Anuj Jain Interim Resolution Professional For Jaypee Infratech Limited Vs. Axis Bank Limited Etc.
Case Citation – 164(IBC)129/2020)
Jaypee Infratech Limited
Anuj Jain (Interim Resolution Professional) For Jaypee Infratech Limited
Axis Bank Limited Etc
Date of Judgement
1. That the impugned transactions had been of transfers for the benefit of JAL, who is a related party of the corporate debtor Jaypee Infratech Limited and is its creditor and surety by virtue of antecedent operational debts. 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 Jaypee Infratech Limited has given a preference in the manner laid down in sub-section (2) of Section 43 of the Code.
2. The transactions in question had been of deemed preference to related party JAL by the corporate debtor Jaypee Infratech Limited during the look-back period of two years and have rightly been held covered within the period stated under Section 43(3) of the Code. The transactions are not of excepted transfers in terms of Section 43(3) of the Code.
ISSUES OF THE CASE
1. One, as to whether the transactions in question deserve to be avoided as being preferential, undervalued and fraudulent, in terms of Sections 43, 45 and 66 of the Code
2. Whether the respondents (lender of JAL) could be recognized as financial creditors of the corporate debtor Jaypee Infratech Limited on the strength of the mortgage created by the corporate debtor, as collateral security of the debt of its holding company JAL.
FACTS OF THE CASE:
Jaiprakash Associates Limited (JAL) is stated to be a public listed company with more than 5 lakh individual shareholders. Jaiprakash Associates Limited (JAL) was awarded the rights for construction of an expressway from Noida to Agra. A concession agreement was entered into with the Yamuna Expressway Industrial Development Authority. Finance was obtained from a consortium of banks against the partial mortgage of land acquired and a pledge of 51% of the shareholding held by JAL.
Jaypee Infratech Limited (JIL) had mortgaged 858 acres of land parcels as collateral to secure debt owed by its holding company – Jaiprakash Associates Limited (JAL) to various lenders (mortgage transactions).
Jaypee Infratech Limited was declared NPA by Life Insurance Corporation of India on 30.09.2015 and by some of its other lenders on 31.03.2016. Then, IDBI Bank Limited instituted a petition under Section 7 of the Code before NCLT, seeking initiation of CIRP against Jaypee Infratech Limited, while alleging that Jaypee Infratech Limited had committed a default to the tune of Rs. 526.11 crores in repayment of its dues.
On 09.08.2017, NCLT passed an order under Section 7 of the Code and appointed an IRP.
The IRP made an application on 06.02.2018, seeking directions that the transactions entered into by the directors and promoters of corporate debtor creating mortgages of 858 acres of immovable property owned by it to secure the debts of Jaiprakash Associates Limited are preferential, undervalued, wrongful, and fraudulent; and hence, the security interest created by corporate debtor, Jaypee Infratech Limited in favour of the lenders of Jaiprakash Associates Limited (JAL) be discharged and such properties be deemed to be vested in corporate debtor.
The NCLT allowed the said application on 16.05.2018 with respect to six of the impugned transactions covering about 758 acres of land. On the appeals filed by lenders of Jaiprakash Associates Limited, NCLAT, by its impugned order dated 01.08.2019, set aside the order passed by NCLT and held that such lenders of Jaiprakash Associates Limited (JAL) were entitled to exercise their rights under the Code.
DECISION BY NATIONAL COMPANY LAW TRIBUNAL (NCLT)
NCLT with respect to section 43 held that, the transactions of creating a security interest by means of mortgage in favour of lenders of JAL, without any consideration or counter guarantee cannot be treated as the transfer in ordinary course of business. The NCLT, stated that the impugned transactions have fulfilled the definition under preferential transactions as defined in section 43(2) (a) of the Code as it is clear that the mortgage of land of Jaypee Infratech Limited in favour of lenders of JAL, amounts to transfer of interest in property of Jaypee Infratech Limited for the benefit of its creditor i.e. JAL and putting it in a beneficial position. Pursuant to which section 45 is also applicable. It is true that the collateral security is common practice in loan transactions. Also it has been stated in the facts of the case that the Corporate Debtor was under liquidity crunch and its accounts were declared NPA by LIC and other creditors. The Corporate Debtor entered into the transaction even without taking prior approval of Joint Lender Forum and mortgaged its unencumbered land in favour of the lenders of the JAL.
