Mukesh Jagetia Vs Kamlesh Bhavarlal Jain (NCLT Ahmedabad)
NCLT Ahmedabad Orders ₹1.76 Crore Restoration in Sunlight Extrusion Insolvency; Related-Party Deals and Land Sale Held Avoidable
In a significant ruling under the Insolvency and Bankruptcy Code, 2016 in Mukesh Jagetia (Successful Bidder, Assignee) v. Kamlesh Bhavarlal Jain & Ors., IA No. 158 of 2022 in CP (IB) No. 261 of 2018, NCLT Ahmedabad Bench, Order dated 24.07.2026, the NCLT AHMEDABAD Bench has directed restoration of ₹1,76,47,084/- to the Liquidation estate of Sunlight Extrusion Pvt. Ltd., holding that its erstwhile promoters routed money to related parties and sold company land at a steep discount just as the company was heading into insolvency.
The Bench of Mr. Shammi Khan (Member, Judicial) and Mr. Sanjeev Sharma (Member, Technical) found that the company had quietly settled a ₹94.01 lakh related-party loan with M/s Rakesh Metal — controlled by a relative of the promoters — by assigning away its own trade receivables, even as banks and other creditors went unpaid. Separately, ₹49.89 lakh was paid out to seven related parties in the two years before the company’s ICD. A prized piece of land at MIDC, Navi Mumbai, was also sold for just ₹50 lakh, despite two independent valuers valuing its worth at over ₹82 lakh.
Calling these classic preferential and undervalued transactions (Avoidance Transaction) under Sections 43 and 45 of the Code, the Tribunal rejected the promoters’ defence that the deals were routine business settlements, noting they had produced no real paperwork to back their claims.
The application was pursued by Mr. Mukesh Jagetia (Successful Bidder), who had earlier acquired the rights to the claim through an e-auction conducted by the Mr. Abhishek Nagori, (Liquidator),
Bidder was represented before the Tribunal by Kumar Pal Mehta, PCS
The Tribunal has directed the promoters and related parties to jointly restore the full amount of Rs. ₹1,76,47,084/- along with 10% annual interest within 30 days, failing which the Applicant has been given liberty to initiate execution proceedings.
FULL TEXT OF THE NCLT JUDGMENT/ORDER
1. This IA was originally filed by Mr. Abhishek Nagori, being Liquidator of Sunlight Extrusion Private Limited. Later vide order dated 06.11.2025 in IA 804 of 2023, the amendment has been carried out in IA No. 158 of 2022, wherein, Mr. Mukesh Jagetia, Successful Bidder, Assignee of the Rights, has been substituted in place of erstwhile liquidator.
The IA No.158 of 2022 was filed on 11.02.2022 by the Liquidator (now substituted by Mr. Mukesh Jagetia, Successful Bidder – hereinafter Applicant) under Section 43 and 45 of the Insolvency and Bankruptcy Code, 2016 for the restoration of the transactions and appropriate orders for the transactions as identified by the auditor appointed to conduct the transaction-based audit, seeking following reliefs: –
a. Your Lordship may be pleased to allow the present application;
b. Your Lordships may be pleased to pass appropriate directions/ orders in terms of Section 44 of the Code to restore amount of Rs. 1,43,90,584 falling under preferential transactions
c. Your Lordships may be pleased to pass appropriate directions/ orders in terms of 46 of the Code for the amount of Rs. 32,56,000/ – falling under undervalued transaction.
d. Your Lordships may be pleased to pass appropriate orders in any other provisions of the Code as it deems fit to this Hon’ble tribunal;
e. Your Lordship may be pleased to grant any other relief or relief as may deem fit in the interest of justice;
In support of this Application, the Applicant has attached an affidavit setting out the facts and verifying the same on which the Applicant relies in the said application.
3. The Applicant has placed the facts through this I.A. in the following manner: –
3.1. The Applicant submitted that the present application has been filed under Sections 43 and 45 of the Insolvency and Bankruptcy Code, 2016 seeking restoration of the transactions and appropriate reliefs in respect of the preferential and undervalued transactions identified in the transaction audit report. The application arises out of the CIRP initiated against M/s Sunlight Extrusion Private Limited pursuant to a petition filed by the Central Bank of India under Section 7 of the Code.
