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TMI Blog2018 (5) TMI 1937X X X X Extracts X X X X X X X X Extracts X X X X ..... owned and in possession of the Corporate Debtor, to secure the debt of related party i.e. Jaiprakash Associates Ltd., by way of mortgage deeds dated 29th December, 2016, 12th May, 2014, 7th March, 2017. 24th May, 2016 and 4th March, 2016 are the fraudulent and wrongful transactions within the meaning of Section 66 of the Code. 2. The directions have been further sought against the Directors and promoters of the Corporate Debtor to make such contributions to the assets of the Corporate Debtor as it may deem fit, including directions under Section 67 of the code. 3. The directions have been sought under section 48(1)(c) of the Code directing the lenders of Jaiprakash Associates Ltd. in whose favour mortgage of 858 acres of land has been created to release or discharge security interest created by the corporate debtor over its immovable properties towards the financial assistance granted to Jaiprakash Associates Ltd. 4. The directions have been sought for declaring the transactions in question as Preferential transactions under section 43 of the code and pass an order under Section 44 in particular under sub-section (1)(c) thereof against the lenders of the Jaiprakash Associates Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s duly on the Resolution Professional to apply to the Adjudicating Authority in respect of fraudulent and wrongful transactions. 8. Petitioner contends that while performing his duties and functions as the Resolution Professional of the Corporate Debtor, and conducting the affairs and business of the Corporate Debtor, on examination of various transactions entered into by the corporate debtor and its promoters shareholders of the company and their Directors, the applicant has found that the business of the corporate debtor has been carried on with the intent to defraud the creditors of the Corporate Debtor and for the fraudulent purpose. The Directors of the corporate debtor did not exercise care or due diligence in minimising the potential loss to the creditors knowing and being fully aware of the financial stress the corporate debtor was going through (having been declared an NPA by the guidelines of RBI). The transactions referred herein also amount to being undervalued and preferential transaction under chapter III of the Code. 9. The Corporate Debtor Company is a special-purpose company promoted by JAL for the design, engineering, construction of six lanes 165 km. long Yamun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... FD programme was not covered by the new Companies Act, 2013. Given the cash crunch, the company has not yet repaid the FD holders. The repayment to FD holders is also being monitored by this Tribunal in an ongoing matter. 13. Petitioner further contends that the Corporate Debtor started lacing financial stress and could not honour its project completion deadlines and failed in it commitment to deliver possession of flat to home buyers in time, It started facing litigation from fiat buyers in some forums it also started defaulting in payments of loans and other financial assistance borrowed from financial creditors. It's account was declared as a Non-Performing Account (from now on NPA) as on 30th September 2015 by Life Insurance Corporation and on 31st March 2016 by other lenders. It is obvious that the Corporate Debtor was in dire needs of funds during this period and was facing severe liquidity crunch to complete the construction of projects and deliver the fiats to homebuvers as well as honour the payment obligations to financial Creditors including the Fixed Deposit Holders. The Corporate Debtor owns various pieces of unencumbered land which was/is available to be liquidat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... approximately Rs. 5000-6000 crores, by the Directors of the Corporate Debtor to secure the debt of JAL, at the time when the Corporate Debtor itself was in dire need of funds and could have sold/mortgaged unencumbered land to raise funds to complete construction of Hats in a timely manner and to fulfil its obligation to its creditors and prevent value deterioration or erosion or insolvency is highly questionable. Therefore, as soon as the applicant discovered the transaction, the applicant vide its letter dated 5th December, 2017 requested JAL to provide documents concerning the transaction entered between the Corporate Debtor, JAL and the banks about the immovable properties of the Corporate Debtor. 16. The applicant vide its letter dated 29th December 2017 called upon the lenders of JAL in whose favour mortgage of land has been created to provide full disclosure, explanation in respect of transaction as explained above keeping in view of the relevant provisions of the Code. The lenders of JAL denied that the transactions arc covered by the provisions of Sections 43, 45, 50 and 66 of the Code. In its reply dated 22nd January, 2018, JAL failed to provide any explanation or justifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was facing litigation from fiat buyers in sonic forums. 