TMI Blog2018 (5) TMI 1937X X X X Extracts X X X X X X X X Extracts X X X X ..... III of the code and therefore, contention of the applicant that the RP has no locus standi to file the present application, is without any basis. The contentions raised by the respondent number 15 that the applicant does not have jurisdiction to Act as Resolution Professional deserves to be rejected - the issue decided in negative in favour of the applicant Resolution Professional. Whether impugned transactions have been carried out with intent to defraud creditors of the corporate debtor or for any fraudulent purpose and is covered under section 66 of the Code? - Whether impugned transactions are preferential transactions covered u/s 43(2)(a) of the code or undervalued transaction covered under section 45 of the Insolvency in Bankruptcy Code 2016? - Whether look-hack period available for the impugned transactions as per provision of section 46(1)(i) is one year or two years? - HELD THAT:- The statutory requirement under sub-section (1) of section 43 of IBC requires that RP has to form an opinion and this opinion can only be formed by perusing the records available with him. Under the Code, the Resolution Professional is not required to give a judgment for initiating action ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come within the purview of 'preferential transaction is to be observed'? - HELD THAT:- It is an undisputed fact, that a secured creditor is better placed than an unsecured creditor in insolvency/liquidation proceedings. Therefore, when a security is being offered to a creditor, he is being placed in a better position than other creditors. However, that does not necessarily result in preference. Grant of security interest, per se. is not preference, but may be proved to be a preference on fulfilment of conditions. In this case, it is undisputed that after the release of earlier mortgage deeds, fresh deed has been executed in favour of the creditors of JAL, which happens lo be holding company of the corporate debtor. Holding company and subsidiary company are separate legal entities. After the release of earlier mortgage and creation of fresh mortgage cannot be treated as a continuation of the earlier mortgage - it is clear that the said act appears to have been committed to defraud the creditors of the Corporate Debtor which are certainly preferential transactions covered u/s. 43(2)(a) of the Code. Therefore, this issue is also decided in positive in favour of Resolution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) - the company application filed by the Resolution Applicant deserves to be allowed. Application allowed. - C.A. No. 26 of 2018, C.P. (IB) No. 77/ALD/2017 - - - Dated:- 16-5-2018 - V.P. Singh, JUDICIAL MEMBER AND Ms. Saroj Rajware, TECHNICAL MEMBER For the Appellant : Sudhanshu Batra, Sr. Adv., Abhishek Anand and Ms. Honey Satpal, Advs. For the Respondent : Anurag Khanna, Sr. Adv., Abhay Singh, Sudeep Harkauli, R.P. Agarwal, Tarun Verma, Vijay Kumar, Abhirjnan Jha, Swetashwa Aggarwal, Yash Tandon, Ms. Gunjan Jadwani, Madhav Kanoria, Shantanu Chaturvedi, O.P. Mishra, Manish Goyal, Abhinav Chopra, Ms. Priyanka Midha, Parag Manini and Ram Kaushik, Advs. JUDGMENT V.P. Singh, Judicial Member This company application has been filed by the Resolution Professional in case of Jaypee Infra tech Ltd., under sections 43, 45 and 60(5)(a), 66 read with section 25(2)(J) of the Insolvency and Bankruptcy Code, 2016 for seeking direction that the transaction entered into by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons 43, 45, 50 and 66 of the Code. The sub-regulation (2) of the Regulation 39 is given below; 39- Approval of resolution plan- (2) The resolution professional shall submit to the committee, all resolution plans which comply with the requirements of the Code and regulations made thereunder along with the details of following transactions, if any, observed, found or determined by him: (a) preferential transactions under Section 43; (b) under valued transactions under Section 45; (c) extortionate credit transactions under Section 50; and (d) fraudulent transactions under Section 66, and the orders, if any, of the adjudicating authority in respect of such transactions.] 7. The sub-section (1) of Section 25 casts a duty upon the Resolution Professional to preserve and protect the assets of the corporate debtor, including the continued business operations of the corporate debtor. For this purpose, clause (J) of sub-section (2) of section 25 casts duty upon the resolution professional to apply for the avoidance of any such transaction before the Adjudicating Authority by Chapter 111 of the Code. Sections 43, 45 and 50 of chapter III deal with the preferentia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r out of total 250 lowers, structure work is going on 66 towers, and finishing work is ongoing in 148 towers, whereas 36 towers had been delivered. As per the revised schedule submitted by the Corporate Debtor with the RERA authorities, the projects in Noida Wish Town was scheduled to be handed over to the flat buyers over the next 3 to 4 years, i.e. until 2021. Corresponding to the amount collected from the customers in the Noida projects, an amount of approximately ₹ 8600 crores has been incurred on the projects, and balance cost of ₹ 8756 crores is yet to be incurred for completion. 11. Since the incorporation of the Corporate Debtor, an amount of approximately ₹ 15,900 crores have been paid to Jaiprakash Associates Ltd. (the holding company and the principal contractor of the Corporate Debtor) towards the various construction activities, expenses etc. undertaken by Jaiprakash Associates Ltd. (i.e, construction of the real estate projects and Yamuna Expressway Toll). 12. The petitioner contends that the Corporate Debtor has the outstanding liability of approximately ₹ 132 crores payable to 7451 Retail Fixed Deposit Holders as on 9th August 2017. