Sahara India vs Shri Nandkishor Vishnupant Deshpande ...

NATIONAL COMPANY LAW APPELLATE TRIBUNAL, PRINCIPAL BENCH, NEW DELHI Company Appeal (AT) (Ins)No. 368 of 2021

IN THE MATTER OF:

Sahara India A Registered Firm with The Registrar of Firms, Lucknow having Registration No. - 168582 Sahara India bhawan, 1, Kapoorthala Complex, Aliganj, Lucknow U.P-226 024 ...Appellant

Vs.

1.Shri Nandkishor Vishnupant Despande Resolution Professional of Royal Refinery Pvt. Ltd. Having office at: 708, 7th Floor, Raheja Centre, Nariman Point Mumbai, Maharashtra - 420 021 ...Respondent No.1

2.Royal Refinery Pvt. Ltd. 3-E, Trishla Premises Co-Op Society Ltd., 3rd Floor, 122 Sheikh menon Street, Mumbai, Maharashtra - 400 002 ... Respondent No.2

Present: For Appellant : Mr. Kumar Anurag Singh, Mr. Anando Mukherjee and Mr. Zain A. Khan, Advocates For Respondents : Mr. Kaustav Som, Mr. Arjun Krishnan for R-1&2, Liquidator

Company Appeal (AT) (Ins) No.368 of 2021 Page 1 of 42

DR. ASHOK KUMAR MISHRA, TECHNICAL MEMBER

1. The present appeal has been filed by the Appellant- 'Sahara India' under

Section 61 of the 'Insolvency and Bankruptcy Code, 2016' (in short 'Code')

against the impugned order dated 07th January, 2021 passed by the

'Adjudicating Authority' (National Company Law Tribunal), Mumbai Bench

in I.A No. 991 of 2020 in CP(IB) No. 2556/MB/2019.

2. The Appellant is a registered firm with the Registrar of Firms, Lucknow

having registration number 168582 with its registered office at Sahara

India Bhawan, 1, Kapoorthala Complex, Aliganj, Lucknow. The Appellant

has remitted the principal amount of Rs. 39,95,00,000/- in various

tranches commencing from April, 2018 to February, 2019 in accordance

with the 'Memorandum of Understanding' (MOU) dated 07th March, 2017

with the Corporate Debtor (CD)/Respondent (in CIRP) for supply of future

goods in the form of gold coins/Gold ornaments. The golds were supposed

to be supplied by the CD any time after January, 2019. As per MoU

(appearing at page 67 - Annexure A of the Appeal Paper book) vide para 1

reflects clearly that all such advance payments will not attract any

interest. It is also stated at para 3 of the MOU that both the parties have

agreed to fix the price of Gold coin/Gold ornaments at the prevailing

Company Appeal (AT) (Ins) No.368 of 2021 Page 2 of 42 market rate of the day when Gold coin/Gold Ornaments demanded is

physically delivered to the Buyer as per the location(s) specified by the

Buyer. The Seller also agrees to give 2% discount on the prevailing market

price of Gold and will not charge making charges and delivery charges on

the future demand by the Buyer (after January, 2019) and at the time of

delivery of quantity. The Buyer has a right to assign its obligations and

rights as per this MOU to its nominee(s) without taking prior consent of

the Seller and the Seller shall not cause any hindrance are raise any

objection in the same. The Seller gives at least 30 days' notice showing its

unwillingness to continue the understanding as reached between the

parties and the buyer is ready to give a mutually agreed compensation as

well as refund the excess amount, if any.

3. The Ld. Counsel for the Appellant has submitted that they have informed

the CD vide its letter dated 04th February, 2019 to supply of 10 kg Gold

coins (100 points of 100 gram each) as obligation in accordance with the

MOU. It is also submitted by the Appellant that the CD vide its letter dated

06th February, 2019 has confirmed to supply the same once it is

manufactured which will take about 3 weeks' time due to their pre-

occupied manufacturing job. Since CD did not supply to them so the

Appellant again asked the CD vide its letter dated 28th February, 2019 to

confirm supply as they failed to do so within three weeks. The CD vide its

Company Appeal (AT) (Ins) No.368 of 2021 Page 3 of 42 letter dated 04th March, 2019 again communicated to the Appellant that

they are pre-occupied with earlier job orders and there is a lack of factory

staffs so they communicated to them that it will take 3-4 months' time and

accordingly, the Appellant vide its letter dated 05th March, 2019 asked the

CD to refund the amount as there is too much delay without any hope that

it will come soon and rather as a CD, you are further asking for 3- 4

months' time whereas the Appellant's customer are in dire need. The CD

informed the Appellant vide its letter dated 11th March, 2019 to convert

the advance amount of the Appellant into unsecured loan with 10% p.a.

rate of interest on outstanding amount till full and final payment of the

same are made to them. However, the Appellant accepted the offer after

communicating the notice of default to the CD in between there are other

correspondence also.