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 properly 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. Its account was declared as a non-performing account (from now on "NPA") on 30th September 2015 by LIC and on 31st March 2016 by the lenders, the Corporate Debtor was in dire needs of funds during this period and was facing severe liquidity crunch to complete the construction of projects and deliver the flats to homebuyers, as well as honour the payment obligation to financial creditors including the fixed deposit holders. Sin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ancial Creditors. Operational Creditors, creditors (including home buyers) and other stakeholders of the Corporate Debtor. However, evidently the Directors of the Corporate Debtor despite being fully aware of the said factum of default, admittedly failed to exercise due diligence in minimising the potential loss to its creditors and entered a transaction which on face-of it, is a transaction entered to give benefits to its related party with a clear intent to defraud its creditors. This land could have been sold today to generate cash that would have been sufficient to complete the construction of flats. The flat buyers are directly affected adversely by this decision. 22. Applicant further contends that the said transaction of the creation of mortgage constitute an undervalued transaction within the meaning of sub-section (2)(b) of Section 45 of the Code as it is made without any consideration of economic gain and had not taken place in the ordinary course of business of the Corporate Debtor. 23. The applicant states that transaction shall be considered undervalued where the Corporate Debtor enters into a transaction with a person which involves transfer of one or more assets by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debtor under section 43(2) determines that certain transactions were made during the relevant period under section 46, which were undervalued, then the Resolution Professional shall make an application to the Tribunal to declare such transaction as void and reverse the effect of such transaction in accordance with the provisions of the code. 28. It is further contended that the said creation of interests by Directors of the Corporate Debtor on the immovable properties of the Corporate Debtor in favour of the lenders of JAL, i.e. related company is a fraudulent arid wrongful transaction within the meaning of section 66, and a preferential transaction and undervalued transactions within the meaning of sections 43 and 45 respectively of the Code. The Promoters and Directors of the Corporate Debtor have connived and conspired to cause loss to the creditors of the Corporate Debtor. 29. Section 25 of the Code casts a duty upon the Resolution Professional to file avoidance application in accordance with chapter III of the Code. Section 66 of the Code casts a duty to apply to the Adjudicating Authority in case he finds a fraudulent and wrongful transaction has been made. Section 20(1) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tors was fraudulent. Even today, the corporate debtor has 741 acres of unencumbered land which could have been used, but not done, by the applicant for raising interim finance for the said purposes of the Corporate Debtor, which is part of the statutory duty. 33. It is pertinent to mention that these facts are already disclosed in various documents in public domain, including the Financial Results of the Corporate Debtor which were widely circulated and uploaded on the website, Prospectus issued in 2010 for the initial public offer, filing done with various Regulatory Authorities like the ROC with whom the Financial Statements, Charges for creation of Security and Offering Documents have been filed under Stock Exchanges and also the Information Memorandum issued by the applicant on 1st December, 2017. It is further contended by the JAL some isolated transaction does not amount to fraudulent conduct of business of the corporate debtor. It is further contended by the JAL the sections 43 and 45 of the IBC came into effect w.e.f. 15st December, 2016 and sections 66, 60, 25, 40. 50, 18, 25 and 69 came into effect w.e.f 15th December, 2016. The I & B Code is prospective legislation and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s about 1,29,000 shareholders. The paid-up value of the shares held by Jaiprakash Associates Ltd is Rs. 995 crores as on 31st March. 