3.2. It is further submitted that the Corporate Debtor was admitted into CIRP by order dated 25.02.2020 under Section 7 of the Code, whereby, Mr. Abhishek Nagori was appointed as the IRP and moratorium was declared. Subsequently, vide order dated 12.07.2021, the Corporate Debtor was ordered to be liquidated and the Applicant was appointed as the Liquidator.
3.3. The Applicant submitted that upon commencement of liquidation, a public announcement was issued inviting claims from stakeholders. Thereafter, the Stakeholders’ Consultation Committee was constituted, the list of stakeholders was finalized and filed before this Adjudicating Authority, and a public announcement thereof was made in compliance with the IBBI (Liquidation Process) Regulations, 2016. The Applicant further appointed M/s Talati 8s Talati LLP as the forensic auditor of the Corporate Debtor.
3.4. The Applicant further submitted that the present application has been filed against the erstwhile directors/promoters of the Corporate Debtor seeking avoidance and restoration of preferential and undervalued transactions identified in the transaction audit report dated 29.10.2021. Despite providing opportunities to the suspended management to furnish clarifications, no satisfactory cooperation was extended. The transaction auditor identified certain transactions undertaken during the review period from 01.04.2012 to 25.02.2020 as appearing to be preferential and undervalued within the meaning of Sections 43 and 45 of the Insolvency and Bankruptcy Code, 2016. The details of same are mentioned below:
PREFERENTIAL TRANSACTION
Anomalies Identified in Settlement of Rakesh Metal Loan Account
3.5. During FY 2017-18, the Corporate Debtor fully repaid the outstanding loan of Rs.2.56 Crores to Rakesh Metals, a related party controlled by Mr. Dilip B. Jain, brother of the ex-directors of the Corporate Debtor. Out of the total outstanding amount, Rs.98.51 lakhs was repaid through bank transactions, while the balance Rs.1.60 Crores was settled by assigning the Corporate Debtor’s trade debtors to Rakesh Metals. The settlement comprised Rs.66,17,207/- on 30.04.2017 and Rs.94,01,455/- on 31.03.2018 through debtor adjustments. As these transactions were effected within the two-year look-back period preceding the Insolvency Commencement Date and involved a related party, the Transaction Auditor has opined that the amount of Rs.1.60 Crores is liable to be examined as a preferential transaction under the provisions of the Insolvency and Bankruptcy Code, 2016.
Refer Section 4.4 at Page 26 of Transaction Audit Report Payment Made to Related Party During the Period of Two Years Preceding the Insolvency Commencement Date
3.6. The Transaction Auditor observed that, during the two years period preceding the Insolvency Commencement Date (25.02.2020), the Corporate Debtor made payments aggregating to Rs.49,89,129/- to seven related parties. Accordingly, the said transactions have been identified for examination as potential preferential transactions under the provisions of the Insolvency and Bankruptcy Code, 2016.
3.7. The details payments to such related parties are as follows:
| # | Name of related party |
Payments made during FY 2018-19 (Amount in INR) | Payments made during FY 2019-20 (Amount in INR) | Remarks |
| 1 | Anitaben Y. Jain | 10,00,000 | Payment during the period of two years preceding the insolvency commencement date — preferential in nature |
|
| 2 | Ashaben K. Jain | 1,68.000 | ||
| 3 | Chandaben B. Jain | 30,00,000 | ||
| 4 | Hiren Yeshw ant Jain |
2,53,000 | ||
| 5 | Sangitaben R. Jain | 2.34,250 | ||
| 6 | Sushilaben
Jain |
73,229 | 2,48,550 | |
| 7 | Star Tubes and Metal Private Limited |
12,100 | ||
| Total | 44,87,579 | 5,01,550 | ||
| Total of FY 2018-19 and FY 2019-20 |
49,89,129 | |||
3.8. The Applicant sought explanations from the Respondents regarding the aforesaid payments; however, no clarification or supporting information was provided. Since the payments were made after the Corporate Debtor was declared NPA and within the two-year look-back period preceding the Insolvency Commencement Date, and were not in the ordinary course of business, the Transaction Auditor has opined that they are liable to be treated as preferential transactions under Section 43 of the Insolvency and Bankruptcy Code, 2016.
Refer Section 4.8 at Page 36 of Transaction Audit Report
3.9. The Transaction Auditor observed that an amount of Rs. 1,43,90,584/-, being assets of the Corporate Debtor, ought to be restored to the liquidation estate for distribution amongst stakeholders in accordance with Section 53 of the Insolvency and Bankruptcy Code, 2016. Despite seeking clarifications from the promoters, the Applicant received no response. Accordingly, the transaction has been identified as a preferential transaction under Section 43 of the Code.
