Extension of the look-back period beyond 2 years for transactions with related parties. 43 not authorized

Sidharth Bharatbhushan Jain v State Bank of India (NCLAT Delhi)

NCLAT Delhi has held that extension of look-back period beyond 2 years for related party transactions under Section 43 of the Insolvency and Bankruptcy Code is not permitted.

Facts-This appeal is directed against an impugned order dated 09.11.2023 by which an application was filed by us. 43 of the Code has been authorized by the NCLT. The appellant contends that the debtor company had supplied certain goods to M/s Pratap Associates, a HUF company of appellant no.3 herein and therefore a related party. These goods were supplied before 23.05.2018 and the amount outstanding against Pratap Associates as on 23.05.2018 was Rs.7,78,31,555/-. M/s Pratap Associates (HUF) could not pay this outstanding amount to the debtor company. .

The 8^th In September 2021, M/s Sysco Industries Ltd, the debtor company, entered the CIRP and thus returns to the period u/s. 43 of the Code started wef 8^th September 2019.

Conclusion- It was held that the outstanding amount dated back more than 2 years before the date of entry into force of the CIRP, the relief provided for in Article 43 of the Code would not be available. In these circumstances, we set aside the impugned order passed by Ld. NCLT, with aforesaid freedom.

FULL TEXT OF NCLAT JUDGMENT/ORDER

This appeal relates to an impugned order dated 09.11.2023 whereby an application filed under Section 43 of the Code was allowed by the Ld. NCLT. Learned counsel for the appellant submits that the debtor company had supplied certain goods to M/s Pratap Associates, a HUF company of the appellant no.3 herein and therefore a related party. These goods were supplied before 23.05.2018 and the amount outstanding against Pratap Associates as on 23.05.2018 was Rs.7,78,31,555/-. M/s Pratap Associates (HUF) could not pay this outstanding amount to the debtor company. .

2. The 8th^th In September 2021, M/s Sysco Industries Ltd, the debtor company, entered the CIRP and hence the look-back period under Section 43 of the Code began on July 8.^h September 2019.

3. Admittedly, the application under Section 43 of the Code was filed by minute of 4^th COC meeting dated 14.12.2021 in which item no. 7 of the agenda reads as follows: –

Agenda 7: File an application under Article 43 and Article 65 separately.

RP informed COC members that there is currently a procedure to file the application under Article 43 and Article 65 separately. It is also necessary to increase the search period, because the company had not been in operation since 2079, more than 2 years before the start date of the CIRP. After detailed discussion, it was decided and the COC approved to file the application under Sections 43 and 66 of the IBC. Finally, it was decided to add a prayer in the extension request. in a research period of 5 years than only 2 years. COC also accepted the attorney’s fees.

4. The following prayers have been made in the petition filed under Section 43 of the Code:

a) That this honorable adjudicating authority may be pleased to allow an extension of the period specified in section 46 for a period of 5 years since the financial data is only available up to the financial year ending March 2019 , in the interest of justice;

b) That this honorable adjudicating authority may be pleased to pass appropriate orders or directions under Section 43 of the Code against the respondents to contribute towards an amount of Rs.7,78,31,555/- being unpaid towards any party bound, in the interest of justice.

5. Now Section 43 of the Code reads:-

(4) A preference will be considered to have been granted at a relevant time if:

(a) it is given to a related party (other than by reason of being an employee) during the two-year period preceding the date of commencement of insolvency; Or

(b) a preference is given to a person other than a related party during the period of one year preceding the date of commencement of the insolvency.

6. The Lord. The NCLT, in pursuance of this application under Section 43 of the Code, had passed the following impugned order:-

17. This article refers to property which has a very broad meaning and which, in our view, includes property. The respondent admitted that the goods were supplied by the DC and the outstanding amount of Rs. 7.78 crores are not dishonored. The respondents have not denied that M/s Pratap Associates is its HUF which is a related party.

18. It is common that before the onset of insolvency, the assets of the debtor company are repeatedly confiscated by management. Suspended management hides RP data during the CIRP process. In the present case also, an application under Section 19(2) has been filed by the RP.

19. The present case clearly falls within the ambit of Section 43 of the Code as the transactions with Pratap Associates are concerned. As such, we do not hesitate to consider that the transactions are subject to the provisions of article 43 of the Code.

20. In view of the above observations, prayers (a) and (b) are permitted. R-1 to R-3 are directed to deposit the said amount of Rs. 7.78 Crores within 15 days from the date of order with the debtor company who in turn should distribute the same immediately to the former members of the COC in their respective roles.

21. Regarding the transactions with the 3 debtors, these are transactions in the ordinary course of business of the Debtor company and as the debtors have not been made a party before us and without hearing them, no order can be passed and for the reasons stated above, we are of the view that section 43 does not apply to the respondents in the affair. Accordingly, prayer (c) is refused.

7. According to the appellant’s counsel, such applications should not have been allowed as there cannot be any extension of the look-back period beyond two years as contemplated in sub-section (4) of the section 43 of the Code. Heard.

8. In Anuj Jain, Interim Resolution Professional for Jaypee Infratech Ltd v Axis Bank Ltd and Others, (2020) 8 Supreme Court Cases 491the honorable Supreme Court held as follows:-

21.2 However, it is not enough to simply grant preference and put the beneficiary in a better position. For a preference to become offensive in order to Article 43 of the Code, another essential and rather primordial requirement is to be satisfied that such an event, preferably, should have occurred within and during the specified time period, called “relevant time”. The relevant time is calculated, in accordance with paragraph (4) of Article 43 of the Code, in two ways: (A) if preference is given to a related party (other than an employee), the relevant period is a period of two years preceding the date of commencement of insolvency; And (b) if preference is given to a person other than a related party, the relevant period is a period of one year preceding that start date. In other words, for a transaction to fall within the harm sought by Items 43 And 44 of the Code, it must be a preferential regime meeting the requirements of the sub- article (2) of article 43; And the preference should have been given at a relevant time, as specified in paragraph (4) of Section 43.

26. Even where all the requirements of subsection (2) of Article 43 of the Code are satisfied, in order to fall within the scope of the damage that we seek to repair by Article 43, the disputed preference should have been granted at a relevant time. In other words, for a preference to become avoidable, it should have been granted within the time period specified in subsection (4) of Section 43. The scope of the “relevant period” is different with regard to the relationship of the beneficiary with the debtor company insofar as, for persons falling within the expression “related party” within the meaning of Article 5 (24) of the Code, this period is two years before the start date of the insolvency while it is one year with regard to the person other than a related party. The conceptions and justification of these provisions can be noticed in the extracts from the Interim Report of the Law Reforms Committee, cited on behalf of the appellants. We can usefully extract the same as below:-

9. Thus, for the reasons mentioned above, the outstanding amount dates back more than two years before the date of entry into force of the CIRP, the relief provided for in article 43 of the Code would not be available. The defendant will, however, be free to take alternative measures, as permitted by law (including Article 66 of the Code).

10. In these circumstances, we set aside the impugned order passed by Ld. NCLT, with aforesaid freedom.

11. The appeal is resolved in the above terms. Pending applications, if any, are also closed.