2017 which amounts to direct contribution by Jaiprakash Associates Ltd to the capital of the Corporate Debtor. On the advice of Yamuna Expressway Industrial Development Authority (YEIDA), JAL agreed to incorporate an SPV for implementation of the project. Accordingly, Jaypee Infratech Ltd. (Corporate Debtor) was incorporated as an SPV on 5th April 2007. The contract was awarded to the answering respondent and accordingly the answering respondent was appointed as the "Concessionaire". The answering Respondent transferred all its valuable rights and benefits and obligations under the Concession Agreement vide Assignment Agreement dated 19th October 2007 followed by Project Transfer Agreement dated 22nd October 2007 to the SPV. The entire project cost of Rs. 13,486 crores was made through a mix of debt of Rs. 6550 crores and equity (including internal accruals from Real Estate Development) of Rs. 6936 crores as on 31st March 2017. The project of the Yamuna Expressway has made a significant contribution to the ongoing-development in the region. 37. The W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s as per the last valuation done on 30th June 2016 through G.A. Advisory Private Limited, the IDBI Bank empanelled valuers. The fair market value of all the assets of the corporate debtor as on 31st March 2017 is shown as Rs. 32.882.03 crores by the answering respondent in a table. The answering respondent has mentioned that land comprising 1738 acres of land mortgaged to IDBI led consortium and 590 acres of unencumbered land with the company is valued as Rs. 20.111 crores on most conservative basis taken by IDBI itself in its application. 40. The answering respondent has further contended that the financial position of the corporate debtor was very strong notwithstanding the temporary financial crunch. The fair market value of the assets was as high as Rs. 32,880 crores against the total outstanding liability of Rs. 12,902 crores only. The debt to equity ratio was also very comfortable. As on 31st March, 2015. it was 1.34, on 31st March, 2016 it was 1.50 and on 31st March, 2017 it was 1.57. For infrastructure companies the debt: equity ratio can be more than 2.00. 41. The answering respondent has further contended that with a view to overcoming the liquidity problems of the Corp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 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. 45. The answering respondent further contended that the jurisdictional condition for invoking section 66 is that the business of the Corporate Debtor has been carried on with intent to defraud creditors of the corporate debtor or for any fraudulent purpose. 46. In the present case, the Corporate Debtor has been carrying on the business of Infrastructure Development. Regarding schedule VI to the Companies Act 2013, the Corporate Debtors is an infrastructure company, and regarding section 186(11), the restrictive provisions contained in that section are not applicable to the Corporate Debtor. There is not even a whispe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that section 43 will apply only if it is shown that the corporate debtor has at the relevant time given preference in such transactions and such manner as laid down in sub-section (2), to any persons as referred to in sub-section (4), as provided in sub-section (2) a corporate debtor shall be deemed to have given preference only to cases where there is a transfer of property or an interest thereof of the corporate debtor for the benefit of a creditor or a surely or a guarantor for or on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor; and such transfer had the effect of putting such creditor or a surety or a guarantor in a beneficial position than to have been in the event of distribution of assets being made in accordance with section 53. 50. The answering respondent contends that none of the ingredients of section 43(2) is satisfied in respect of impugned transactions. In the instant case, the impugned mortgages have been created by the Corporate Debtor on account of financial debts extended by mortgagee Banker to JAL and not to the Corporate Debtor. The impugned mortgages have not been created on account of any ant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 60 provides that NCLT shall have jurisdiction to entertain or dispose of any application or proceeding by or against the corporate debtor or corporate person. There is no dispute as to the jurisdiction of this tribunal, but in the present case, the question of invoking the jurisdiction of this Tribunal does not arise as the relevant provisions referred lo above are not applicable. 56. ICICI Bank has also filed its objection against the application filed by Resolution Professional. It is stated in the objection that ICICI Bank is a secure financial creditor of the Corporate Debtor. It is submitted that ICICI Bank has filed its claim against the corporate debtor before the Resolution Professional for a total amount of Rs. 304,10,12,486.52 as on 9th August 2017 about the financial assistance granted to the Corporate Debtor. It is further contended that the ICICI bank is also a member of the Consortium of lenders (JAL lenders) that sanctioned the credit facilities to the holding company of the Corporate Debtor, viz, Jaiprakash Associates Ltd. ("JAL"). 