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and is in nature of asset stripping and entered into with intent to defraud the creditors of the Corporate Debtor. It is pertinent to state that as per sub-section (10) of Section 3 of the Code, creditor consist of 3 classes of creditors-financial Creditors. Operational Creditors and creditors other than financial and Operational Creditors. The CIRP Regulations require the creditors other than the financial and Operational Creditors to file proof of claim in form-f. The homebuyers and the fixed Deposit Holders are also Creditors of the Corporate Debtor. 15. The applicant contends that JAL is a holding company, owing 995,000,000 number of shares of Corporate Debtor as on 31st March 2017, JAL is a related party within the meaning of Section 2(24) of the Companies Act, 2013 and promoter of the Corporate Debtor within the meaning of Section 2(69) of Companies Act, 2013. The applicant further contends that mortgage of land by the company to its related party may not be forbidden under law it becomes questionable if it has been done in complete disregard to the interest of the creditors and stakeholders of such company, results in asset stripping, and is done without protecting the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Corporate Debtor would have provided no objection to creation of mortgage to secure debt of related party as that would have compromised recovery of not only their dues but also the interest of thousands of home buyers waiting for their Flats in which their hard earned monies have been invested. The same for fixed deposit holders. 17. The Applicant contends that the said transactions of the creation of mortgage of 858 acres of land to secure the debt of related party is a fraudulent and wrongful transaction under section 66 of the Code as it has been carried on with the intent to defraud the creditors of the Corporate Debtor. 18. The applicant contends that as per sub-section (10) of Section 3 of the Code, Creditor means any person to whom a debt is owed and includes a Financial Creditor and Operational Creditor, Seemed Creditor, an Unsecured Creditor and a Decree Holder. Therefore, it broadly creates three classes of Creditors-Financial Creditors, Operational Creditors and Creditors other than Financial and Operational Creditors, while the banks, financial institutions and fixed deposit holders of the Corporate Debtor are Financial Creditors. 19. The Corporate Debto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in such manner shall be liable to make such contribution to the assets of the Corporate Debtor as it may deem fit. sub-section (2) of Section 66 states that if before the insolvency commencement date, a Director or partner knew or ought to have known that there was no reasonable prospect of avoiding the commencement of Corporate Insolvency Resolution Process (CIRP) in respect of the Corporate Debtor; and such Director or partner did not exercise due diligence in minimising the potential loss to the creditors of the Corporate Debtor, such director shall be liable to make such contribution to the assets of the Corporate Debtor. 21. Admittedly Directors of the Corporate Debtor and its related party, i.e. JAL were well aware of the fact that the Corporate Debtor was in default of the financial Creditors, Operational Creditors, Creditors (including homebuyers) and other stakeholders. The Directors were aware that they had been declared as NPA by fit and other creditors. They were defaulting in timely construction, completion and delivery of flats to homebuyers. There were further defaulting payment to the fixed deposit holders. Therefore, the Directors of the Corporate Debtor were fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Professional is of the opinion that the corporate debtor has at a relevant time given preference in such transaction and such manner as laid down in sub-section (2) to any person is 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. 26. Applicant has contended that section 43(1) of the Code provides that a corporate debtor shall be deemed to have given preference if there is any interest created over properly of the corporate debtor for the benefit of a creditor and has the effect of putting such creditor in the beneficial position than it would have been in the event of a distribution of assets being made in accordance with section 53 of the Code. In the instant case, the Directors of the Corporate Debtor have created an interest over the immovable properties as security in favour of the lenders of JAL its holding company, for the benefit of JAL and its creditors and have put the Creditors of the Corporate Debtor in disadvantageous position than they would have been in the event of distribution of assets of Corporate Debtor being made in accordanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Professional under the Code. Given the above facts, the above application is without the authority of law and wholly without jurisdiction which deserves to be rejected outright. 31. It is contended in the objection of JAL that it cannot be disputed that so far the lenders of the Jaiprakash Associates Ltd. have not enforced the impugned mortgages and no liability has fallen on the Corporate Debtor. No Resolution plan has been finalised, and no quantum of shortfall attributable to the impugned mortgages has been determined. Hence, the application is only academic, as no loss has been caused to the Corporate Debtor or to any class of creditors nor any financial measure which Corporate Debtor intended to take at any stage was hampered or obstructed by the impugned mortgages. The allegation in the above application is all hypothetical. Further, the contention of the applicant that the said land could have been sold or mortgaged for loans which could have been raised by JIL to meet its obligations towards Creditors. Homebuyers and FD holders is wrong and baseless. 