UNDERVALUED TRANSACTION
Transaction Pertaining to Sale of Land at Mumbai –
3.10 The Transaction Auditor observed that the Corporate Debtor had purchased land at MIDC, Navi Mumbai by paying a capital advance of Rs.30.02 lakhs. Subsequently, on 03.09.2019, the land was sold to M/s Rishabh Enterprises for Rs.50,00,000/-. However, an independent valuation obtained from an IBBI-registered valuer assessed the average market value of the property at Rs.82,56,500/-, indicating that the land was sold at an undervalued price by Rs.32,56,500/-. Accordingly, the Transaction Auditor identified the transaction as liable to be examined as an undervalued transaction under the provisions of the Insolvency and Bankruptcy Code, 2016.
3.11. The Transaction Auditor noted several irregularities in the sale of the MIDC land, including inadequate documentation evidencing ownership, insufficient supporting records for Rs.17 lakhs allegedly paid by M/s Rishabh Enterprises on behalf of the Corporate Debtor, sale of the property at a value significantly below its assessed market value, recording of the resultant loss in the books of accounts on the Insolvency Commencement Date, and an outstanding sale consideration of Rs.5 lakhs as on the Insolvency Commencement Date, of which Rs.2 lakhs was received during CIRP, leaving a balance of Rs.2,99,533/-outstanding. Accordingly, the transaction has been identified as liable to be examined as an undervalued transaction under the Insolvency and Bankruptcy Code, 2016.
3.12. The Applicant sought clarifications from the suspended management regarding the sale of land to Rishabh Enterprises after receipt of the draft Transaction Audit Report; however, no response was received. In view of the absence of any satisfactory explanation and the findings of the Transaction Auditor, the transaction has been identified as an undervalued transaction liable to be examined under Section 45 of the Insolvency and Bankruptcy Code, 2016.
Section 4.1 at page 17 of transaction audit report
3.13. Based on the findings of the Forensic Audit and Transaction Audit. Reports, the Applicant contends that the suspended management/promoters of the Corporate Debtor entered into preferential and undervalued transactions within the meaning of Sections 43 and 45 of the Insolvency and Bankruptcy Code, 2016. Accordingly, the Respondents are liable to restore the value of such transactions to the liquidation estate or return the assets acquired thereunder, so that the same may be distributed amongst the stakeholders in accordance with the waterfall mechanism under Section 53 of the Code.
4. After issuance notice, the Respondent No.1 (Kamlesh Bhavarlal Jain) has filed its written statement in reply on 13.04.2022 vide Inward No. D 2045. Further, a purshis has been filed on 06.07.2022 on behalf of the Respondent Nos. 2 85 3 (Rakesh Bhavarlal Jain and Yeshwant Bhavarlal Jain) , adopting the reply filed by the Respondent No.1 . The contents thereof are reproduced hereinbelow
4.1. The Respondent has filed the present reply affidavit denying all the averments, allegations and contentions made in the Application, except those specifically admitted herein. It is submitted that the Application is devoid of merit, that the Applicant has suppressed material facts, and is therefore liable to be dismissed. The Respondent has further sought liberty to file a detailed reply upon verification of the original documents relied upon by the Liquidator.
4.2. PRELIMINARY OBJECTIONS:
The Respondent submits that the present Application is based on incomplete facts and suppression of material particulars by the Liquidator. It is contended that the Respondent should be permitted to verify the original documents relied upon by the Liquidator before any adverse inference is drawn against the Suspended Management.
(A) FORENSIC AUDIT
The Respondent challenges the appointment of M / s. Talati Talati LLP as Forensic Auditor by the Liquidator vide intimation dated 28.05.2021, contending that the appointment was arbitrary and unwarranted. It is submitted that the Corporate Debtor had availed credit facilities from Central Bank of India since 2012, its account was classified as NPA on 31.03.2016, and neither the Bank nor any statutory, internal, concurrent or RBI audit had reported diversion, siphoning or misappropriation of funds, nor was the Corporate Debtor declared a wilful defaulter. The Respondent further submits that the forensic audit was conducted without granting adequate opportunity to furnish records and that, despite the Liquidator’s email dated 28.10.2021 seeking information, the Forensic Auditor submitted its report on 29.10.2021. It is also contended that although the Liquidator directed the audit to cover the period from 01.04.2012 to 25.02.2021, the report itself records no adverse findings up to 31.03.2016.