57. It is further contended that corporate debtor has mortgaged certain of its immovable properties, referred in part XXVI of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ations of fraud which are not supported by any cogent reasons are documentary evidence whatsoever. The mere reckless allegation of fraud is irresponsible. Any such allegation is to be supported by cogent evidence to set-aside the impugned transactions. The impugned transactions equally do not fall under the avoidance rules concerning undervalue transactions. A transaction is required to be subjected to scrutiny under section 45 of the code to determine whether such transaction has been undervalued only if such transaction is a preferential transaction that fails within section 43(2) of the Code and not otherwise. The answering respondent contends that impugned transactions are not preferential transactions. 61. In the instant case, the corporate debtor has created a security interest in favour of the JAL lenders including the answering respondent herein for adequate consideration of the grant of loans to JAL, its holding company. It is also relevant to mention here that not only JAL, the Corporate Debtor's holding company is closely associated with the construction project at the Noida Expressway and residential development, as JAL was the initial allottee of the said project ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tent to defraud creditors. The merits of the impugned transactions were duly approved under the requested corporate authorizations, by applicable law. 63. The burden of proof is on the applicant to prove that there was subjective intent to defraud the creditors by keeping the property out of the reach of the creditors. The impugned transactions have been carried out in the ordinary course of business of the applicant for the valuable and commercially valid consideration. Hence the impugned transactions cannot he termed a transaction intended to defraud the creditors of the corporate debtor. It is further submitted by the answering respondent that the Resolution professional has failed to appreciate that the necessary filing/registration undertaken by the corporate debtor with the registrar of companies. CERSAI. The public record was available to everyone including the lenders of the corporate debtor. It is further submitted that despite the knowledge of the Consortium Mortgages and Exclusive Mortgages being in public records and the annual report of JAL, none of the lenders of the corporate debtor, whether at any of the joint lenders meetings are otherwise, have raised any objecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of the earlier order dated 4th September, 2017. In the light of order of the Hon'ble Supreme Court dated 11th September, 2017 it is clear that the stay order granted by Hon'ble Supreme Court on 4th September, 2017 has been vacated. 70. In the writ petition mentioned above, Hon'ble Supreme Court by order dated 21st March, 2018 has further issue direction to IRP "to proceed and finalize the Resolution Plan, but the same shall be implemented after taking leave of this Court." Given the above, the applicant has been conducting the corporate insolvency resolution process of the corporate debtor. The Resolution Professional submitted that by Regulation 39(2) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process of Corporate Persons) Regulation 2016, he is required to submit to the committee of creditors all details of the transactions, if any which falls under sections 43, 45, 50 and 66 of the Code. Before discussing the issue, the relevant provisions of the Code are reproduced herein below: 25. Duties of resolution professional - (1) It shall be the duty of the resolution professional to preserve and protect the assets of the corporate debto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (taken together for convenience). 72. The JAL contention that the application is only academic & hypothetical so far as its lenders have not enforced the impugned mortgages and no liability has fallen on the Corporate Debtor is completely devoid of merits and untenable in law. The applicant Resolution Professional has filed this application seeking avoidance of the transaction by which mortgages have been created in favour of the lenders of the Jaiprakash Associates Ltd. regarding the unencumbered 858 acres of land of the Corporate Debtor, at a time when the corporate debtor's account was declared NPA by some of its lenders and rather using the said land to raise funds to make its account standard, the Promoters and Directors of the Corporate Debtor created mortgages In favour of the lenders of JAL. 73. It is obvious that the Corporate Debtor was in dire needs of funds during the period and was facing severe liquidity crunch to complete the construction of the projects and deliver the flats to the homebuyers, as well as on a payment obligation to finalize the dues of creditors including to the fixed deposit holders. The corporate debtor owns various pieces of unencumbered la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discovered that, right in the middle of its immense financial crunch, and while continuing to default to