4. It is also submitted by the Ld counsel for the appellant that 'Corporate

Insolvency Resolution Process' (CIRP) was initiated against the CD on 13th

November, 2019 by the Adjudicating Authority. As a result of which the

'Resolution Professional' (RP) took over the control of the CD and invited

public notice and claim. Accordingly, the Appellant has submitted its claim

in Form-C. The RP exchanged communication with the Appellant for

reconciliation of amount maintained in the books of the CD and apparently

there were some difference on the interest account. The Appellant in spite

Company Appeal (AT) (Ins) No.368 of 2021 Page 4 of 42 of submitting all the details vide its two emails, the RP still considered the

claims of the Appellant, not in the category of the 'Financial Debt' and as

a result of the Appellant has challenged the decision of the RP before the

Adjudicating Authority vide its I.A No. 991 of 2020 in CP(IB) No.

2556/MB/2019. However, even the Adjudicating Authority vide its

impugned order dated 07th January, 2021 has taken a different a stand

and dismissed the petition of the Appellant by comparing the facts of the

Appellant's case partially with Anuj Jain Case (Anuj jain IRP Vs. Axix bank

Ltd.) 2020 8 SCC 401 and refused to classify the claim of the Appellant

amounting to Rs.42,61,33,333/- as 'Financial Debt'.

5. The Ld. Counsel for the Appellant has submitted that the Adjudicating

Authority has not only rejected the claim of the Appellant but has treated

the same as preferential transaction in term of Section 43(2)(a) of the Code.

Considering that this has been within the two years look back period as

required by the Code.

6. The Ld counsel for the Appellant has also submitted that the transactions

is purely a 'Financial Debt' and the Adjudicating Authority cannot consider

the same as 'preference transaction' without their being an avoidance

application by the RP or the Liquidator under Section 44 of the Code. It

was also submitted by the Appellant that the MOU gets substituted by the

loan agreement and this amounts to novation of the earlier agreement with

Company Appeal (AT) (Ins) No.368 of 2021 Page 5 of 42 an entirely new agreement as per Section 62 of the Indian Contract Act,

1872. The Ld. Counsel for the Appellant also submitted that they are not

in any way related party with the CD. However, they could not confirm

whether this was the first transaction with the CD or there was earlier

transaction also. They have also cited the various judgments as stated

below:

 Prayag Polytech (P) Ltd. Vs. Shivalik Enterprises (P) Ltd

IB 312 (ND) 2019

 Swiss Ribbons (P) Ltd. Vs. Union of India (2019) 4 SCC

17

7. It was also stated by the Ld. Counsel for the Appellant that Section 43 of

the Code relates to transactions pertaining to a transfer of property or a

security interest thereof. However, in the present case, it is not so. They

have further stated as follows:

"ln Anuj Jain (supra) the Hon'ble Supreme Court had

categorically held that for a transaction to fall within the

mischief of Section 43 of the Code, both the twin

requirements of clause (a) and (b) of sub-section 2 coupled

with either clause (a) or (b) of sub - section 4 needs to be

satisfied, the observation of the Hon'ble Supreme Court is

Company Appeal (AT) (Ins) No.368 of 2021 Page 6 of 42 being reproduced below for the convenience and ready

reference of this Tribunal:

" 18.1. 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 has, at

a relevant time, given a preference in such transactions

and in such manner as specified in subsection (2), to any

person/persons as referred to in sub-section (4), he is

required to apply to the Adjudicating Authority for

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(...)"

"19. In order to understand and imbibe the provisions

concerning preference at a relevant time, it is necessary to

notice that as per 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 clause (a) and (b)

of sub-section (2) coupled with the applicable requirements

Company Appeal (AT) (Ins) No.368 of 2021 Page 7 of 42 of either clause (a) or clause (b) of sub-section (4), as the

case may be. are satisfied."

8. The Ld. Counsel for the Appellant has also stated that that Section 44 of

the Code provides that it is the RP or the Liquidator who is supposed to

file an application for initiation of action under Section 43(1) of the Code

and also stated that Transaction to be classified as a 'Preferential

transaction' it is sine qua non that the transaction fulfils the Twin

Condition of Section 43 and that an avoidance Application has been made

to the Adjudicating Authority under Section 43(1) of the Code. The

Appellant in a summarized way further presented that the Operational

debt was converted to financial debt because of the inability of the CD to

supply the goods as required under the MOU, in spite of granting some

leverage to the CD. Hence, at the request of the CD, the advance for supply

of goods get converted into the unsecured loan with specified percentage

of interest and hence prayed to the Tribunal for setting aside the impugned

order dated 07th January, 2021 in IA No. 1991 of 2020 in CP(IB) No.

2556/MB/2019 and to declare all the proceedings carried out in

furtherance of the impugned order as null and void etc.

9. The Adjudicating Authority while passing the impugned order dated 07th

January, 2021 has observed at para 18 to 23 as depicted below:

Company Appeal (AT) (Ins) No.368 of 2021 Page 8 of 42

18. In terms of Section 43 (2) (a) the Corporate Debtor by

virtue of executing a loan agreement dated 15.04.2019 has

converted operational debt into a financial debt, with an

intention to prefer the creditor and to put him in a beneficial

position that he could have been in the event of distribution

of asset in according with section 53 of IBC.

19. This sort of arrangement could not have been done in

its ordinary course of business, an Operational Creditor

who advanced money with an intention of buying gold was

treated as a lender under the Loan Agreement dated

15.04.2019.

