section (2) of Section 43, the transaction, of transfer of property or an interest thereof of the corporate debtor, ought to be for the benefit of a creditor or a surety or a guarantor for or on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor; and as per clause (b) thereof, such transfer ought to be of the effect of putting such creditor or surety or guarantor in beneficial position than it would have been in the event of distribution of assets under Section 53.
‘deemed’ under S 43 IBC – Meaning
The charging parts of Section 43 of the Code i.e., sub-sections (4) and (2) thereof, a corporate debtor shall be deemed to have given preference at a relevant time if the twin requirements of clauses (a) and (b) of sub-section (2) coupled with the applicable requirements of either clause (a) or clause (b) of sub-section (4), as the case may be, are satisfied.
The sum total of sub-sections (2) and (4) is that a corporate debtor shall be deemed to have given a preference at a relevant time if:
(i)the transaction is of transfer of property or the interest thereof of the corporate debtor, for the benefit of a creditor or surety or guarantor for or on account of an antecedent financial debt or operational debt or other liability;
(ii)such transfer has the effect of putting such creditor or surety or guarantor in a beneficial position than it would have been in the event of distribution of assets in accordance with Section 53; and
(iii) preference is given, either during the period of two years preceding the insolvency commencement date when the beneficiary is a related party (other than an employee), or during the period of one year preceding the insolvency commencement date when the beneficiary is an unrelated party.
Section 43: Preferential transactions and relevant time:
(1) Where the liquidator or the resolution professional, as the case may be, is of the opinion that the corporate debtor has at a relevant time given a preference in such transactions and in such manner as laid down in sub-section (2) to any persons as referred to in sub-section (4), he shall apply to the Adjudicating Authority for avoidance of preferential transactions and for, one or more of the orders referred to in section 44.
(2) A corporate debtor shall be deemed to have given a preference, if—
(a) there is a transfer of property or an interest thereof of the corporate debtor for the benefit of a creditor or a surety or a guarantor for or on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor; and
(b) the transfer under clause (a) has the effect of putting such creditor or a surety or a guarantor in a beneficial position than it would have been in the event of a distribution of assets being made in accordance with section 53.
(3) For the purposes of sub-section (2), a preference shall not include the following transfer —
(a) transfer made in the ordinary course of the business or financial affairs of the corporate debtor or the transferee;
(b) any transfer creating a security interest in property acquired by the corporate debtor to the extent that—
(i) such security interest secures new value and was given at the time of or after the signing of a security agreement that contains a description of such property as security interest and was used by corporate debtor to acquire such property; and
(ii) such transfer was registered with an information utility on or before thirty days after the corporate debtor receives possession of such property:
Provided 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.
Explanation.—For the purpose of sub-section (3) of this section, “new value” means money or its worth in goods, services, or new credit, or release by the transferee of property previously transferred to such transferee in a transaction that is neither void nor voidable by the liquidator or the resolution professional under this Code, including proceeds of such property, but does not include a financial debt or operational debt substituted for existing financial debt or operational debt.
(4) A preference shall be deemed to be given at a relevant time, if—
(a) it is given to a related party (other than by reason only of being an employee), during the period of two years preceding the insolvency commencement date; or
(b) a preference is given to a person other than a related party during the period of one year preceding the insolvency commencement date.
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