homebuyers and financial creditors, and even after it had been declared as NPA, the Directors of the Corporate Debtor, in utter disregard to fiduciary duties and duty of care to the creditors of the Corporate Debtor, Mortgaged 858 acres of unencumbered land owned by the Corporate Debtor to secure the debt of the related party i.e. Jaiprakash Associates Ltd. (hereinafter, "JAL"). The value of the Land Mortgaged by the Corporate Debtor was estimated to be in the range of Rs. 5000 to 6000 crores approximately, 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. That on examination of records of the Corporate Debtor accessible to the applicant, the applicant 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, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iver the flats to homebuyers, as well as honour the payment obligation to financial creditors including the fixed deposit holders. Since the Corporate Debtor itself was in dire need of funds and could have sold/mortgaged unencumbered land to raise funds to complete construction of flats in a timely manner and to fulfil its obligation to its creditors and prevent value deterioration erosion or insolvency is highly questionable. But, it choose to give away the land to secure the debt for a related party. The mortgage was created in complete disregard to the interest of the creditors and stakeholders of the Corporate Debtor. Now JAL has defaulted to its lenders exposing the mortgaged land to the risk of being sold to recover the dues payable by JAL. 79. The sub-section (1) of Section 66 of the Code provides that if during the CIRP, it is found that any business of the corporate debtor has been carried on with the intent to defraud creditors of the corporate debtor or for any fraudulent purpose, the tribunal may on application of the Resolution Professional pass an order directing any persons who were knowingly parties to carry on the business in such manner shall be liable to make su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng but a mechanical reproduction of the language of section 43(1). The following facts show that he has moved the application without application of mind to the relevant material and the provisions of the law- In Para XXIX/page 15- it is stated that RP sent a letter dated 05.12.201 7 to all lenders of JAL to seek their explanation concerning proposed avoidance of impugned mortgages, but they denied that various sections referred to in the letter were applicable. In their replies sent by lenders to RP, all lenders have explained in detail the reasons that the impugned transactions are not covered by sections 43, 45 etc. From the averments made by RP in Para XXIX of the Application, it is clear that he has not examined the explanation given by the lenders and formed an opinion as to whether the provisions of IBC are applicable or not and has mechanically proceeded to file the instant application. There is no formation of opinion as to the applicability of the provisions of IBC to the impugned transactions. In Para XXXII/page 15 RP has stated that a letter dated 05-12-2017 was sent to JAL to seek their explanation, but JAL failed to provide any explanation. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of assets being made under Section 53. iii. Above ingredients of section -43(2) are not satisfied in the present case in as much as - Impugned mortgages have been created by Corporate Debtor on account of financial debts extended by mortgagee/bankers to Jaiprakash Associates Limited and not to the Corporate Debtor; mortgages are not created on account of any antecedent debt or liability owed by the Corporate Debtor; hence, the question of putting the mortgagees in a beneficial position viz-a-viz other creditors of the Corporate Debtor in the event of a distribution of assets does not arise. even otherwise, as clearly mentioned in the NCLT Order dated 09.08.2017 [at page 28 of Application] "it was an undisputed position in the present matter that the Financial Creditor along with other lenders and the Corporate Debtor company are having a consensus for early approval of resolution plan", which shows that even financial creditors upto the stage of admission of CP 77/17 did not contemplate that the contingency of distribution of assets will arise as required under section 53 of IBC. iv. Sub-section (3) of Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2), a preference shall not include the following transfers- (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 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has admitted that it has made substantial sacrifices in favour of the corporate debtor, as its subsidiary, and has been rendering all kinds of assistance both managerial and financial. Therefore, the answering respondent's JAL has admitted that the JAL is also an operational creditor of its subsidiary JIL. Thus, the deeming provision of preferential transactions as provided in section 43 (2) applies for the transactions, i.e. mortgages executed by the corporate debtor thereby creating a security interest in favour of the lenders of Jaiprakash Associates Ltd (JAL). who is a creditor of JIL and is put in a beneficial position, then it would have been in the event of distribution of assets made in accordance with Section 53. 