32. The decision was taken by the Directors in good faith, in the facts and circumstances then prevailing or which co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... effected long back. These are not the transactions which have taken place for the 1st time on the dates mentioned in the above application. The applicant has deliberately misrepresented the fact and avoided to give complete details with mala fide intention to bring the impugned transactions within the limitation period. The impugned transactions were approved by concern Committees/Board of Directors and were disclosed by the Corporate Debtor on various dates. The securities provided/mortgage created were disclosed in the financial statement of the Corporate Debtor in respective financial years 2009-10, 2010-11, 2011-12, 2012-13, 2013-14, 2014-15, 2015-16 and 2016-17. The fact of a mortgage created by the Corporate Debtor in favour of the lenders of JAL was also disclosed in the Red Herring Prospectus issued in 2009-10 at the time of Initial Public Offer made by the Corporate Debtor. 36. The answering respondent has contended that the Corporate Debtor was incorporated on 5th April 2007 as a public limited company in the State of the U.P. The main object of the Corporate Debtor is to develop infrastructure facility, the 165 km Six Lane Assess Controlled Expressway between Noida an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 2014-15. The company had been meeting all its liabilities towards the lenders and the depositors and other creditors, and there was no default in repayment of the dues of above parties. Only during financial year 2015-16 onwards, the performance of the corporate debtor took a setback due to various reasons, beyond the control of management, such as general economic slowdown, subdued market and low sales volume in real estate market, National Green Tribunal statemate, delay in completion of semi finished inventory leading to declining construction linked real estate collection, though the assets base remain considerably higher than the liabilities. In spite of the decline in performance, the corporate debtor has been making a sincere effort to pay the interest dues of lenders to the extent possible. The corporate debtor had moved an application under section 74(2) of the Companies Act 2013 before this Tribunal for extension of time of repayment of deposits. 39. It is further contended that against the outstanding liability of ₹ 12,902.49 crores the Corporate Debtor has a very large asset base. The result is that in spite of the liquidity problems the asset base continues ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd financial. 42. The answering respondents further contend that the revival plan of the corporate debtor was under active consideration of the lenders, when the IDBI Bank received direction dated 15th June, 2017 from the Reserve Bank of India for initiation of insolvency regulation process under the provisions of Insolvency and Bankruptcy code, 2016. 43. The financial position of the corporate debtor has been very sound. The fair value of its assets has been substantially higher than the outstanding liabilities. Its debt to equity ratio was very comfortable. The corporate debtor has large land bank and hence the lenders, most of the lenders being common, never objected to including mortgages of land in favour of JAL keeping in view the totality of circumstances and the special relationship between the corporate debtor and JAL. The Jaiprakash Associates Ltd. has been helping Jaypee Infratech Ltd. in various ways, and hence the creation of impugned mortgages was not unusual but merely reciprocal. Such reciprocal accommodation cannot be termed without consideration. It is general banking practice to ask for additional security from the third party for the financial assistance p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orate debtor. Hence, once the above jurisdictional condition itself is not satisfied, the subsequent provisions of this section will not be attracted. 47. The mortgages were in effect measure to give comfort to the lenders in line with the normal banking/business practice in the circumstances then prevailing or which could be reasonably anticipated, and there was no risk of lenders getting any opportunity to enforce the mortgage. 48. The Corporate Debtor is a public limited company, and its shares are listed on NSE and BSE. The affairs of the Company are subject to the scrutiny of SEBI and other Regulatory Authorities. The Corporate Debtor has a professional team of Directors including nominee Directors and independent Directors. These Directors have been attending the meeting of the board, the minutes of the board meeting is confirmed at the next board meeting. None of these directors ever recorded any note of dissent to the impugned transactions in any meeting is otherwise as they were fully aware that the transactions were in normal course of business and there was nothing wrong in it. If the allegations of the applicant are believed to be true, it will imply that all the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... They are not related parties. Hence the limitation period of only one year laid down in section 43(4) will apply and not two years. In the present case the impugned mortgages were created more than one year before insolvency commencement date. 53. It is further contended by the answering respondent that the provisions of section 45(2)(b) of IBC are not at all applicable in the present case. It is noteworthy that section 42(2)(b) is relevant only when the transaction is covered by section 43(2). The impugned transactions are not a preferential transaction and not covered by section 43(2). Hence section 45 does not apply to the impugned transactions. 54. It is further submitted by answering respondent that the impugned transactions cannot be regarded undervalued transactions given the fact that Jaiprakash Associates Ltd. has been helping Jaypee Infratech Ltd. in various ways, hence the creation of impugned mortgages were not unusual but merely reciprocal. Such reciprocal accommodation cannot he termed without consideration . The companies Act, 2013 does not prohibit the creation of security interest by a company for securing the debt extended to other companies including a ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he answering respondent is a bank duly authorised by the RBI amongst other things, to carry out the business of commercial lending on a secured basis. It is customary for the answering respondents and other banks to seek credit enhancement on account of outstanding debts by way of creation of security interests by borrowers and their group companies. 