20. Looking at the factual matrix and scanning of series of

events which took place between April and November 2019,

DRI seized the assets of Corporate Debtor in May 2019, the

Corporate Debtor was defending Insolvency Petitions

before NCLT, conversion of operational debt to financial

debt, it is clearly established that the corporate debtor has

enhanced/elevated the operational creditor to financial

creditor knowing its inability to repay money and there is

every likelihood of Insolvency and that such loan

Company Appeal (AT) (Ins) No.368 of 2021 Page 9 of 42 agreement will give the Applicant unsecured rights in a

financial debt.

21. It is beneficial to refer to para 20 of the judgement of the

Hon'ble Supreme Court in Anuj Jain's case. Para 20 of the

case is extracted below:

20. The analysis foregoing leads to the position that in order

to find as to whether a transaction, of transfer of property

or an interest thereof of the corporate debtor, falls squarely

within the ambit of Section 43 of the Code, ordinarily, the

following questions shall have to be examined in a given

case:

(i). As to whether such transfer is for the benefit of a creditor

or a surety or a guarantor?

(ii). As to whether such transfer is for or on account of an

antecedent financial debt or operational debt or other

liabilities owed by the corporate debtor?

(iii). As to whether 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 being made in accordance with Section 53?

Company Appeal (AT) (Ins) No.368 of 2021 Page 10 of 42

(iv). If such transfer had been for the benefit of a related

party (other than an employee), as to whether the same

was made during the period of two years preceding the

insolvency commencement date; and if such transfer had

been for the benefit of an unrelated party, as to whether the

same was made during the period of one year preceding

the insolvency commencement date?

(v) As to whether such transfer is not an excluded

transaction in terms of Sub-section (3) of Section 43?

22.In view of the ratio laid down in Anuj Jain's case and

looking at the facts of the present case that the CIRP

against the Corporate Debtor commenced on 13.11.2019,

the Loan Agreement dated 15.04.2019 executed by the

Corporate Debtor, substituting the earlier MOU dated

07.03.2017 between the same parties, was created, seven

months prior to CIRP, it is concluded that this arrangement

is a preferential transaction in terms of Sec 43 (2)(a) of Code

and is well within the two years look back period as

prescribed by the code. Therefore, this bench declares that

Resolution Professional has rightly rejected the claim of

Financial Creditor, but has not filed any application under

Company Appeal (AT) (Ins) No.368 of 2021 Page 11 of 42 sec.43 for avoidance of transaction, this bench has Suo

Moto considered the facts and gravity of the transaction to

the extent of conversion of Operational Debt to financial

debt for the benefit of the operational creditor and thus

treated the transaction dated 15.04.2019 to be a

preferential transaction.

23. Hence the Bench doth orders as follows:

• In the light of aforesaid findings, the Application is

dismissed."

10. The Ld. Counsel for the Respondents have submitted that the

Appeal is infructuous in view of the Liquidation order dated 16th April,

2021 passed by the Adjudicating Authority in IA No. 59/2021 in CP(IB)

No. 2556/MB/2019. It was submitted by the Ld. Counsel for the

Respondents that the Liquidation order is not under challenge and

continues to remain in effect. It was further submitted by the Ld. Counsel

for the Respondent that once the CD liquidation order continues to be in

effect, the present appeal is infructuous and that the questions and issues

raised in the appeal have presently become entirely academic and is of no

legal consequence and no useful purpose will be served in the adjudication

of this appeal. The Respondent has also submitted that the Liquidator is

a different Insolvency Professional and not the Respondent No.1 as

Company Appeal (AT) (Ins) No.368 of 2021 Page 12 of 42 appearing in the appeal. With the passing of the Liquidation order, the RP

is no longer with the CD and hence, the RP is become functus officio. The

other Insolvency Professional Mr. Arihant Nenawati, has become the

Liquidator of the CD. They went on to submit that in accordance with the

Regulation 12 of the IBBI (liquidation process) Regulation, the Liquidator

has issued a public announcement dated 27.04.2021 calling for claims

from stakeholder of the CD within 22nd May, 2021. However, as learnt by

the Appellant that the Appellant has not filed its proof of claim before the

Liquidator. Hence, present appeal is infructuous on the face of it. As far

as the issue on merits are concerned, that the nature of claim has made

by the Appellant vide its proof of claims submitted on 03.03.2020 cannot

be categorized in any way as financial debt under Section 5(8) of the Code.

The amount entered into through MOU was subsequently mentioned for

supply against the provisions of goods and not is a Financial debt per se.

They categorically stated that in MOU, it is an advanced payment towards

further supply of gold coins and jewelry and the same is to supply after

January, 2019. Hence, the disbursement of amount was not against the

consideration of time value of money as required under Section 5(8) of the

Code and was at best and advance payment for supply of goods and hence,

it is an operational debt as per section 5(21) of the Code. They have also

Company Appeal (AT) (Ins) No.368 of 2021 Page 13 of 42 cited the Judgment of Hon'ble Apex Court - Swiss Ribbons (P) Ltd. Vs.

Union of India, (2019) 4 SCC 17, which held as follows:

"42. A perusal of the definition of ―financial creditor‖ and

―financial debt‖ makes it clear that a financial debt is a debt

together with interest, if any, which is disbursed against the

consideration for time value of money. It may further be

money that is borrowed or raised in any of the manners

prescribed in Section 5(8) or otherwise, as Section 5(8) is an

inclusive definition. On the other hand, an ―operational

debt‖ would include a claim in respect of the provision of

goods or services, including employment, or a debt in respect

of payment of dues arising under any law and payable to

the Government or any local authority.