(B) Para 4 “Findings” on Transaction pertaining to the sale of land (Annexure “G”) Page 69 to 72 of the present application. The Respondent disputes the allegation that the sale of land situated at Patal Ganga Industrial Estate, MIDC, Navi Mumbai, Maharashtra constituted an undervalued transaction. It is submitted that the land was purchased after making the initial payment on 11.08.2010 for a total consideration of Rs.30.02 lakhs and was subsequently sold on 18.09.2019 to M/ s. Rishabh Enterprises. According to the Respondent, the property was never mortgaged to the secured creditor, remained unused after the account became NPA on 31.03.2016, and was exposed to substantial non-utilisation charges and the risk of forfeiture by MIDC. It is further contended that the Forensic Auditor relied only upon the fair market value while ignoring the realizable value and distress value, and also failed to consider that the purchaser incurred Rs.17,00,000/- on 15.05.2019 towards MIDC non-utilisation charges, interest and other expenses. On these grounds, the Respondent submits that the sale cannot be treated as an undervalued transaction under Section 45 of the Code.
(C) Transaction Audit
The Respondent submits that the payment of Rs.49,89,129/- made during F.Y. 2018-19 and F.Y. 2019-20 represented reversal of investment entries and cannot be treated as a preferential transaction under Section 43 of the Code. It is further contended that the Forensic Auditor prepared the report only on the basis of audited financial statements as on 25.02.2020 without examining complete books of account and ledger records, rendering the findings incomplete. The Respondent also disputes the allegation regarding repayment of Rs.2.56 Crores to M/s. Rakesh Metal, submitting that the entries represented repayment of unsecured loans and investments, which were reversed during the period 30.04.2017 to 09.11.2017, prior to the initiation of CIRP, and were genuine commercial transactions undertaken through RBL Bank and Dombivali Co-operative Bank after the Central. Bank account became inoperative following NPA classification on 31.03.2016.
4.3. The Respondent reiterates that the payment of Rs.2.56 Crores to M/s. Rakesh Metal was made pursuant to settlement of unsecured loans and investments and cannot be characterised as a preferential transaction. It is further submitted that the adjustment of outstanding debtors was effected in 2017, whereby M/s. Rakesh Metal undertook recovery of receivables on behalf of the Company. Consequently, the payment of Rs.94,01,455/-, alleged by the Liquidator to be preferential, merely reflected implementation of the earlier commercial settlement and does not attract Section 43 of the Code. Likewise, the amount of Rs.49,89,129/- represented reversal of entries relating to connected parties, and therefore the aggregate amount of Rs.1,43,90,584/- cannot be regarded as constituting preferential transactions.
4.4. UNDER VALUED TRANSACTION
The Respondent reiterates that the sale of the MIDC land for Rs.30.02 lakhs, purchased in 2010 and sold on 18.09.2019, was a commercially prudent distress sale necessitated by mounting MIDC liabilities and the imminent risk of forfeiture. It is further submitted that the purchaser assumed additional liabilities, including payment of Rs.17,00,000/- towards MIDC dues, which were ignored by the Forensic Auditor while arriving at the alleged fair market value. Accordingly, the Respondent denies that the transaction is liable to be avoided under Section 45 or that the findings of the Forensic Auditor justify relief under Sections 43, 45 or 53 of the Code.
4.5. The Respondent submitted that the Corporate Debtor’s account was classified as NPA on 31.03.2016, despite the unit being technically feasible and economically viable. It is further contended that the Corporate Debtor had explored a One Time Settlement (OTS) with the Financial Creditor and that the proposed purchaser deposited Rs.80 lakhs as upfront token amount in a No Lien Account with the Central. Bank of India. However, the OTS proposal was not accepted and the Corporate Debtor subsequently requested refund of the said amount vide letter dated 08.03.2022. On these grounds, it is prayed that the present Application under Sections 43 to 46 and 53 of the IBC be dismissed as it is founded upon an incomplete forensic report and lacks merit.