59. The answering respondent is a lender to JAL and, after careful financial and commercial diligence of the creditworthiness of JAL, the answering respondent had sought the creation of further security interest from JAL. The JAL subsequently requested the corporate debtor to create mortgages over the mortgaged properties as security for the JAL. Facilities. It is submitted that since the transfer envisaged under the Consortium Mortgages and the Exclusive Mortgages are for the benefit of the answering respondent in the ordinary course of the answering respondent's business or financial affairs. Thus the creation of mortgage over the mortgaged properties cannot be and ought not to be considered as preferential transactions, as falsely and wrongly alleged by the Resolution Professional in the application. 60. It is further subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L lenders. Third-party mortgages are accepted commercial practice among the lending company in India and globally. It is thus clear that at the time impugned transactions were entered into, the consideration received by the Corporate Debtor for creating the Consortium Mortgages as well as the Exclusive mortgages, was commensurate with the value of the consideration provided by it. 62. The respondent further contends that impugned transactions do not amount to fraudulent transactions under section 66 of the Code. Section 66(1) of the Code would be applicable only when this Tribunal finds a specific intent on the part of the Corporate Debtor to defraud its creditors. The Resolution Professional has miserably failed to bring any fact, correspondence, documents or other evidence on record which leads to the conclusion that business of the corporate debtor has been carried on with intent to defraud creditors of the corporate debtor or for any fraudulent purpose or that the corporate debtor entered into the impugned transactions with such specific fraudulent intent. On the contrary, third-party credit enhancement by group companies is a globally recognized principle which is also well ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have been carried out with intent to defraud creditors of the corporate debtor or for any fraudulent purpose and is covered under section 66 of the Code? 3. Whether impugned transactions are preferential transactions covered u/s 43(2)(a) of the code or undervalued transaction covered under section 45 of the Insolvency in Bankruptcy Code 2016? 4. Whether look-hack period available for the impugned transactions as per provision of section 46(1)(i) is one year or two years? ISSUE NO.1 66. The respondent no.15 i.e. Jaiprakash Associates Ltd. has objected that the applicant has no locus standi to file this company application No.26 of 2018. The contention of the respondent number 15 is misconceived and contrary to the provisions of insolvency in bankruptcy code 2016. 67. In this regard, it is to be clarified that Hon'ble Supreme Court in writ petition No. 744 of 2017, vide order dated 4th September 2017 stayed the operations of the order dated 9th August 2017 passed by this Tribunal. This order was further modified by Hon'ble Supreme Court vide order dated 11th September 2017 whereby it was directed to the IRP to formulate and submit an interim' resolution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccordance with Section 29; h. invite prospective lenders, investors, and any other persons to put forward resolution plans; i. present all resolution plans at the meetings of the committee of creditors; j. file application for avoidance of transactions in accordance with Chapter III, if any; and k. such other actions as may be specified by the Board. This sub-section (1) of sec. 25, casts a duty upon the Resolution Professional to preserve and protect the assets of the Corporate Debtor, including the continued business operations of the Corporate Debtor. For this purpose, clause (J) of sub-section (2) of sec. 25 casts a duty upon the resolution professional to apply for the avoidance of any such transaction before the Adjudicating Authority by chapter III of the code. Thus, in view of the provisions of the Code and the orders passed by the Hon'ble Supreme Court, the applicant has a duty to file an application for avoidance of any such transaction before the Adjudicating Authority in accordance with chapter III of the code and therefore, contention of the applicant that the RP has no locus standi to file the present application, is without any basis. 71. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ximately, as per the valuation report prepared at the time of mortgage of the said land. The mortgage of land was created without any counter guarantee from a related party. The mortgage of land is in nature of asset stripping and entered into with the Intent to defraud the Creditors of the Corporate Debtor. 75. The Jaiprakash Associates Ltd. has failed to explain as to the circumstances under which the promoters and Directors have decided to mortgage the lands of the corporate debtor to the lenders of JAL and why no consideration thereof has been paid to the Corporate Debtor and that too without any counter guarantee from JAL This clearly shows that the said transaction has been entered to defraud the Lenders of the Corporate Debtor. It is important to point out that Resolution Professional has pointed out that he could not find any approval obtained from the lenders of the corporate debtor for the impugned mortgages. It is pertinent to note that at the lime when the mortgage was created, Corporate Debtor was already in default to its lenders and it is unlikely that the lenders of The Corporate Debtor would have provided no objection to creation of mortgage to secure debt of re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted. The same for fixed deposit holders. 77. The applicant contends that the said Transactions of Creation of Mortgage of 858 acres of land to secure the debt of related party is clearly a fraudulent and wrongful transaction under section 66 of the Code as it has been carried on with the intent to defraud the creditors of the Corporate Debtor. 