TMI Blog2022 (5) TMI 1478X X X X Extracts X X X X X X X X Extracts X X X X ..... the year 2017 was meant for supply of goods in the form of gold coins/gold ornaments and order of initiation of CIRP in Raksha Bullion, Mumbai reflects that the CD was in regular business of buying and selling gold bar. So, the MOU apparently does not look under the grey area when it is also not proved that they are the related party. If they are not related party, then naturally the transactions falling within a period of one year can only be covered under even in the best scenario as preferential transactions. So, the entire amount cannot be put under preferential transaction. The Adjudicating Authority in its impugned order has exceeded its jurisdiction while recording the finding to the effect that the Appellant herein is a related party which is beyond scope of the petition filed in the Tribunal. The Resolution Professional has not filed any application for the preferential transaction as required under Section 43(1) of the Code - apparently while going through the petition and hearing of Ld. Counsels for both the parties, it is very much clear that the Adjudicating Authority on its own has recorded it a related party which is beyond the provisions contend in the Code eithe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al Paper book) vide para 1 reflects clearly that all such advance payments will not attract any interest. It is also stated at para 3 of the MOU that both the parties have agreed to fix the price of Gold coin/Gold ornaments at the prevailing market rate of the day when Gold coin/Gold Ornaments demanded is physically delivered to the Buyer as per the location(s) specified by the Buyer. The Seller also agrees to give 2% discount on the prevailing market price of Gold and will not charge making charges and delivery charges on the future demand by the Buyer (after January, 2019) and at the time of delivery of quantity. The Buyer has a right to assign its obligations and rights as per this MOU to its nominee(s) without taking prior consent of the Seller and the Seller shall not cause any hindrance are raise any objection in the same. The Seller gives at least 30 days notice showing its unwillingness to continue the understanding as reached between the parties and the buyer is ready to give a mutually agreed compensation as well as refund the excess amount, if any. 3. The Ld. Counsel for the Appellant has submitted that they have informed the CD vide its letter dated 04th February, 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, 2021 has taken a different a stand and dismissed the petition of the Appellant by comparing the facts of the Appellant s case partially with Anuj Jain Case (Anuj jain IRP Vs. Axix bank Ltd.) 2020 8 SCC 401 and refused to classify the claim of the Appellant amounting to Rs.42,61,33,333/- as Financial Debt . 5. The Ld. Counsel for the Appellant has submitted that the Adjudicating Authority has not only rejected the claim of the Appellant but has treated the same as preferential transaction in term of Section 43(2)(a) of the Code. Considering that this has been within the two years look back period as required by the Code. 6. The Ld counsel for the Appellant has also submitted that the transactions is purely a Financial Debt and the Adjudicating Authority cannot consider the same as preference transaction without their being an avoidance application by the RP or the Liquidator under Section 44 of the Code. It was also submitted by the Appellant that the MOU gets substituted by the loan agreement and this amounts to novation of the earlier agreement with an entirely new agreement as per Section 62 of the Indian Contract Act, 1872. The Ld. Counsel for the Appellant also su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is the RP or the Liquidator who is supposed to file an application for initiation of action under Section 43(1) of the Code and also stated that Transaction to be classified as a Preferential transaction it is sine qua non that the transaction fulfils the Twin Condition of Section 43 and that an avoidance Application has been made to the Adjudicating Authority under Section 43(1) of the Code. The Appellant in a summarized way further presented that the Operational debt was converted to financial debt because of the inability of the CD to supply the goods as required under the MOU, in spite of granting some leverage to the CD. Hence, at the request of the CD, the advance for supply of goods get converted into the unsecured loan with specified percentage of interest and hence prayed to the Tribunal for setting aside the impugned order dated 07th January, 2021 in IA No. 1991 of 2020 in CP(IB) No. 2556/MB/2019 and to declare all the proceedings carried out in furtherance of the impugned order as null and void etc. 9. The Adjudicating Authority while passing the impugned order dated 07th January, 2021 has observed at para 18 to 23 as depicted below: 18. In terms of Section 43 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same was made during the period of one year preceding the insolvency commencement date? (v) As to whether such transfer is not an excluded transaction in terms of Sub-section (3) of Section 43? 