5. Further, a written statement in reply by Respondent Nos. 4 to 12 has been filed on 06.07.2022 vide Inward No. D 3762, which are reproduced as under:-
5.1. The Respondents submitted that the present Application filed by the Liquidator is devoid of merit, based on inadequate appreciation of facts and evidence, and is liable to be dismissed. It is contended that the Liquidator has suppressed material facts and that the Respondents should be afforded an opportunity to verify the original documents relied upon in the Application before any adverse findings are recorded.
5.2. The Respondents submitted that the transactions impugned by the Liquidator have been identified solely on the basis of the forensic audit conducted by M/s. Talati 85 Talati LLP and have been incorrectly characterized as preferential and undervalued transactions. According to the Respondents, the allegations pertain to (i) repayment of Rs.94,01,455/ to M/s. Rakesh Metal (Respondent No.4), (ii) repayment of Rs.49,89,129/- to Respondents Nos.6 to 12 during F.Y. 2018-19 and F.Y. 2019-20, and (iii) sale of the MIDC land allegedly valued at Rs.82,56,000/-but sold for Rs.50,00,000/-. It is further submitted that the Corporate Debtor’s account was classified as NPA on 31.03.2016 and CIRP commenced on 25.02.2020.
5.3. PRILIMINARY OBJECTIONS:
(A) Para 4 “Findings” on Transaction pertaining to the sale of land (Annexure “G”) Page 69 to 72 of the present application.
The Respondents deny that the sale of land situated at Patal Ganga Industrial Estate, MIDC, Navi Mumbai constitutes an undervalued transaction. It is submitted that the land was originally purchased after making the initial payment on 11.08.2010 for Rs.30.02 lakhs and was subsequently purchased by Respondent No.5 on 18.09.2019. The Respondents contend that Respondent No.5 is a bona fide purchaser, had no collusion with the Corporate Debtor, and had also borne the MIDC non-utilisation charges. It is further submitted that the property was never mortgaged to the secured creditor, remained unused after the account became NPA on 31.03.2016, and was on the verge of forfeiture due to non-utilisation. The Respondents dispute the valuation adopted by the Liquidator on the ground that no valuation report has been produced and only the fair market value was considered while ignoring the realizable value and distress value. It is also pointed out that the purchaser incurred Rs.17,00,000/- on 15.05.2019 towards MIDC non-utilisation charges, interest and miscellaneous expenses, which ought to have been considered while determining the sale consideration. On these grounds, the allegation of an undervalued transaction under Section 45 of the Code is denied.
(b) Transaction Audit
The Respondents submit that the payment of Rs.49,89,129/- made during F.Y. 2018-19 and F.Y. 2019-20 merely represented reversal and adjustment of investment entries and refund of amounts due to related parties. It is contended that the transaction only amounted to squaring off long outstanding dues and cannot be treated as a preferential transaction under Section 43 of the Insolvency and Bankruptcy Code, 2016.
(C) Alleged repayment of Rs.2.56 Crores to M/s. Rakesh Metal Loan Account.
The Respondents submit that M/s. Rakesh Metal had longstanding business dealings with the Corporate Debtor since 2009, and during F.Y. 2017- 18, the Corporate Debtor owed Rs.2.56 Crores towards purchase of commodities. It is submitted that after the Corporate Debtor’s account was declared NPA on 31.03.2016, the parties executed a Memorandum of Understanding dated 31.03.2017, whereby the Corporate Debtor assigned its receivables and outstanding debtors to M/s. Rakesh Metal towards adjustment of the outstanding dues. According to the Respondents, the MOU was executed well before the commencement of the statutory look-back period preceding CIRP initiated on 25.02.2020, and therefore the transaction cannot be treated as a preferential transaction under Section 43. It is further submitted that M/s. Rakesh Metal realized the assigned amounts directly from the debtors and not from the Corporate Debtor, and accordingly the transfer must be reckoned from the date of execution of the MOU dated 31.03.2017 and not from the subsequent realization of the amounts.