78. The Corporate Debtor has approximately 30,000 flats under construction and once the promoters and directors of the Corporate Debtor were aware of the financial stress since 30th September, 2015, and to undertake such transaction to create an interest in its immovable property for financial assistance to it's related party has been entered to defraud the Creditors of the Corporate Debtor and the homebuyers at large. It had also defaulted in payment of loans and other financial assistance borrowed from financial creditors, including fixed Deposit Holders. The mortgage was created in complete disregard to the interests of the Creditors and Stakeholders of the Corporate Debtor and the homebuyers at large. It has defaulted in payment of loans, and oilier financial assistance borrowed from financial creditors, including fixed deposit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 81. Since it is a condition precedent to applying, this is a jurisdictional condition, and if this condition is not satisfied, the application would be liable to be rejected outright without going into the merits of the case. It is contended that in the present case, the above jurisdictional condition is not satisfied in as much no opinion in the eyes of the law can be said to have been formed by Resolution Professional before applying in view of the following: (i) Opinion has a special meaning in law. 'Opinion' must be formed after considering the relevant facts and legal provisions. 'OPINION is not a synonym of impression, hearsay, or gossip. An opinion formed without considering the relevant material and without application of mind is not opinion and proceedings founded on such illegal formation of opinion are void, being without jurisdiction. The Ld. counsel has relied on case law 2006 (281) ITR 147(All)-at pages 154-155 Raghuram Graph P. Ltd. v ITO wherein it is held that opinion means something more than mere retailing of gossip or hearsay, it means judgment or belief, that is, a belief or a conviction resulting from what one thinks on a particular ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hall apply to the Adjudicating Authority for avoidance of preferential transactions referred to in section 44 of the code. Thus statutory requirement to take the decision is on the Adjudicating Authority not on the Resolution Professional. The opinion formed by the Resolution Professional can be based on the records available with him. By the averment of the answering respondent, it is clear that the resolution professional has sought an explanation from the concerned persons and after that, he has formed the opinion. 83. The learned counsel for the answering respondents contends that for initiating section under Section 43, the following ingredients have to be satisfied- i. it is to be shown that Corporate Debtor has at a relevant time given preference in such transactions and such manner as laid down in Section 43 of sub-section (2) to any persons as referred to in sub-section (4). ii. as provided in sub-section (2), a Corporate Debtor can be said to have given preference only in cases where 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 antece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is only one year and not two years. The impugned transactions pertain to period beyond one year. Hence relief claimed is time-barred. Section 43 of the Insolvency and Bankruptcy Code, 2016 is reproduced hereunder for ready reference; 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 pos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransactions will not be applicable in this case. 85. Admittedly, in this case, the corporate debtor has mortgaged its unencumbered 858 acres of land in favour of lenders of Jaiprakash Associates Ltd. (JAL) to secure the debt granted to JAL and Resolution Professional has applied for the avoidance of said transactions. That Senior Counsel appearing on behalf of the Resolution Professional has emphasized on the averments made by the respondent No. 15, i.e. JAL in its reply at page no.2659. The applicant has filed the chart relating to the operational creditor's claim, which contains the name of Jaiprakash Associates Ltd. at a serial no. 3, and a claim of ₹ 261.77 crore as operational creditor's claim in the name of JAL. In the remark column, it is stated that INR 212 crore is a claim against the invocation of corporate guarantee which is considered as equity contribution and remaining INR 49 crore is to be adjusted against advance to JAL. Moreover, JAL is the principle contractor of Corporate Debtor. Relying on the admission of Jaiprakash Associates Ltd, the holding company of Javnee Infratech Ltd. (JIL) there remains no doubt that the Jaiprakash Associates L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 Before discussing the issue of the relevant time, definition of related party needs to be brought out. Sec. 5(24) of I B Code provides that: related party , in relation to a corporate debtor, means- (i) a body corporate which is a holding, subsidiary or an associate company of the corporate debtor, or a subsidiary of a holding company to which the corporate debtor is a subsidiary; 88. On a bare reading of the above provision, it is clear that subsidiary and its holding company is defined as the related party given the provision of section 5(24) of Insolvency and Bankruptcy Code. Admittedly corporate debtor Jaypee Infratech Ltd. JAL is a subsidiary of Jaiprakash Associates Ltd. (JAL.). 89. It is clear that for transactions of a related party look back period is two years preceding the insolvency commencement date. Admittedly, in this case, the insolvency commencement dale is 9th August, 2017. Therefore the two years look back period as provided in the code commences f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xclusion clause, i.e. sub-section (3) of section 43 of the Code which is given as under: Sub-section (3) of section 43 of IBC: For the purposes of sub-section (2), a preference shall not include the following transfers- (a) a transfer made in the ordinary course of the business or financial affairs of the corporate debtor or the transferee. 