....51. According to us, it is clear that most financial

creditors, particularly banks and financial institutions, are

secured creditors whereas most operational creditors are

unsecured, payments for goods and services as well as

payments to workers not being secured by mortgaged

documents and the like. The distinction between secured

and unsecured creditors is a distinction which has obtained

since the earliest of the Companies Acts both in the United

Company Appeal (AT) (Ins) No.368 of 2021 Page 14 of 42 Kingdom and in this country. Apart from the above, the

nature of loan agreements with financial creditors is

different from contracts with operational creditors for

supplying goods and services. Financial creditors generally

lend finance on a term loan or for working capital that

enables the corporate debtor to either set up and/or operate

its business. On the other hand, contracts with operational

creditors are relatable to supply of goods and services in the

operation of business.

Financial contracts generally involve large sums of money.

By way of contrast, operational contracts have dues whose

quantum is generally less. In the running of a business,

operational creditors can be many as opposed to financial

creditors, who lend finance for the set up or working of

business. Also, financial creditors have specified repayment

schedules, and defaults entitle financial creditors to recall a

loan in totality. Contracts with operational creditors do not

have any such stipulations. Also, the forum in which dispute

resolution takes place is completely different. Contracts with

operational creditors can and do have arbitration clauses

where dispute resolution is done privately.

Company Appeal (AT) (Ins) No.368 of 2021 Page 15 of 42 Operational debts also tend to be recurring in nature and the

possibility of genuine disputes in case of operational debts

is much higher when compared to financial debts. A simple

example will suffice. Goods that are supplied may be

substandard. Services that are provided may be

substandard. Goods may not have been supplied at all. All

these qua operational debts are matters to be proved in

arbitration or in the courts of law. On the other hand,

financial debts made to banks and financial institutions are

well-documented and defaults made are easily verifiable.

51.Most importantly, financial creditors are, from the very

beginning, involved with assessing the viability of the

corporate debtor. They can, and therefore do, engage in

restructuring of the loan as well as reorganization of the

corporate debtor's business when there is financial stress,

which are things operational creditors do not and cannot do.

Thus, preserving the corporate debtor as a going concern,

while ensuring maximum recovery for all creditors being the

objective of the Code, financial creditors are clearly different

from operational creditors and therefore, there is obviously

Company Appeal (AT) (Ins) No.368 of 2021 Page 16 of 42 an intelligible differentia between the two which has a direct

relation to the objects sought to be achieved by the Code."

11. It was also submitted by the Ld. Counsel for the Respondents that

Section 5(8) of the Code does not qualify financial debt resulting from

conversion of operational debt into a financial debt at a later date and that

too has been done within a very short period of commencement of CIRP

process. It was also stated that the loan agreement dated 15.04.2019

between the Appellant and the CD allows for any conversion of the

purportedly disbursement amount to financial debt from any other

category of debt under the Code, the same is void for contravening the

provisions of the Code. In this regard, it is submitted that in light of the

overriding provision in Section 238 of the Code and the judgment of the

Hon'ble Supreme Court in Gujarat Urja Vikas Nigam Limited Vs. Amit

Gupta, 2021 SCC Online SC 194, para 87, it is no longer res integra that

provisions of the Code can override a bilateral commercial contract with

the CD, such as the Loan agreement. It is also stated that the terms of the

Loan Agreement that there was no certain schedule for repayment of the

purported loan amount. Clause 3, 4 & 5 of the loan agreement:

"3. Interest and Due Date

3.1 - The said loan shall carry an interest @10% p.a. and

any reset in the rate of interest shall be effective from the

Company Appeal (AT) (Ins) No.368 of 2021 Page 17 of 42 subsequent quarter upon mutual agreement of the lender

and the borrower.

3.2. - The due date for payment of interest shall be within

seven days from the close of Financial year on March 31,

every year. The final interest against the loan shall be

payable on the date of maturity of the loan.

4.Tenure of loan

The loan shall be for a period of 5 years. The repayment

period for the loan shall be commencing from 1.04.2019

and first installment of interest shall be payable on

31.03.2020.

5.Repayment

The entire amount of said loan is repayable in the fifth

year, however, the repayment can be made earlier by the

borrower. The borrower shall be entitled to prepay the

loan any time to the Lender without any prepayment

charges with prior notice of 15 days in advance."

The above terms of the purported Loan Agreement clearly

shows that only the schedule for payment of installments of

the interest amount was agreed, and that the Loan

Agreement did not provide for a clear repayment schedule of

Company Appeal (AT) (Ins) No.368 of 2021 Page 18 of 42 the purported principal amount. There was no specification

of the installment amount. Further, the Loan Agreement also

did not provide for the consequences of any default on the

part of the CD.

12. It is also stated by the Ld Counsel for the Respondents that the Loan

Agreement was a sham and collusive document to give fraudulent preference

to the Appellant:

a. No legal remedy was undertaken by the Appellant to

recover its operational debt dues or ask for performance

of the MOU, despite such remedy being available in the

form of arbitration. This goes against common business

sense, and the only plausible reason for this was that the

Appellant was aware that the CD was about to go into

insolvency, and both parties colluded to improve the

position of the Appellant in anticipation of insolvency;

b. An extremely long period of 5 years was given for

repayment, with the principal of purported interest

amount. The loan agreement itself was self-contradictory,

in as much as clause 5, which permitted repayment of

entire amount in 5th year was contrary to clauses 3.2 and

4 of the Loan Agreement.