86. In the context of preferential transfers- section 3(34) of IBC, it may be noted that "transfer" is an omnibus expression encompassing "sale, purchase, exchange, mortgage, pledge, gift, loan, or any other form of transfer of right, title, possession or lien'' Therefore, a transfer may be in the form of creation of security interest on the assets of the corporate debtor, and thus, creation of security interest or collateral may get categorized into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arious provisions of the Code. IBC and sections 43, 45, 60(5)(a), 66 and 25(2)(i), came into force on or after 01.12.2016 and are not made applicable retrospectively. The transactions which are being questioned in the above Application were undertaken before 01.12.2016, the IBC and the above provisions do not apply to the impugned transactions. The limitation period of 2 years or 1 year, as the case may be, will apply only to transactions made on or after 01.12.2016 and not beyond that date. In the present case, the transactions were made before 01.12.2016. Hence no provision of IBC applies to such transactions. Judgments relied on (4) Punjab Tin Supply Co. v. Central Government AIR 1984 87- Paras 16-20, 32, 24 (5) R. Rajagaopai Reddy v. Padmini ChandraSekharan AIR 1996 SC 238 Paras 15-18 It is held in the above judgments that all laws which affect substantive rights generally operate prospectively and there is a presumption against their retrospectivity if they affect vested rights and obligations unless the legislative intention is clear and compulsive. 91. The argument advanced by the learned counsel is regarding prospective legislation. No doubt every statute implies pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annot be treated as preferential transactions because the bank is duly authorized by RBI amongst other things to carry out the business of commercial lending on a secured basis. It is further said that for credit enhancement on account of outstanding debts, the creation of security interest by the borrower is in the normal course of business of the bank. Therefore, the impugned transactions cannot be treated as preferential transactions given the exclusion clause, i.e. sub-section (3) of section 44. 96. It is true that exclusion clause of section 43 excludes transactions like "transfer made in the ordinary course of the business or financial affairs of the corporate debtor or the transferee". But the transaction of creating a security interest by way of mortgage in favour of lenders of the third party, i.e. holding company of the corporate debtor, on the unencumbered land of the corporate debtor without any consideration or counter guarantee cannot be treated as transfer in the ordinary course of business or financial affairs of the corporate debtor. (The language of the exclusion clause itself indicates that the "the transfer made in the ordinary course of business or financial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 100. Since the Corporate Debtor was facing financial stress and was unable to honour its project completion deadlines and failed in its commitment to deliver possession of flats to homebuyers in time, it was facing litigation from flat buyers in some Forums. The corporate debtor has approximately 30,000 flats under construction. 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 other financial assistance borrowed from financial creditors, including fixed deposit holders. Its account was declared as a non-performing account (from now on "NPA") on 30th September. 2015 by LIC and on 31st March.2016 by other lenders, 'the Corporate Debtor was in dire needs of funds during this period and was facing severe liquidity crunch to complete the construction of projects and deliver the flats to homebuyers as well as honour the payment obligation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. The Corporate Debtor ought to have exercised due diligence in minimizing the potential loss to the financial Creditors, Operational Creditors, creditors (including home buyers) and other stakeholders of the Corporate Debtor. However, evidently, the Directors of the Corporate Debtor despite being fully aware of the said factum of default admittedly failed to exercise due diligence in minimising the potential loss to its creditors and entered the transactions which were on face-of it were entered to give benefits to its related party with a clear intent to defraud its creditors. This land could have been sold today to generate cash, that would have been sufficient to complete the construction of flats. The flat buyers are directly affected adversely by this decision. 103. On perusal of the letter issued by the Resolution Professional it appears that he sought an explanation from the Mortgagee ICICI Bank regarding the transactions mentioned below, S.N. Details of property Initial Mortgage 1. 