94. The learned counsel representing the ICICI Bank and Standard Chartered Bank has emphasized that the bank which has acquired the mortgagee rights upon the mortgage properties in a legal and bona fide manner in the ordinary course of business or financial affairs of the corporate debtor. It is further submitted that under the Consortium mortgages and Exclusive Mortgage, the answering respondent is the beneficiary of the interests. The answering respondent i.e. beneficiary of the interest, is a bank, duly authorized by the RBI amongst other things, to carry out the business of commercial lending on a secured basis. It is customary for the answering respondents and other banks to seek credit enhancement on account of outstanding debts by way of creation of security interests by borrowers and their group companies. 95. The argume ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icant, he could not find any approvals obtained from the Lenders of the Corporate Debtor to mortgage its immovable properties as detailed above in favour of lenders of a related party, i.e. JAL. While nominees for lender attended the Board Meeting of the Corporate Debtor in which the decision to mortgage the land was taken, that cannot be treated as approval/no objection of lenders as lenders invariably have covenants in loan agreement that require their approval to be obtained for creating interest in favour of any one of the unencumbered assets of the borrower. Further, on examination of the records, the applicant has also reason to believe that no shareholders' approval was obtained to mortgage the land of the corporate debtor in favour of the lenders of JAL. It is pertinent to note that when the Mortgage was created, the corporate debtor was already in default to is lenders and it is unlikely that the Lenders of Corporate Debtor would have provided no objection to creation of mortgage to secure debt of related party as that would have compromised recovery of not only their dues but also the interest of thousands of homebuyers waiting for their flats in which their hard earn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directing any persons who were knowingly parties to carry on the business in such manner shall be liable to make such contribution to the assets of the Corporate Debtor as it may deem fit. Sub-section (2) of section 66 states that if before the insolvency commencement date, a director or partner knew or ought to have known that there was no reasonable prospect of avoiding the commencement of Corporate Insolvency Regulation Process (CIRP) in respect of the corporate debtor; and such director or partner did not exercise due diligence in minimising the potential loss to the creditors of the corporate debtor, such director shall be liable to make such contribution to the assets of the corporate debtor. 102. Admittedly Directors of the corporate debtor and its related party, i.e. JAL were well aware of the fact that the corporate debtor was in default of the financial creditors, operational creditors, creditors (including home buyers) and other stakeholders. The directors were aware that the account of Corporate Debtor had been declared as NPA by LIC and other creditors. They were defaulting in timely construction, completion and delivery of flats to homebuyers. They were further de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, Khair. Aligarh. Mortgage deed dated 7 March 2017 executed by JIL in favour of IDBI trusteeship services Ltd in the capacity of security trustee for a term loan of ₹ 1200 crore granted by ICICI Bank to JAL against the facility agreement dated 25 May 2015. 5. 166.229 acres of land situated at village: Chagan, Chalesar, Agra Mortgage deed dated 29 December 2016 executed by JIL in favour of Axis Trustee Services Ltd. to provide as additional security for a term loan of ₹ 23,490.75 crores sanctioned by various financial institutions as a consortium, including ICICI Bank limited to JAL. 6. 166.9615 acres of land Kansera, Aligarh situated at Tappal Mortgage deed dated 29 December 2016 executed by JIL in favour of Axis Trustee Services Ltd. to provide as additional security for a term loan of ₹ 23,490.75 crores sanctioned by various financial institutions as a consortium, including ICICI Bank limited to JAL. 104. It is also mentioned in the notice to ICICI bank that as you are aware, the corporate debtor started defaulting on paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e security by JIL - was on 15 September 2015 and should be considered as such for this evaluation. 107. In respect of mortgages listed in paragraph 1(b) of this letter (collectively exclusive mortgages), it is clarified that the exclusive mortgages, to the extent created by the mortgage deed dated 12 May 2014 and as contained in paragraph 1(b)(i) of this letter, has been satisfied. The said exclusive mortgage dated 12 May 2014 was created vide separate mortgage deed to secure facilities which have been repaid in full, i.e. Term Loan of ₹ 1500 Crores under facility agreement dated 12 December 2013 and an overdraft facility of INR 1.75 crores granted to JAL by ICICI. 108. It is further stated by ICICI bank that the impugned transactions are not preferential transactions under section 43(2) of the IBC . 