It is also clear that these transactions have taken place during the relevant period of 2 years from the date of initiation of Corporate Insolvency Process as provided under section 46(1) (ii) of the Code. The transactions were executed within the look back period of two years before the commencement of Insolvency proceeding and is therefore covered U/s 43(4) (a). Further, transaction cannot be treated is in ordinary course of business or financial affairs of Corporate Debtor and is not excluded U/s 43(3).
Therefore, NCLT had allowed the appeal of the IRP and had also ordered that under Section 48(a) of the Code,the properties mortgaged by way of preferential and undervalued transactions shall from now on be deemed to be vested in the Corporate Debtor.
DECISION BY NATIONAL COMPANY LAW APPELLATE TRIBUNAL (NCLAT)
Preferential Transaction (Section 43 of the Insolvency & Bankruptcy Code)
The Hon’ble National Company Law Appellate Tribunal stated, that the ‘Corporate Debtor’ has created interest on the property of the Corporate Debtor but not in favour of any 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 as stated under Section 43 (2) (a) of the Insolvency and Bankruptcy Code. Therefore the interest on the property of the Corporate Debtor has been created in regard to financial debt given by the Appellants to Jaiprakash Associates Ltd and not the corporate debtor or the appellants.
Therefore, NCLAT held that Section 43(2)(a) is not applicable in any of the case of the Appellants Bank, thereby any of the Appellants Bank does not come in the ambit of the meaning of ‘deemed to have given a preference’, as used in Section 43. Therefore, the mortgage(s) created in their favour cannot be annulled on the ground of preferential transaction in terms of Section 43 (2) (a) of the Code.
That Section 43(2) (b) of the Code relates to transfer under Section 43(2) (a), which puts the 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. As Section 43(2) (a)is not applicable, therefore the question of applicability of Section 43(2)(b) does not arise.
Under Section 43(3) (a) states “a preference shall not include the transfer made in the ordinary course of the business or financial affairs of the Corporate Debtor or the transferee”. The mortgages in question which were made in favour of the Appellants-Banks and Financial Institutions have been made in ordinary course of business and financial affairs of the transferee, as apparent from the relevant facts. Therefore, Section 43 is not attracted to any of the transaction/mortgage(s) made in favour of the Appellants.
Undervalued Transaction (Section 45 of the Insolvency & Bankruptcy Code)
Under Section 45(2), the transaction shall be considered “undervalued”, where the Corporate Debtor makes a gift to a person or enters into a transaction with a person which involves the transfer of one or more assets by the Corporate Debtor for a consideration the value of which is significantly less than the value of the consideration provided by the Corporate Debtor and such transaction has not taken place in the ordinary course of business of the Corporate Debtor”.
In the present case the transactions have been made in the form of mortgage in favour of the Appellants as and when made against the amount payable by Jaiprakash Associates Limited (borrower), the amount is not payable by the Corporate Debtor. Therefore, Section 45(2) is not applicable. Also, Section 43(2) (b) & Section 45 are also not applicable as the transactions stated in the facts are not related to any payment due from the Corporate Debtor.
NCLAT held “As Section 44 is not attracted, it is not necessary to notice Section 46 which is not attracted and, therefore, the Adjudicating Authority has no power to pass any order under Section 48 of the ‘I&B Code’”.
Fraudulent Trading or Wrongful Trading (Section 66 of the Insolvency & Bankruptcy Code)
The Hon’ble NCLAT observed that the corporate debtor (one of the group company), like a guarantor, had executed mortgage deeds in favour of the lender banks and financial institutions and the transactions were in the ordinary course of business of the corporate debtor, therefore NCLAT did not had any contrary evidence to show that the mortgages were made to defraud the creditors of the corporate debtor or for any fraudulent purpose. Further, it was not open to the Adjudicating Authority to hold that the mortgage deeds in question were made by way of transactions within the meaning of ‘fraudulent trading’ or ‘wrongful trading’ under Section 66.