22. In view of the ratio laid down in Anuj Jain s case and looking at the facts of the present case that the CIRP against the Corporate Debtor commenced on 13.11.2019, the Loan Agreement dated 15.04.2019 executed by the Corporate Debtor, substituting the earlier MOU dated 07.03.2017 between the same parties, was created, seven months prior to CIRP, it is concluded that this arrangement is a preferential transaction in terms of Sec 43 (2)(a) of Code and is well within the two years look back period as prescribed by the code. Therefore, this bench declares that Resolution Professional has rightly rejected the claim of Financial Creditor, but has not filed any application under sec.43 for avoidance of transaction, this bench has Suo Moto considered the facts and gravity of the transaction to the extent of conversion of Operational Debt to financial debt for the benefit of the operational creditor and thus treated the transaction dated 15.04.2019 to be a preferential transaction. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 5(21) of the Code. They have also cited the Judgment of Hon ble Apex Court Swiss Ribbons (P) Ltd. Vs. Union of India, (2019) 4 SCC 17, which held as follows: 42. A perusal of the definition of ―financial creditor‖ and ―financial debt‖ makes it clear that a financial debt is a debt together with interest, if any, which is disbursed against the consideration for time value of money. It may further be money that is borrowed or raised in any of the manners prescribed in Section 5(8) or otherwise, as Section 5(8) is an inclusive definition. On the other hand, an ―operational debt‖ would include a claim in respect of the provision of goods or services, including employment, or a debt in respect of payment of dues arising under any law and payable to the Government or any local authority. .51. According to us, it is clear that most financial creditors, particularly banks and financial institutions, are secured creditors whereas most operational creditors are unsecured, payments for goods and services as well as payments to workers not being secured by mortgaged documents and the like. The distinction between secured and unsecured credito ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... different from operational creditors and therefore, there is obviously an intelligible differentia between the two which has a direct relation to the objects sought to be achieved by the Code. 11. It was also submitted by the Ld. Counsel for the Respondents that Section 5(8) of the Code does not qualify financial debt resulting from conversion of operational debt into a financial debt at a later date and that too has been done within a very short period of commencement of CIRP process. It was also stated that the loan agreement dated 15.04.2019 between the Appellant and the CD allows for any conversion of the purportedly disbursement amount to financial debt from any other category of debt under the Code, the same is void for contravening the provisions of the Code. In this regard, it is submitted that in light of the overriding provision in Section 238 of the Code and the judgment of the Hon ble Supreme Court in Gujarat Urja Vikas Nigam Limited Vs. Amit Gupta, 2021 SCC Online SC 194, para 87, it is no longer res integra that provisions of the Code can override a bilateral commercial contract with the CD, such as the Loan agreement. It is also stated that the terms of the Lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and 4 of the Loan Agreement. 13. It is also submitted by the Respondent that the Appellant has mischievously suppressed the email dated 06.05.2020, by which the RP declined to categorize the Appellant as a Financial Creditor. It is submitted that the email dated 06.05.2020 makes a clear reference to the decision of the Hon ble Supreme Court in Anuj jain, IRP Vs. Axis Bank Ltd, (2020) 8 SCC 401. The said judgment, besides clarifying the position of law on what constitutes financial debt under Section 5(8) of the Code also lays down the criteria for what constitutes by interpreting section 43 of the Act. The Hon ble Supreme Court held as under: 20.5 - At this juncture, we may usefully refer to paragraph 177 of UNCITRAL Legislative Guide on Insolvency Law, as referred to and relied upon by learned counsel for the respondent as also paragraphs 178 and 179 thereof, to indicate the basic theory and principles governing the provisions under consideration. In the said Guide, while dealing with the topic of treatment of assets on commencement of insolvency proceedings, it is stated broadly on the theory of avoidance of preferential transactions as follows: (c) Preferential t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d directors of the CD were recruited by Mr. Punamiya and were working on the directions of Mr. Punamiya to import duty-free gold bars and unlawfully divert the same to domestic market. On May 2019 the office premises of the CD were subjected to raids by the DRI. Search and seizure was conducted by the DRI at 14 locations related to the CD and no stock of Gold Bullion Bars or Silver bars were found in the locations. It is also stated by the Respondent that several irregularities in the financial statements of the CD over three financial years since 2016, including drastic increase in creditors and receivables, while sales level was mostly stagnant for the CD. The CD has also found that a significant volume of the CD s stock in gold bars had been sold off to a few number of entities immediately prior to the raid conducted by the DRI (i.e. 01.05.2019 to 20.05.2019). The CD has had a history of indulging in bogus donations in previous years, as had been confessed by an erstwhile director of the CD during the course of proceedings before the Assistant Commissioner of Income Tax, Circle 5(3)(2), Mumbai, vide order dated 23.12.2016. 