NCLAT Upholds Reversal of Preferential Transactions Made by Suspended Directors During CIRP Look-Back Period

The NCLAT upheld the reversal of preferential transactions made by the suspended directors during the CIRP look-back period.

The National Company Law Appellate Tribunal (NCLAT), New Delhi Bench, comprising Justice Sharad Kumar Sharma (Judicial Member) and Mr. Jatindranath Swain (Technical Member), reviewed a company appeal along with connected interlocutory applications and held that the transactions executed by the suspended directors of the Corporate Debtor during the CIRP look-back period—being outside the ordinary course of business and conferring undue benefit on related parties—amounted to preferential transactions under Section 43 of the Insolvency and Bankruptcy Code, 2016. The burden to rebut this classification rested on the Appellants, who failed to discharge it, thereby justifying the reversal of the impugned amounts.

In the company appeal filed under Section 61 of the Insolvency and Bankruptcy Code, 2016, the NCLAT was called upon to determine whether certain transactions, as flagged in the Committee of Creditors (CoC) meeting held on 09.11.2020, qualified as preferential under Section 43 of the Code. The appeal stemmed from the order of the NCLT, Bengaluru, which had allowed IA No. 482/2020 filed by the Resolution Professional (RP) based on a forensic audit report identifying transactions of ₹81.33 lakhs and ₹78.81 lakhs as preferential and fraudulent, respectively. The Adjudicating Authority, by its order dated 02.02.2022, had declared the impugned transactions as preferential and directed Appellants No. 1, 2, and 3 to return ₹24,29,874, ₹25,53,233, and ₹11,50,000, respectively, to the Corporate Debtor within thirty days.

The NCLAT considered the appeal filed on 03.05.2022, which was accompanied by an application seeking exemption from filing a certified copy of the impugned order. Despite the interlocutory application remaining pending, the Tribunal, invoking the overriding effect of the IBC and the scope of Rule 31 of the NCLAT Rules, allowed the exemption and took up the appeal for consideration on merits. It was noted that the Corporate Debtor had taken financial assistance from a cooperative bank under a loan agreement dated 17.10.2016, which was secured through mortgage and hypothecation of various assets. Due to the company’s financial default, CIRP was initiated on 29.10.2019.

Subsequently, the CoC directed the IRP to examine possible violations under Sections 43, 45, 50, and 66 of the Code. A forensic audit conducted by two chartered accountant firms revealed certain transactions allegedly made to defeat the insolvency process. The final forensic report dated 20.11.2020, identified specific transactions as preferential. Relying on these findings, the RP filed IA No. 482/2020 before the Adjudicating Authority, seeking directions for the reversal of such payments. During the proceedings, the RP also filed an additional affidavit, expanding the relief sought by adding a recovery of ₹11.5 lakhs from a third party related to the Directors.

The Adjudicating Authority, after providing adequate opportunity to the Appellants and considering their objections, found that the transactions were not carried out in the ordinary course of business and squarely fell within the ambit of Section 43 of the IBC. The Tribunal emphasised that the burden of proof to establish otherwise lay with the Appellants under Section 101 of the Evidence Act, which they failed to discharge. The Appellants’ claim that the transactions were routine and fell within the exceptions under Section 43(3) of the Code was found to be unsubstantiated.

On appeal, the NCLAT upheld the findings of the Adjudicating Authority, holding that there was no perversity or misappreciation of evidence. It was satisfied that the lower authority had duly considered the forensic audit reports, the statements of the suspended directors, and all objections raised. Concluding that the transactions were rightly classified as preferential, the Tribunal found no merit in the appeal and accordingly dismissed it. All connected interlocutory

applications stood disposed of.

Mr. Manu Kulkarni, Mr. Manoj Raikar and Mr. Skanda Kumar, Advocates, represented the Appellants.

Mr. Addanki Haresh, Liquidator, appeared in person.

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