Company Appeal (AT) (Ins) No.368 of 2021 Page 19 of 42

13. It is also submitted by the Respondent that the Appellant has

mischievously suppressed the email dated 06.05.2020, by which the

RP declined to categorize the Appellant as a Financial Creditor. It is

submitted that the email dated 06.05.2020 makes a clear reference

to the decision of the Hon'ble Supreme Court in Anuj jain, IRP Vs.

Axis Bank Ltd, (2020) 8 SCC 401. The said judgment, besides

clarifying the position of law on what constitutes financial debt under

Section 5(8) of the Code also lays down the criteria for what

constitutes by interpreting section 43 of the Act. The Hon'ble

Supreme Court held as under:

"20.5 - At this juncture, we may usefully refer to paragraph 177

of UNCITRAL Legislative Guide on Insolvency Law, as referred to

and relied upon by learned counsel for the respondent as also

paragraphs 178 and 179 thereof, to indicate the basic theory and

principles governing the provisions under consideration. In the

said Guide, while dealing with the topic of treatment of assets on

commencement of insolvency proceedings, it is stated broadly on

the theory of avoidance of preferential transactions as follows:

"(c) Preferential transactions

(i) Criteria

Company Appeal (AT) (Ins) No.368 of 2021 Page 20 of 42

177. Preferential transactions may be subject to avoidance

where:

(a) the transaction took place within the specified suspect

period;

(b) the transaction involved a transfer to a creditor on account

of a pre-existing debt; and (c) as a result of the transaction, the

creditor received a larger percentage of its claim from the

debtor's assets than other creditors of the same rank or class

(in other words, a preference). Many insolvency laws also

require that the debtor was insolvent or close to insolvent when

the transaction took place and some further require that the

debtor have an intention to create a preference. The rationale

for including these types of transaction within the scope of

avoidance provisions is that, when they occur very close to the

commencement of proceedings, a state of insolvency is likely

to exist and they breach the key objective of equitable

treatment of similarly situated creditors by giving one member

of a class more than they would otherwise legally be entitled

to receive.

Company Appeal (AT) (Ins) No.368 of 2021 Page 21 of 42

14. It is also stated by the Ld Counsel for the Respondent that the

letter dated 06.05.2020 made a clear reference to the purported loan

transaction being vitiated for giving a preference to the Appellant, in

terms of the judgment of the Hon'ble Supreme Court in Ajun jain

(supra). Accordingly, the Appellant could not be treated as 'Financial

Creditor'. The contention of the Appellant that the Adjudicating

Authority could not suo motu hold the transaction to be preferential

because this was not one of the reasons given by the RP/Respondent

No.1 is clearly erroneous and devoid of merit. It is to be noted show

cause notice was issued by the Department of Revenue Intelligence

under Section 124 of the Custom Act, 1962 dated 21.11.2019 (ref no.

F. No.DRI/MZU/D/INT95/2019/7687) to the CD and several other

persons. Subsequently, based on the said DRI show cause notice, an

order dated 04.02.2021 was also issued by the Joint Commissioner,

Customs, Ahmedabad in File No. FNo.VII/10-94/RRPL/O&A/2019-

20, by way of which orders of confiscation of seized articles and

penalty have been imposed inter alia on the CD. The CD was a 'front

company' run by one Mr. Manoj Kumar Babulal Punamiya to obtain

duty free gold/silver under the Advance Authorization Scheme,

pursuant to authorizations granted in favour of the CD. The

suspended directors of the CD were recruited by Mr. Punamiya and

Company Appeal (AT) (Ins) No.368 of 2021 Page 22 of 42 were working on the directions of Mr. Punamiya to import duty-free

gold bars and unlawfully divert the same to domestic market. On May

2019 the office premises of the CD were subjected to raids by the

DRI. Search and seizure was conducted by the DRI at 14 locations

related to the CD and no stock of Gold Bullion Bars or Silver bars

were found in the locations. It is also stated by the Respondent that

several irregularities in the financial statements of the CD over three

financial years since 2016, including drastic increase in creditors

and receivables, while sales level was mostly stagnant for the CD.

The CD has also found that a significant volume of the CD's stock in

gold bars had been sold off to a few number of entities immediately

prior to the raid conducted by the DRI (i.e. 01.05.2019 to

20.05.2019). The CD has had a history of indulging in 'bogus

donations' in previous years, as had been confessed by an erstwhile

director of the CD during the course of proceedings before the

Assistant Commissioner of Income Tax, Circle - 5(3)(2), Mumbai, vide

order dated 23.12.2016.

