Summary
The Supreme Court restored avoidance of six mortgages created by Jaypee Infratech Limited to secure loans to its holding company, Jaiprakash Associates Limited. The transfers preferred a related creditor and surety within the two-year look-back period and were outside the debtor’s ordinary business or financial affairs. Independently, the holding company’s lenders did not become financial creditors of the corporate debtor merely through those mortgages. Questions of undervaluation and fraud were left open.
Issues
- Whether the six mortgage transactions constituted avoidable preferences under Section 43 of the Insolvency and Bankruptcy Code.
- Whether the ordinary-course exception applied and how the relevant look-back period was determined.
- Whether third-party mortgagees thereby became financial creditors of the corporate debtor.
Provisions considered
- Section 43, Insolvency and Bankruptcy Code, 2016Applied the cumulative statutory conditions for deemed preference, relevant time and exclusions without requiring proof of an intention to prefer. (¶¶ 12.2, 18, 19, 20, 22, 23, 24, 25, 27)
- Section 44, Insolvency and Bankruptcy Code, 2016Upheld directions avoiding the six preferential mortgages and discharging the resulting security interests. (¶¶ 12.2, 27, 31.4, 55)
- Sections 5(7) and 5(8), Insolvency and Bankruptcy Code, 2016Distinguished financial debt and financial creditors from creditors holding only third-party mortgage security. (¶¶ 12.1, 43, 44, 45, 46, 47, 48, 54)
- Section 5(24), Insolvency and Bankruptcy Code, 2016Holding-company relationship made the beneficiary a related party for the two-year look-back period. (¶¶ 12.1, 22.2.2, 23, 24)
- Sections 3(30) and 3(31), Insolvency and Bankruptcy Code, 2016Security interest may confer secured-creditor status without establishing a financial debt owed by the corporate debtor. (¶¶ 12.1, 46.1, 47.2, 54)
Held
- Section 43 requires the statutory conditions concerning an antecedent liability, benefit relative to Section 53 distribution, relevant time and absence of an exclusion. Once these are satisfied, preference is deemed irrespective of intention or anticipation; the provision operates in corporate insolvency resolution as well as liquidation. (¶¶ 16.3, 18, 19, 20)
- The mortgages benefited JAL, JIL’s related creditor and surety, on account of antecedent liabilities and improved its position at the expense of JIL’s other stakeholders. The beneficiary’s relationship attracted the two-year period, notwithstanding that the mortgagee banks were unrelated. (¶¶ 22.2.1, 22.2.2, 22.3, 22.4, 22.5, 23, 24)
- The statutory look-back period did not postpone commencement of Section 43. Release ended earlier mortgages; subsequent mortgages were fresh transfers examined within the relevant period. The separate seventh transaction outside that period remained excluded. (¶¶ 23.1, 23.1.1, 23.1.2, 24.1, 24.2, 24.3.1, 24.5)
- In Section 43(3)(a), the word connecting corporate debtor and transferee must be read conjunctively. Ordinary-course dealing by the banks alone did not suffice. In the circumstances, encumbering JIL’s assets for its holding company’s debts was outside JIL’s ordinary business or financial affairs; annual-report disclosure and creditors’ silence did not cure the preference. (¶¶ 25.3, 25.5, 25.6, 25.6.2, 25.7, 25.8)
- Financial debt requires the essential elements of disbursal against consideration for time value of money, or features traceable to them. Every secured creditor is not necessarily a financial creditor. These mortgages alone established no financial debt owed by JIL to JAL’s lenders and conferred no financial-creditor status upon them. (¶¶ 43, 44, 45, 46.1, 47.2, 48, 54)
- Preference, undervaluation and fraudulent or wrongful trading require distinct enquiries and appropriate material pleadings. Since avoidance was sustained under Section 43, the other questions and related questions of law were left open; the combined findings below were not affirmed wholesale. (¶¶ 29, 29.1, 29.2, 55)
Result
Appeals allowed to the stated extent. NCLAT’s order set aside; NCLT’s avoidance directions restored on the ground of preference under Section 43, and its orders rejecting the mortgagees’ financial-creditor claims restored. Undervaluation and fraud questions left open.