15. We have carefully gone through the submission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties that none of them stated that the Appellant and the CD are related party. If they are not related party, then lookout period is a period of one year. If that be the case that in November, 2019 CIRP commenced, so the payment released from 01.04.2018 to 30.06.2018, in any way will not get covered under Section 43 of the Code and hence as per details furnished at page 121 of the Appeal paper book out of 39.95 crore two payments will only get covered even remotely is the payment of 13.02.2019 i.e. Rs. 2.5 Crore and 15.02.2019 i.e. 2.04 crore only can be treated as preferential payment and not the balance payment out of 39.95 crore. For brevity and clarity, the provisions of Section 43 44 of the Code are reproduced below: Section 43: Preferential transactions and relevant time 43. (1) Where the liquidator or the resolution professional, as the case may be, is of the opinion that the corporate debtor has at a relevant time given a preference in such transactions and in such manner as laid down in subsection (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eding the insolvency commencement date. Section 44: Orders in case of preferential transactions. The Adjudicating Authority, may, on an application made by the resolution professional or liquidator under subsection (1) of section 43, by an order: (a) require any property transferred in connection with the giving of the preference to be vested in the corporate debtor; (b) require any property to be so vested if it represents the application either of the proceeds of sale of property so transferred or of money so transferred; (c) release or discharge (in whole or in part) of any security interest created by the corporate debtor; (d) require any person to pay such sums in respect of benefits received by him from the corporate debtor, such sums to the liquidator or the resolution professional, as the Adjudicating Authority may direct; (e) direct any guarantor, whose financial debts or operational debts owed to any person were released or discharged (in whole or in part) by the giving of the preference, to be under such new or revived financial debts or operational debts to that person as the Adjudicating Authority deems appropriate; ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the judgments, both have cited the same judgment. However, for brevity and clarity some of the judgments are analyzed below: Swiss Ribbons (p) Ltd Vs. Union of India (2019) 4 SCC 17 It is true that that para 37 to 51 of the above judgment held that Financial creditors are from the very beginning involved with the assessment of viability of CD and engaged in restructuring of loan as well as reorganization of CD business when there is a financial stress. While Operational creditors do not and cannot do. Pioneer Urban Land and Infrastructure Ltd. Vs. Union of India (2019 8 SCC 416. This is not applicable to the present appeal as it relates to Real Estate developers where the stand of home buyers/allottes are on a different footing. Phoenix A.R.C Vs. Spade Financial Services, (2021) 3 SCC 475 This is also not applicable to the present case as it relates to Financial creditors that are the related party. Manish Trivedi Vs. State of Rajasthan, (2014) 14 SCC 420 This case relates to Prevention of Corruption Act, 1988, the facts of these two cases are totally different. Hence, it can not also be applied to the present case. Voltas Ltd Vs. Union of India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on flow of transactions in affairs of business there is a course, an ordinary course. It means that the transaction must fall into place as part of the undistinguished common flow of business done, that it should form part of the ordinary course of business as carried on, calling for no remark and arising out of no special or particular situation. (emphasis supplied) 25.6.2. Taking up the transactions in question, we are clearly of the view that even when furnishing a security may be one of normal business practices, it would become a part of ordinary course of business of a particular corporate entity only if it falls in place as part of the undistinguished common flow of business done ; and is not arising out of any special or particular situation 28.6.2 - Taking up the transactions in question, we are clearly of the view that even when furnishing a security may be one of normal business practices, it would become a part of ordinary course of business of a particular corporate entity only if it falls in place as part of the undistinguished common flow of business done ; and is not arising out of any special or particular situation , as rightly expressed in Downs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en it is also not proved that they are the related party. If they are not related party, then naturally the transactions falling within a period of one year can only be covered under even in the best scenario as preferential transactions. So, the entire amount cannot be put under preferential transaction. j. The Adjudicating Authority in its impugned order has exceeded its jurisdiction while recording the finding to the effect that the Appellant herein is a related party which is beyond scope of the petition filed in the Tribunal. The Resolution Professional has not filed any application for the preferential transaction as required under Section 43(1) of the Code. Hence, apparently while going through the petition and hearing of Ld. Counsels for both the parties, it is very much clear that the Adjudicating Authority on its own has recorded it a related party which is beyond the provisions contend in the Code either explicitly or implicitly. k. Reference may be invited to the Hon ble Apex Court Judgment in a Central Excise matter of Godrej Industries Limited and Anr. Vs. Commissioner of Central Excise Mumbai and Anr. (2008) 17 SCC 471 held at para3 5 Para 3- The Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X
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