109. The learned counsel representing JAL has in their written submission regarding the impugned transactions stated that: DETAILS OF IMPUGNED MORTGAGES (i) Given in our reply (JAL) para V/Page 13 onwards show that mortgages were not created for the first time after Corporate Debtor started facing the financial problem. The practice was continuing since 2009. Fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e earlier mortgage. (v) JLF MINUTES: The JLF minutes show that lenders and Corporate Debtor were concerned about the interest of flat buyers and depositors. The allegation made by RP that directors did not take care of the interest of Flat buyers and depositors is wrong. Reference is invited to following pages of our Reply - Volume VI Meeting dated 28.03.2016 - Minutes at page 2688- at pages 2689-2690 Meeting dated 18.04.2016 - Minutes at page 2695 - at pages 2695, 2697-2698 Meeting dated 0-1.06.2016 - Minutes at page 2703 - at pages 2703 2708 Meeting dated 04.02.2017 Minutes at page 2710-at pages 2710-2716 Meeting dated 08.03.2017 - Minutes at page 2721 -at pages 2721-2723, 2725-2727 Meeting dated 17.06.2017 -Minutes at page 2740 at pages 2740, 2741 Core Committee Meeting Minutes dated 05.05.2017 Minutes at page 2731- at all pages (vi) LIMITATION : For computing the relevant period u/ss. 43(4), 45 and 46, the above BOD meeting dates are relevant. The execution of mortgage deeds is an only administrative function which is not relevant. The BOD has approved the mortgages before the commencement of IBC, i.e. 1.12.2016. Hence the same is not open to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he present case, no lender has objected to the decisions in question till date. Lenders of JAL, who represent 80% of the exposure in Corporate Debtor, are objecting to the present Application. The fact that lenders' approval was there is established from the Minutes of JLF dated 08.03.2017 [at page 2727 of our Reply] in which for the first time, the lenders advised the Corporate Debtor not to create any mortgage or charge on any assets/land parcels without the approval of JIL lenders. The RP does not represent the lenders and has no right to raise above objection or to observe that lenders would not have given their approval if Corporate Debtor had approached them. Such an observation is a figment of his imagination and without any authority. (viii) ABSENCE OF COUNTER GUARANTEE: The contention of RP that mortgages were effected without giving any counter guarantee, is devoid of any merit. Absence of counter guarantee does not affect the interest of Corporate Debtor in any way and its right to recover the payment made/loss caused to it in case the mortgages are enforced, is protected under section 69 of the Contract Act. A counter guarantee would have been merely a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the relevant time keeping in view the facts and circumstances then prevailing and in good faith and after due diligence. The applicant has no legal right to question the economic wisdom of the directors of The Corporate Debtor and the lenders and has no legal right to say that they ought to have acted only in a particular manner. The Board of Directors who took the decision were not only lower level executives having limited knowledge but comprised of senior officers of the Lenders as their Nominee Directors, and also Independent Directors appointed as per prevailing legal requirement and had considerable experience and expertise in the field of finance and business management. 112. It is pertinent to mention that the account of the corporate debtor was declared is Non-Performing Asset on 30.09.2015 by LIC and on 31.03.2016 by other lenders. RP has filed the copy of minutes of the Board Meeting dated 28 May 2015 and 6 August 2015 , Annexure A-8, copy of minutes board meeting dated 11th for February 2016. Annexure A-9, minutes of board meeting dated 10 September 2016 Annexure A-10, minutes of board meeting dated 5 December 2017 Annexure A-11 which clearly shows that the board ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deemed approval of the JLM because before this there was no such prohibition on the mortgage of asset/land parcel of the Corporate Debtor without prior approval of the JIL lenders. This argument has no force because of the only inference which could be drawn from the above statement is that JLM prohibited mortgage of the land of the corporate debtor without prior approval of JIL lenders. 117. It is important to point out the minutes of JLF meeting dated 28 March 2016 which is at page no.2688 of reply of JAL. In the said minutes it is stated that: A. Debt Asset Swap: A total of 1737.4 acres spread across four land parcels, having distress value of ₹ 14.548 crores, as per IDBI's empanelled Valuers Report of October 2015 has been mortgaged to lenders. The company also has certain unencumbered land which it proposes to swap, along with the part of the mortgaged land, towards the reduction of part of its debt as also for clearance of overdues. The details of land parcels proposed to be swaped are as under: S.N. Description LP-2, Jaganpur LP-3 Mizapur Total Grand t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Date of initial mortgage Description Particulars of registration Remarks 1 24 February 2015 Mortgage deed for 167.23 acres Registered on 24 February 2015 Initially mortgaged 2 24 February 2015 Mortgage deed for 167.96 acres of land. Registered 24 February 2015 Initially mortgaged The details of a mortgage given at serial numbers 2 and 2 were subsequently extended substituted/released/recreated on different occasions under a change in the amount of facility or the terms and conditions of the financial assistance, availed by JAL, as detailed above. A. 167.23 acres of land at LP-5 at Agra 1 15 September 2015 Release deed for 167.23 acres Registered on 24 September 2015 Released with a simultaneous mortgage 2 15 September 2015 Indenture of mortgage for 167.23 acres of land ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cres at the LP-5 is given which shows that 167,23 acres of land were earlier mortgaged, but it was released on 15th September, 2015 vide Registration No. 13-992 dated 24th September, 2015, The same land was again mortgaged on 15th September, 2015 In Registration No.13993 dated 24th September, 2015 with a change of facility amount from an aggregate of ₹ 3,250 crores to aggregate ₹ 24,109 crores. The above data itself is alarming. On examining the details of transaction it appears that after the release of mortgage on 15th September, 2015 fresh mortgage was created with a change of facility from 3250 crores to 24,109 crores. It is apparent from the face of the record that fresh mortgage has been created with an additional liability of 20,859 crores. The Corporate Debtor has taken this liability for a 3rd party, i.e. holding company JAL without the