Objections To Constitution of CoC Cannot Defeat RP's Plea To Reverse Preferential Deals: NCLT Ahmedabad

The National Company Law Tribunal (NCLT) at Ahmedabad has held that objections to the constitution of the Committee of Creditors cannot be used to block a Resolution Professional's application under Section 43 of the Insolvency and Bankruptcy Code seeking to avoid and reverse preferential transactions.

The tribunal said that avoidance proceedings are meant to protect the corporate debtor's estate and “cannot be defeated by unsubstantiated conspiracy theories,” especially when the challenge to the CoC's constitution has already been dismissed.

The tribunal allowed a plea seeking reversal of transactions worth Rs 31.7 lakh executed on the insolvency commencement date, ruling that objections to the CoC's composition cannot defeat avoidance proceedings.

A coram of Judicial Member Shammi Khan and Technical Member Sanjeev Sharma observed, “Jurisdiction to decide a Section 43 application is independent of the constitution of the CoC. Section 43 is a standalone provision for protection of creditors against fraudulent conduct of directors and is not dependent on any act of the CoС.”

Decent Laminates Pvt Ltd entered CIRP on 3 May 2021. In its third meeting on 6 August 2021, the CoC approved the appointment of a transaction auditor, who submitted a detailed report on 23 November 2021 identifying preferential transactions amounting to Rs 31.7 lakh along with an addendum dated December 13, 2021.

The transactions included the transfer of the corporate debtor's office building to proposed purchasers Rohitbhai Sonagara and Dharmisthaben Sonagara, and the transfer of gold coins to an employee, Ashok  Patel, all executed on the insolvency commencement date and purportedly in lieu of payment dues.

After its resolution plan was approved, Rare Asset Reconstruction Ltd continued to prosecute the application filed by the Resolution Professional seeking reversal of these transfers.

The suspended directors and respondents opposed the application, alleging that the CIRP was conducted in collusion with a related party, that the CoC was improperly constituted, that the transaction audit report was vague and unreliable and that the application was barred by Regulation 35A.

They also claimed that the transfers were bona fide dealing and that payments had been made under earlier agreements. Several respondents contended that the auditor had exceeded his remit and that the addendum report was unjustified.

The tribunal rejected these objections and noted that the auditor's findings were based on the corporate debtor's own books and ledgers supplied by the suspended management, whose authenticity had never been disputed.

It found that unsecured respondents had been placed in a more favourable position than they would have been in liquidation.

The tribunal noted, “Both transactions took place on the insolvency commencement date and put the concerned creditors and employee in a better position than they would have been in liquidation under section 53.”

It further noted that these proposed purchasers “were unsecured creditors until registration for consideration of only Rs 30,00,000. In case of liquidation their claim would have ranked below secured creditors and workmen under section 53 of the Code.”

Having found that the transactions met the statutory requirements of a preferential transaction, the tribunal allowed the application and directed reversal of the transfers so that the value is restored to the corporate debtor's estate. 

Case Title: Rare Asset Reconstruction Limited vs Mukundkumar Dayabhai Patel & Ors

Case Number: IA/649(AHM)2023 in CP(IB)/387/2020

For Applicant: Advocates Jaimin Dave, Hirva Dave

For Respondents : Advocate Pratik Thakkar for Respondent No 1 and 3 ; Advocate Pratik Jasani for Respondent 4 & 5

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