100 acres of land situated at village Tappal, Khair, Aligarh Dated 12 May 2014 in favour of ICICI bank limited, against the facility agreement dated 12 December 2013 granting term loan o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pay its creditors is a serious matter. 858 acres of land is valued at thousands of crores of rupees and could have been available to raise money to complete construction of project for the benefit of thousands of homebuyers". 105. In another notice sent to Standard Chartered bank the resolution Professional has sought full disclosure, explanation or justification regarding the following transaction; Mortgage deed dated 24th May 2016 for 25.0040 acres of land situated at village Sultanpur, sector-128, Noida, district-Gautam Budh Nagar, U.P. Executed on 24 May 2016 in favour of IDBI trusteeship services Ltd., as additional security, again the facility agreement dated 29 August 2012 between SCB and JAL of Rs. 400 crores. The security was further extended for facility IInd for Rs. 450 crores on 27 December 2012; for facility 3rd Rs. 538.16 crores on 29th April 2015; for facility 4th for Rs. 81.84 crores on 29th April 2015 and working capital facility of Rs. 297 crores on 29 August 2012. 106. It is on record that the ICICI bank has submitted a reply to the notice wherein it is stated that "due to administrative reasons, in order to extend Consortium Mortgages in favour of additional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate Debtor after 08.08.2015 but on the contrary mortgaged land area was considerably reduced. (ii) Proposals for creation of Mortgages were approved by BOD in meetings held on 27.05.2009, 12.11.2012, 11.02.2013. 12.11.2013, 09.02.2015, 28.05.2015, 06.08.2015, 11.02.2016, 26.05.2016 [Our Reply Page 23]. The mortgages were approved unanimously by all directors without any note of dissent by any one. The minutes are circulated to all directors/ lenders and confirmed in the next 80D meeting. Even at the stage of confirmation or at any subsequent date no objection was received by Corporate Debtor from anyone. (iii) COMPOSITION OF BOD: already given earlier, the BOD was dominated by independent directors who are governed by the Code of Conduct laid down in Schedule IV to the Companies Act, 2013. The promoter/Directors were in the minority. Hence, the contention of RP that all directors have conspired and connived is an absurd proposition. (iv) BOD MINUTES: Minutes of Meeting held on 28.05.2015 - Application Page 370 At page 386 - Reasons for delay in completion of flats-NOT order dated 28.10.2013 referred. At page 396 Additional loan of Rs. 2,000 C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lders, placed in AGM and approved by shareholders, filed with ROC, submitted to all the lenders, placed on the website of Corporate Debtor, sent to Stock Exchange and placed on their website and also on the website of MCA. These have been within the public domain and not confidential documents. SHAREHOLDERS' APPROVAL - Approval of shareholders was not required given exclusion of infrastructure companies from the purview of Section 186 of the Companies Act, 2013 vide sub-section (11). JIL is an infrastructure company as defined in Schedule VI to Companies Act. In any case, it is settled law that when Accounts are approved by shareholders then disclosures made therein are also approved. Judgment relied on: (10) 1993(77) Co. Cs. 1 (Karn.) - Paras 9-20 Chamundi Chemicals & Fertilizers Ltd. V.M.C. Cherian LENDERS APPROVAL- Lenders have their nominee director on BOD of Corporate Debtor and such nominee directors were party to the decision. The observation of RP that loan agreements provide that approval by nominee directors does not imply approval of lenders is fallacious. Such clause in loan agreements is protective and becomes relevan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of Corporate Debtor for almost nine months, and he has not moved any application in SC/NCLT seeking permission to sell any part of 741 acres unencumbered land to meet the requirement of funds for completing the construction of flats. (x) PAYMENT MADE TO JAL- In para XX/Page 9 of Application, RP has stated that ever since the incorporation of Corporate Debtor, an amount of approximately Rs. 15,900 crores have been paid to JAL. There is no allegation that said payments were illegal or unjustified or money was siphoned off the nature of these payments has been clarified by JAL in its Reply Para (13) at page 52. In RA Paras 12-13, the RP has not controverted the above facts. (xi) It is relevant to point out that in the Application, except questioning the impugned mortgages, there is no allegation of any fraudulent conduct of business, misappropriation, siphoning of funds or even mismanagement etc. 110. The argument has been advanced that perusal of details of mortgages will show that mortgages were not created for the first time after corporate debtor started facing the financial problem. The practice was continuing since 2009. 