National Company Law Appellate Tribunal, therefore, allowed the appeals and set aside the impugned order passed by NCLT on 16.05.2018
DECISION BY SUPREME COURT ON THE FIRST ISSUE
Analysis on Section 43, 45 & 66 of the Insolvency & Bankruptcy Code
Supreme Court stated that Section 43 states that if a transaction entered into by a corporate debtor is not falling in either of the exceptions provided under Section 43(3) and satisfies the three-fold requirements of sub-sections (4) and (2), it would be deemed to be a preference during a relevant time, whether or not in fact it were so; and whether or not it were intended or anticipated to be so.
The Supreme Court had also acknowledged few situations:
The Hon’ble Supreme Court stated that whether a transaction is undervalued requires a different enquiry as per Sections 45 and 46 of the Code and such application can also be made by the creditor under Section 47 of the Code. The consequences of undervaluation are contained in Sections 48 and 49. Per Section 49, if the undervalued transaction is referable to sub-section (2) of Section 45, the Adjudicating Authority may look at the intent to examine if such undervaluation was to defraud the creditors. The provisions of Section 66 related to fraudulent trading and wrongful trading entail the liabilities on the persons responsible therefor.
The supreme court held “We are not elaborating on all these aspects for being not necessary as the transactions in question are already held preferential and hence, the order for their avoidance is required to be approved; but it appears expedient to observe that the arena and scope of the requisite enquiries, to find if the transaction is undervalued or is intended to defraud the creditors or had been of wrongful/fraudulent trading are entirely different. Specific material facts are required to be pleaded if a transaction is sought to be brought under the mischief sought to be remedied by Sections 45/46/47 or Section 66 of the Code. As noticed, the scope of enquiry in relation to the questions as to whether a transaction is of giving preference at a relevant time, is entirely different. Hence, it would be expected of any resolution professional to keep such requirements in view while making a motion to the Adjudicating Authority.”
DECISION BY SUPREME COURT ON THE SECOND ISSUE
The Hon’ble Supreme Court stated that lenders of JAL, on the strength of the mortgages in question, may fall in the category of secured creditors, but such mortgages being neither towards any loan, facility or advance to the corporate debtor nor towards protecting any facility or security of the corporate debtor, it cannot be said that the corporate debtor owes them any ‘financial debt’ within the meaning of Section 5(8) of the Code and hence, such lenders of JAL do not fall in the category of the ‘financial creditors’ of the corporate debtor Jaypee Infratech Limited
1) The impugned order dated 01.08.2019 as passed by NCLAT in the batch of appeals is reversed and is set aside. It comprised of two appeals filed by the lenders of JAL, being Comp. App (AT) (Ins) No. 353 of 2018 and Comp. App (AT) (Ins) No. 301 of 2018 that were preferred against the orders passed by NCLT on 09.05.2018 and 15.05.2018 respectively, whereby NCLT approved the decision of IRP rejecting the claims of such lenders of JAL to be recognized as 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.
2) The appeals preferred before NCLAT against the order dated 16.05.2018, as passed by NCLT on the application filed by IRP, are dismissed; and consequently, the order dated 16.05.2018 so passed by NCLT is upheld in regard to the findings that the transactions in question are preferential within the meaning of Section 43 of the Code. The directions by NCLT for avoidance of such transactions are also upheld accordingly. The NCLAT had quashed the verdict of NCLT, Allahabad, which on May 16, 2018 had held that the mortgage of properties of JIL, which was facing insolvency proceedings under the Insolvency and Bankruptcy Code (IBC), in favour of the lending financial institutions of holding firm JAL cannot be countenanced.
The NCLT had also held that the lenders of JAL do not fall in the category of the “financial creditors” of corporate debtor JIL just because of the mortgage of JIL’s properties in favour of JAL.
3) The appeals preferred before NCLAT against the orders passed by NCLT dated 09.05.2018 and 15.05.2018 on the applications filed by the lender banks are also dismissed and the respective orders passed by NCLT are restored with the findings that the applicants are not the financial creditors of the corporate debtor Jaypee Infratech Limited.
This Article has been Compiled by Richa Singh
You can direct your queries or comments to the author at email@example.com
The contents of this article should not be construed as legal opinion. This article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. We expressly disclaim any financial or other responsibility arising due to any action taken by any person on the basis of this article.