15. We have carefully gone through the submissions made by the Ld

counsel for the parties and the documents available on records and laid

down provisions of the I & B Code, 2016 and we are having the following

observations: -

Company Appeal (AT) (Ins) No.368 of 2021 Page 23 of 42 a. It is undisputed fact that money has been received by the

'Corporate Debtor' in different tranches. The object of all these

payments are to meet the requirement of 'Memorandum of

Understanding' (appearing at page 67 of the appeal paper book) to

consider it as advance payment towards future supply of gold

coin/Jewelry against the estimated quantity as indicated by the

buyer to take place after January, 2019.

b. It is also very much clear that at this time the advance payment

was not attracting any interest.

c. It is also not in dispute that at the time of 'origination of

transactions' from April 2018 to February, 2019, it was in the

nature of purely of operational debt and meeting all the criteria of

operational debt as enunciated in Section 5(21) of the Act. For

brevity and clarity, the same is depicted below:

"Section 5 (21) - "operational debt" means a claim in

respect of the provision of goods or services including

employment or a debt in respect of the 5 [payment] of

dues arising under any law for the time being in force

and payable to the Central Government, any State

Government or any local authority"

Company Appeal (AT) (Ins) No.368 of 2021 Page 24 of 42 d. The 'Resolution Professional has also not disputed the receipt of

the amount received from the Appellant. What is the grey area that

converting the operational debt into financial debt resulting from

inability of the Corporate Debtor/Respondent to supply the gold as

requested by the Appellant on 04th February, 2019 and in the

month of March, 2019 the Corporate debtor has requested for

getting the operational debt/advance payment converted into loan,

it was accepted by the appellant in March, 2019 and the CIRP

initiated on 13th November, 2019. The CIRP process was started

on the Petition of Raksha Bullion, Mumbai against the CD by the

Adjudicating Authority on the ground that CD committed a default

of Rs. 4.90 Crore under Section 9 of the Code and that CD was

having regular business for buying and selling gold bar. The case

of the present appellant is that they have paid the advance against

the MOU entered into in March, 2017 and advanced payment

commenced from 01.04.2018 and ended on 15.02.2019.

e. During the submission of the Ld counsels for both the parties that

none of them stated that the Appellant and the CD are related

party. If they are not related party, then lookout period is a period

of one year. If that be the case that in November, 2019 CIRP

commenced, so the payment released from 01.04.2018 to

Company Appeal (AT) (Ins) No.368 of 2021 Page 25 of 42 30.06.2018, in any way will not get covered under Section 43 of

the Code and hence as per details furnished at page 121 of the

Appeal paper book out of 39.95 crore two payments will only get

covered even remotely is the payment of 13.02.2019 i.e. Rs. 2.5

Crore and 15.02.2019 i.e. 2.04 crore only can be treated as

preferential payment and not the balance payment out of 39.95

crore. For brevity and clarity, the provisions of Section 43 & 44 of

the Code are reproduced below:

"Section 43: Preferential transactions and relevant

time

43. (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--

Company Appeal (AT) (Ins) No.368 of 2021 Page 26 of 42

(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

Company Appeal (AT) (Ins) No.368 of 2021 Page 27 of 42 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--

Company Appeal (AT) (Ins) No.368 of 2021 Page 28 of 42

(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."

Section 44: Orders in case of preferential

transactions.

"The Adjudicating Authority, may, on an application made

by the resolution professional or liquidator under sub-

section (1) of section 43, by an order:

(a) require any property transferred in connection with the

giving of the preference to be vested in the corporate

debtor;

(b) require any property to be so vested if it represents the

application either of the proceeds of sale of property so

transferred or of money so transferred;

(c) release or discharge (in whole or in part) of any security

interest created by the corporate debtor;

(d) require any person to pay such sums in respect of

benefits received by him from the corporate debtor, such

Company Appeal (AT) (Ins) No.368 of 2021 Page 29 of 42 sums to the liquidator or the resolution professional, as the

Adjudicating Authority may direct;

(e) direct any guarantor, whose financial debts or

operational debts owed to any person were released or

discharged (in whole or in part) by the giving of the

preference, to be under such new or revived financial debts

or operational debts to that person as the Adjudicating

Authority deems appropriate;

(f) direct for providing security or charge on any property

for the discharge of any financial debt or operational debt

under the order, and such security or charge to have the

same priority as a security or charge released or

discharged wholly or in part by the giving of the

preference; and

(g) direct for providing the extent to which any person

whose property is so vested in the corporate debtor, or on

whom financial debts or operational debts are imposed by

the order, are to be proved in the liquidation or the

corporate insolvency resolution process for financial debts

or operational debts which arose from, or were released or

Company Appeal (AT) (Ins) No.368 of 2021 Page 30 of 42 discharged wholly or in part by the giving of the

preference:

Provided that an order under this section shall not--

(a) affect any interest in property which was acquired from

a person other than the corporate debtor or any interest

derived from such interest and was acquired in good faith

and for value;

(b) require a person, who received a benefit from the

preferential transaction in good faith and for value to pay

a sum to the liquidator or the resolution professional.

Explanation I.--For the purpose of this section, it is

clarified that where a person, who has acquired an interest

in property from another person other than the corporate

debtor, or who has received a benefit from the preference

or such another person to whom the corporate debtor gave

the preference,--

(i) had sufficient information of the initiation or

commencement of insolvency resolution process of the

corporate debtor;

(ii) (ii) is a related party,

Company Appeal (AT) (Ins) No.368 of 2021 Page 31 of 42 it shall be presumed that the interest was acquired or the

benefit was received otherwise than in good faith unless

the contrary is shown.

Explanation II.--A person shall be deemed to have

sufficient information or opportunity to avail such

information if a public announcement regarding the

corporate insolvency resolution process has been made

under section 13."