111. The applicant is questioning the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were duly disclosed to the consortium of lenders led by IDBI Bank in the presentation made on 8 March 2017. (Annexure-R-48). 114. On perusal of the above minutes of JLF and core committee meeting, it appears that approval of JLF was not taken for the impugned transactions. It is important to point out that the corporate debtor was facing financial crunch and its account was declared as NPA, Joint Lenders Forum, a core committee of lenders was constituted under the directions of RBI and meeting of JLF was also held during 2015-2017. In the circumstances, why approval of JLF was not taken for the impugned transactions whereby unencumbered land of the corporate debtor was mortgaged to create security for the debt of JAL, i.e. a holding company of the corporate debtor. 115. It is pertinent to mention that Minutes of the Senior Level Joint Lenders Forum meeting dated 8th March, 2017 which is at page number 2721 of the reply of the Jaiprakash Associates Ltd. (JAL). It is stated in the minutes at page 2727 that. "Further, JLM lenders advised the company to not to create any mortgage/charge on any asset/land parcel without approval from the JIL lenders." 116. Relying on the above res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... JLF dated 28th March, 2016 it is clear that that JLF decided to transfer the land lo a trust to be set up by the company and the lenders shall be the beneficiary. But it appears that the corporate debtor has not followed the decision of JLF and contrary to the above decision the corporate debtor has mortgaged the unencumbered land to the lenders of JAL. Therefore, it is clear that the said transactions have been done not only without the consent of the Joint Lender Forum but also contrary to the decision of JLF. In reply to the application of Resolution Professional, details of transactions have been given by respondents nos.1, 2, 3, 4, 9, 13 & 14 at page 14, which is as follows: S.N 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 condit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In Registration No.13993 dated 24th September, 2015 with a change of facility amount from an aggregate of Rs. 3,250 crores to aggregate Rs. 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 executing Registered Release Deed and there after fresh Mortgage Deed was executed. In one transaction only we see that by mortgage of 167.23 acres of land, additional loan facility of 20,859 crores was granted to a related party JAL, without any considerati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ety 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 preferential transactions. A. Property of the Corporate Debtor The subject of transfer must be property or an interest in such property of the corporate debtor. The expression "of the corporate debtor" may be interpreted so as to refer to assets that qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itors, 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 interests' and "new value" in the context of "preferences". So far as the Code is concerned, it may be noted that "transfer" is an omnibus expression encompassing "sale, purchase, exchange, mortgage, pledge, gift loan, or any other form of transfer of right, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 21. 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 distribution of assets being made by section 53 of the code. 122. The said mortgage of immovable properties, i.e. of the unencumbered land of the incorporate debtor has been made without any consideration to the corporate debtor. Therefore the said transaction is covered under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 tenders of JAL, amounts to transfer of interest in property of JIL for the benefit of its creditor i.e. JAL and putting it in a beneficial position vis-a-vis other creditors is a preferential transactions U/s 43(2)(a) & (b). 130. The transactions were executed within the look back period of tw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tee-ship Services Limited in the capacity of security trustee for term loan of Rs. 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 Rs. 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 S.N Details of exclusive mortgage in favour of Standard Chartered Bank Ltd ("SCB") (i) Mortgage deed dated 24.05.2016 for 25.0040 acres of land situated at Village Sultanpur, Sector-128, Noida, District Gautam Budh Nagar. U.P. 201 304 executed by the Corporate Debtor in favour of IDBI Trustee-ship Services Ltd., as additional security, against the facility agreement dated 29.08.2012 between SCB and JAL of Rs. 400 crores. The security was further extended for Facility II for Rs. 450 crores on 27.12.2012; for facility III for 538.16 crores on 29.04.2015; for facility IV for Rs. 81.84 cro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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