approval of Joint Lenders Forum inspite of the fact that Corporate Debtor was facing liquidity crunch and its account had been declared as NPA. 119. The learned counsel for JAL submitted that the fresh mortgage deed is in continuation of the earlier deed. This argument has no force because earlier mortgage was released by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the fore- (i) There is a property or an interest in the property (collectively called property hereafter) of the corporate debtor ; (ii) Such property is transferred ; (iii) The transfer operates for the benefit of a creditor or a surety or a guarantor (referred to as beneficiary , for the sake of brevity); (iv) The transfer is for or on account of an antecedent debt (operational/financial) or other liabilities, owed by the corporate debtor; (v) The transfer has the effect of putting the beneficiary in a better position that it would have been if assets were distributed in accordance with section 53 of the Code. Exceptions have been carved out where the corporate debtor gets new value or where the transactions took place in ordinary course of business . Here, it is also important to distinguish a preferential transfer and fraudulent transfer. For example, where the transfer does not benefit a creditor, but a third party in such manner that the asset is put beyond the reach of all the creditors. Also, a transaction might be a preferential as well as a fraudulent transfer at the same time. Following is the some of the aspects pertaining to p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umbered assets will not be available to creditors generally and will place restrictions on the debtor's use of those assets. A transaction granting a security interest might he avoided on the basis that it is a transaction intended to defeat, delay or hinder creditors, or a preferential or undervalued transaction. In many cases, it will be a preferential transaction because it involves an existing creditor, Examples of security interests which are vulnerable to being classified as preferential are - (i) grant of a security interest shortly before commencement of proceedings, which although otherwise valid, may be found to have favoured unfairly a certain creditor at the expense of the rest; (ii) the grant of a security interest to secure a prior debt or on the basis of past consideration (permitted in some legal systems, but not in others); (iii) payments to a secured creditor, if the secured creditor is under secured and is paid in full within the suspect period. Section 239 of the Insolvency Act, 1986 (UK) does not specifically mention about creation of security interests. However, section 547 of the US Bankruptcy Code too talks about 'security intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the said act appears to have been committed to defraud the creditors of the Corporate Debtor which are certainly preferential transactions covered u/s. 43(2)(a) of the Code. Therefore, this issue is also decided in positive in favour of Resolution Professional. 121. After the elaborate discussion, we have decided that impugned transaction are preferential transactions as defined in the sub-section (2)(a) of Section 43 of insolvency and bankruptcy code 2016. We have found that corporate debtor Jaypee Infratech Ltd. (JIL) has by way of mortgage of unencumbered land created security interest in favour of lenders of the Jaiprakash Associates Ltd. (JAL), which happens to be the holding company of JIL, without any consideration. We have also found that the corporate debtor was facing liquidity crunch and their accounts were declared as NPA and even after formation of Joint Lender Forum, without obtaining approval from Joint Lender Forum, unencumbered land of the corporate debtor has been mortgaged in favour of lenders of JAL. There by this transfer has the effect of putting the JAL one of the creditor of JIL in a beneficial position than it would have been in the event distribut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Corporate Debtor, lenders of JAL and JAL, who happens to be an Operational Creditor of the Corporate Debtor. 127. It is true that the collateral security is common practice in loan transactions. It is tin record that in this case, the Corporate Debtor was under liquidity crunch and its accounts were declared NPA by LIC and other creditors. The Joint Lender Forum was formed to deal with the situation. But 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. 128. In the circumstances stated above it is clear that the impugned preferential transactions are also undervalued transactions and covered under section 45(1) of the Code. It is also clear that these transactions are undertaken 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. Therefore, this issue is also decided in positive, in favour of applicant Resolution Professional and against the Corporate -Debtor 129. In view of the above, it is clear that the mortgage of land of JIL in favour of tender ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Trustee Services Ltd to provide as an additional security for term loans of ₹ 21081.5 crores sanctioned by the consortium to JAL. A copy of mortgage deed is annexed as Annexure A-3 of the application S.N. Details of exclusive mortgage in favour of ICICI Bank Ltd. i. Mortgage dated 07.03.2017 for 158.1739 acres situated at Village Jaganpur and Aurangpur, Uttar Pradesh, executed by JIL. in favour of IDBI Trustee-ship Services Limited in the capacity of security trustee for term loan of ₹ 1200 crore granted by ICICI Bank Limited to JAL against the facility agreement dated 25.05.2015. ii Mortgage deed, dated 07.03.2017 for 151.0063 acres situated at Village Jikarpur, Tehsil Khair, District Aligarh, Uttar Pradesh, executed by JIL. in favour of IDBI Trustee-ship Services Limited in the capacity of security Trustee for term loan of ₹ 1200 crore granted by ICICI Bank Limited to JAL against the facility agreement dated 25.05.2015. A copy of mortgage deed is annexed as Annexure- A-6 of the application ..... X X X X Extracts X X X X X X X X Extracts X X X X
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