It is abundantly clear from the above provision of the

Code that transfer made in the ordinary course of business

or financial affairs of the Corporate Debtor shall not be

covered under preferential transaction. Hence, this issue

goes in favour of the Appellant.

f. While hearing the Ld counsels for both the parties that they have

cited the catena of the Judgments to supplement their stands and

in some of the judgments, both have cited the same judgment.

However, for brevity and clarity some of the judgments are

analyzed below:

 Swiss Ribbons (p) Ltd Vs. Union of India (2019) 4 SCC 17

It is true that that para 37 to 51 of the above judgment held

that Financial creditors are from the very beginning involved

Company Appeal (AT) (Ins) No.368 of 2021 Page 32 of 42 with the assessment of viability of CD and engaged in

restructuring of loan as well as reorganization of CD

business when there is a financial stress. While Operational

creditors do not and cannot do.

 Pioneer Urban Land and Infrastructure Ltd. Vs. Union of

India (2019 8 SCC 416.

This is not applicable to the present appeal as it relates to

Real Estate developers where the stand of home

buyers/allottes are on a different footing.

 Phoenix A.R.C Vs. Spade Financial Services, (2021) 3 SCC

475

This is also not applicable to the present case as it relates to

Financial creditors that are the related party.  Manish Trivedi Vs. State of Rajasthan, (2014) 14 SCC 420

This case relates to Prevention of Corruption Act, 1988, the

facts of these two cases are totally different. Hence, it can

not also be applied to the present case.

 Voltas Ltd Vs. Union of India (1995) Supp (2) SCC 498

This case is also related to MRTP Act and the facts of two

cases are totally different

Company Appeal (AT) (Ins) No.368 of 2021 Page 33 of 42  Grindlays Bank Ltd Vs. Central Govt. Industrial Tribunal,

1980 Supp SCC 420.

This case is related to labour laws and does not seem to have

relationship with the facts of the present case. Hence, it

cannot be considered.

g. Similarly, the Appellant has also cited the judgement (appearing at page

27 of the appeal paper book) is given below:

 Pragyag Polytech Pvt. Ltd. Vs. Shivalik Enterprises Pvt. Ltd., IB

312/(ND)/2019, NCLT, New Delhi Bench.

This case is also not applicable in the present appeal.

h. Now let us consider the case - Anuj Jain, IRP Vs. Axis Bank Ltd., (2020)

8 SCC 401;

This judgment has been cited by both the parties and the Adjudicating

Authority. So, it is prudent to deal with this case.

"Para 28.6.1- Thus, the enquiry now boils down to the

question as to whether the impugned transfers were made

in the ordinary course of business or financial affairs of the

corporate debtor JIL. It remains trite that an activity could

be regarded as 'business' if there is a course of dealings,

which are either actually continued or contemplated to be

continued with a profit motive. As regards the meaning

Company Appeal (AT) (Ins) No.368 of 2021 Page 34 of 42 and essence of the expression 'ordinary course of

business', reference made by the appellants to the

decision of the High Court of Australia in Downs

Distributing Co (supra), could be usefully recounted as

under:-

"As was pointed out in Burns v. McFarlane the issues in

sub-s. 2(b) of s. 95 of the Bankruptcy Act 1924-1933 are

"(1) good faith; (2) valuable consideration; and (3) ordinary

course of business." This last expression it was said "does

not require an investigation of the course pursued in any

particular trade or vocation and it does not refer to what is

normal or usual in the business of the debtor or that of the

creditor." It is an additional requirement and is cumulative

upon good faith and valuable consideration. It is, therefore,

not so much a question of fairness and absence of

symptoms of bankruptcy as of the everyday usual or

normal character of the transaction. The provision does not

require that the transaction shall be in the course of any

particular trade, vocation or business. It speaks of the

course of business in general. But it does suppose that

according to the ordinary and common flow of transactions

Company Appeal (AT) (Ins) No.368 of 2021 Page 35 of 42 in affairs of business there is a course, an ordinary course.

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." (emphasis supplied)

25.6.2. Taking up the transactions in question, we are

clearly of the view that even when furnishing a security

may be one of normal business practices, it would become

a part of 'ordinary course of business' of a particular

corporate entity only if it falls in place as part of 'the

undistinguished common flow of business done'; and is

not arising out of 'any special or particular situation'"

28.6.2 - Taking up the transactions in question, we are

clearly of the view that even when furnishing a security

may be one of normal business practices, it would become

a part of 'ordinary course of business' of a particular

corporate entity only if it falls in place as part of 'the

undistinguished common flow of business done'; and is

not arising out of 'any special or particular situation', as

rightly expressed in Downs Distributing Co (supra).

Company Appeal (AT) (Ins) No.368 of 2021 Page 36 of 42 Though we may assume 43 vide State of Andhra Pradesh

v. H. Abdul Bakshi and Bros.: 1964 STC 644 (at p.