5.4. With respect to Para 13 of the Application, the Respondents deny the allegation regarding repayment of Rs.2.56 Crores to M/s. Rakesh Metal and reiterate that the transaction arose out of genuine commercial dealings since 2009, culminating in the Memorandum of Understanding dated 31.03.2017, and therefore falls outside the ambit of Section 43 of the Code. In respect of Para 14, the Respondents submit that after classification of the account as NPA on 31.03.2016, the receivables were assigned to M/s. Rakesh Metal under the MOU dated 31.03.2017, and consequently the payments of Rs.66,17,207/- made on 30.04.2017 and Rs.94,01,455/- made on 31.03.2018 merely represented realization of rights already assigned and cannot be construed as preferential transactions. With regard to Paras 16 to 20, the Respondents reiterate that the payment of Rs.49,89,129/- during F.Y. 2018-19 and F.Y. 201920 represented reversal of entries relating to connected parties and that the aggregate amount of Rs.1,43,90,584/-, comprising Rs.94,01,455/- realized pursuant to the MOU dated 31.03.2017 and Rs.49,89,129/- towards reversal entries, cannot be treated as preferential transactions under Section 43 of the Code. The Respondents further contend that any alleged non-submission of clarifications to the forensic auditor cannot prejudice the bona fide rights acquired by them.
6. Affidavit on behalf of Applicant to place on record Assignment Agreement dated 11.04.2023 has been filed on 28.04.2023 vide Inward No. D 1486, which is as under:-
6.1. The Applicant/ Liquidator has filed the present affidavit seeking substitution/continuation of the proceedings by the successful assignee on account of assignment of the rights arising from the avoidance transaction application.
6.2. It is submitted that the Liquidator conducted an e-auction pursuant to the E-Auction Notice dated 24.02.2023 for assignment of the rights/benefits arising out of the application filed under Sections 43 and 45 of the Insolvency and Bankruptcy Code, 2016.
6.3. In the said e-auction, Mr. Mukesh Jagetia was declared the successful bidder for a consideration of Rs.1,87,000/-, and the entire sale consideration has been paid. Consequently, the Liquidator issued a Sale Certificate dated 11.04.2023.
6.4. The Applicant further submits that an Assignment Agreement dated 11.04.2023 was executed whereby all rights, title and interest in the specified asset, including the right to prosecute the present proceedings, were assigned in favour of the successful bidder.
6.5. It is contended that in view of the Assignment Agreement, the assignee has stepped into the shoes of the assignor and is entitled to continue and prosecute the present application in accordance with law.
6.6. Accordingly, the Applicant has prayed that Mr. Mukesh Jagetia (Assignee) be permitted to continue the present application and that necessary amendment in the cause title and pleadings be carried out in accordance with law.
Written submission has been filed by the Applicant/Liquidator on 31.07.2025 vide Inward No. D 5086. The major contentions of the Applicant are as follows: –
7.1. The present application has been filed by the Liquidator under Sections 43 and 45 of the Insolvency and Bankruptcy Code, 2016, seeking avoidance and reversal of preferential and undervalued transactions identified in the Forensic and Transaction Audit Report.
7.2. The Applicant has identified the following transactions for adjudication:
- Undervalued sale of land at Navi Mumbai to M/s Rishabh Enterprises under Section 45 of the Code.
- Settlement of Rakesh Metal Loan Account, alleged to be a preferential transaction under Section 43 of the Code.
- Payments made to related parties during the relevant look-back period, alleged to be preferential transactions under Section 43 of the Code.
7.3. It is the case of the Applicant that the Navi Mumbai land was sold for Rs.50 lakhs against the average valuation of Rs.82.56 lakhs determined by two IBBI Registered Valuers, resulting in an alleged undervaluation of Rs.32.56 lakhs.
7.4. It is further alleged that repayment of the related party loan of M/s Rakesh Metal to the extent of Rs.94.01 lakhs during the statutory look-back period constitutes a preferential transaction under Section 43 of the Code.
7.5. The Applicant has also alleged that payments aggregating Rs.49.89 lakhs made to related parties during the two years preceding the insolvency commencement date are preferential transactions under Section 43 of the Code.
7.6. The Applicant has prayed for restoration of Rs.1,43,90,584/- towards the alleged preferential transactions under Section 44 and Rs.32,56,000/-towards the alleged undervalued transaction under Section 46 of the Code.
8. Respondent Nos. 4 to 12 has filed its written submission on 03.12.2025 vide Inward No. D 8137. The major contentions of the Respondent Nos.4 to 12 in their defence are as follows:
8.1. It is submitted that the present application is based solely on the Forensic and Transaction Audit Report, which, according to the Respondents, is arbitrary, incomplete, and prepared without examining the primary books of accounts or granting a reasonable opportunity to the suspended management.