647). that the transactions in question were entered in the

ordinary course of business of bankers and financial

institutions like the present respondents but on the given

set of facts, we have not an iota of doubt that the impugned

transactions do not fall within the ordinary course of

business of the corporate debtor JIL. As noticed, the

corporate debtor has been promoted as a special purpose

vehicle by JAL for construction and operation of Yamuna

Expressway and for development of the parcels of land

along with the expressway for residential, commercial and

other use. It is difficult to even surmise that the business

of JIL, of ensuring execution of the works assigned to its

holding company and for execution of housing/building

projects, in its ordinary course, had inflated itself to the

extent of routinely mortgaging its assets and/or

inventories to secure the debts of its holding company. It

had also not been the ordinary course of financial affairs

of JIL that it would create encumbrances over its properties

to secure the debts of its holding company. In other words,

Company Appeal (AT) (Ins) No.368 of 2021 Page 37 of 42 we are clearly of the view that the ordinary course of

business or financial affairs of the corporate debtor JIL

cannot be taken to be that of providing mortgages to secure

the loans and facilities obtained by its holding company;

and that too at the cost of its own financial health. As

noticed, JIL was already reeling under debts with its

accounts with some of the lenders having been declared

NPA; and it was also under heavy pressure to honour its

commitment to the home buyers. In the given

circumstances, we have no hesitation in concluding that

the transfers in questions were not made in ordinary

course of business or financial affairs of the corporate

debtor JIL."

The above para clearly reflects that it must be identified

first whether it is ordinary course of business or

otherwise.

i. Now in the present case, it is very much clear that the MOU which was

entered into long back in the year 2017 was meant for supply of goods

in the form of gold coins/gold ornaments and order of initiation of CIRP

in Raksha Bullion, Mumbai reflects that the CD was in regular

business of buying and selling gold bar. So, the MOU apparently does

Company Appeal (AT) (Ins) No.368 of 2021 Page 38 of 42 not look under the grey area when it is also not proved that they are

the related party. If they are not related party, then naturally the

transactions falling within a period of one year can only be covered

under even in the best scenario as preferential transactions. So, the

entire amount cannot be put under preferential transaction.

j. The Adjudicating Authority in its impugned order has exceeded its

jurisdiction while recording the finding to the effect that the Appellant

herein is a related party which is beyond scope of the petition filed in

the Tribunal. The Resolution Professional has not filed any application

for the preferential transaction as required under Section 43(1) of the

Code. Hence, apparently while going through the petition and hearing

of Ld. Counsels for both the parties, it is very much clear that the

Adjudicating Authority on its own has recorded it a related party which

is beyond the provisions contend in the Code either explicitly or

implicitly.

k. Reference may be invited to the Hon'ble Apex Court Judgment in a

Central Excise matter of Godrej Industries Limited and Anr. Vs.

Commissioner of Central Excise Mumbai and Anr. (2008) 17 SCC 471

held at para3 & 5

"Para 3- The Tribunal in its impugned order has exceeded

its jurisdiction by recorded finding to the effect that Godrej

Company Appeal (AT) (Ins) No.368 of 2021 Page 39 of 42 Soap Ltd is a related person vis a vis Procter & Gamble

Godrej Ltd which is beyond the scope of the show-cause

notice. We ourselves have gone through the show cause

notice and we are satisfied that the finding recorded by

the Tribunal insofar as it relates to a related person is

beyond the scope of show cause notice and therefore, the

same cannot be sustained and is accordingly set aside.

Para 5-In view of the same, the order of the Tribunal on

other issues are also set aside and the Tribunal is

directed to decide afresh on three issues, in accordance

with law, namely, (a) advertisement charges incurred by

PGG; (b) amounts paid under the non-competition

agreement; and (c) amounts paid by PGG to Godrej &

Boyce for the trademarks can be loaded on to the

assessable value."

l. In the case of Reserve Bank of India Vs. Jindal Steel and Power Limited

2021 SCC Online DEL 1356 the Hon'ble Delhi High Court has referred

the Learned Single Judge order in case of Mahender Singh Gill Vs.

Chief Election Commissioner; (1978) 1 SCC 405 that:

"8. When a statutory functionary makes an order

based on certain grounds, its validity must be judged

Company Appeal (AT) (Ins) No.368 of 2021 Page 40 of 42 by the reasons so mentioned and cannot be

supplemented by fresh reasons in the shape of

affidavit or otherwise. Otherwise, an order bad in the

beginning may, by the time it comes to court on

account of a challenge, get validated by additional

grounds later brought out..."

It reflects that the Resolution Professional, a statutory functionary,

has not filed an application for initiation of proceedings under Section

43 of the Code in respect of preferential transactions and the

Adjudicating Authority has passed the order, then it is supplementing

it by fresh reason in through affidavit or otherwise. This is also not

acceptable in the case of the Code.

m. In these facts and circumstances of the case as observed above let the

'Adjudicating Authority' again go back into the details of these

transactions which can be done even in the liquidation proceedings

which has commenced from April 2021 and yet to be completed to

ascertain and finally determine the voracity whether it is still a

preferential transaction or not.

n. With these observations, it is prudent to set aside the impugned order

dated 07.01.2021 in I.A No. 991 of 2020 in CP(IB) No. 2556/MB/2019

and remand back the matter to the 'Adjudicating Authority' for

Company Appeal (AT) (Ins) No.368 of 2021 Page 41 of 42 reconsidering the case as a fresh case without getting influenced by

any comments made in this Judgment and deciding the matter on the

merits in accordance with law.

Pending application, if any, stands disposed of.

Interim order, if any, passed by this Tribunal stands disposed of.

No order as to costs.

[Justice M.Venugopal] Member (Judicial)

(Dr. Ashok Kumar Mishra) Member(Technical)

09th May, 2022 New Delhi

Raushan.K

Company Appeal (AT) (Ins) No.368 of 2021 Page 42 of 42