8.2. It is further submitted that the transaction pertaining to M/s Rakesh Metal does not constitute a preferential transaction as the assignment of debts was effected pursuant to the Board Resolution dated 24.02.2017 and Memorandum of Understanding dated 31.03.2017, which falls beyond the statutory look-back period under Section 43 of the Code.
8.3. It is further submitted that the payments aggregating to Rs.49,89,129/- made to Respondent Nos. 6 to 12 represented repayment of capital contributions/advances and not financial or operational debts, and therefore do not fall within the ambit of Section 43 of the Code.
8.4. With regard to the sale of land to M/s Rishabh Enterprises, it is submitted that the property was sold under financial distress to avoid forfeiture by MIDC and that the sale consideration reflected the distress value of the property. It is further contended that the purchaser was an independent third party and the transaction cannot be treated as an undervalued transaction under Section 45 of the Code.
8.5. The Respondents further submitted that all the impugned transactions were undertaken in the ordinary course of business, were duly reflected in the books of accounts, and no fraud or mala fides can be attributed to the Respondents.
8.6. Accordingly, the Respondents have prayed for dismissal of the present application.
9. We have heard Ld. Counsel for the Applicant, Ld. Counsel for the Respondent No.1 to 12 and have carefully examined the pleadings of the IA, Replies, Rejoinder, affidavits, written submissions, annexures, transaction audit report and the oral arguments advanced by all sides. On the basis of pleadings and submissions, the following issues arise for determination: –
(i) Issue No.1; Whether the transactions relating to M/s Rakesh Metal are preferential transactions under Section 43 of the Insolvency and Bankruptcy Code, 2016?
(ii) Issue No.2; Whether the payments of 49,89,129/-made to the related parties constitute preferential transactions under Section 43 of the Insolvency and Bankruptcy Code, 2016?
(iii) Issue No.3; Whether the sale of the MIDC land in favour of M/s Rishabh Enterprises constitutes an undervalued transaction under Section 45 of the Insolvency and Bankruptcy Code, 2016?
(iv) Issue No.4; Whether the Applicant is entitled to the reliefs sought?
10. Before we analyse and decide the issues, we consider appropriate to refer to some additional facts as available in the pleadings.
- Sunlight Extrusion Private Limited was incorporated on 10.01.2002 and was a manufacturer, wholeseller,and exporter of copper and copper alloy products.
- Talati and Talati LLP was appointed as forensic and transaction auditor by the Liquidator vide letter of 28.05.2021 and the auditor submitted a report on 29.10.2021.
- As on 31.03.2016, the company equity was negative of 2.33 crores, borrowings (non-current) were Rs 6.23 crores, Borrowings current were 12.03 crores, trades payable were 5.39 crores, trade receivables were of Rs 9.62 crores, property, plant and equipment were of Rs 4.66 crores, and inventories of Rs 3.78 crores.
- The company had taken credit facilities from Central Bank of India. The account became NPA on 31.03.2016 and had bank outstanding of Rs 21.30 crores on 22.05.2018.
- As on 31.03.2019, the company’s borrowings (current) were of Rs 12.03 crores same as on 31.03.2016 but non-current reduced to 2.70 crores.
- The CIRP was commenced on 22.02.2020.
- Two valuers were appointed for valuation of MIDC land and Mr. Parag Seth valued at Rs 80,55,000 and Mr. Ramesh Jain at Rs 84,58,000.
- The Transaction Auditor, in addition to the transactions alleged to be preferential and undervalued, had also identified transactions (i) potential mismatch as per the records in the books of account vis-à-vis Bank Statement, trade receivables/debtors outstanding in the books of account but debtor denied the claim, Potential anomalies in the transactions undertaken with Central Bank of India, transactions with Nishi Industries Private Limited and Star Tubes and Metals Private Limited.
- The Liquidator had sent the draft forensic audit report to the Respondents by email on 24.08.2021 and another email was issued on 08.09.2021. Another email was issued on 15.09.2021 seeking reply. The correspondence attached with the IA shows that communication took place between the Liquidator and suspended management.
11. Findings on Issue No. (1): Whether the transactions relating to M/s Rakesh Metal are preferential transactions under Section 43 of the Insolvency and Bankruptcy Code, 2016?
11.1. The present issue is whether the settlement of the loan account of M/s Rakesh Metal, a related party of the Corporate Debtor, by payment of Rs.94,01,455/ – through adjustment of trade receivables during the statutory look-back period constitutes a preferential transaction under. Section 43 of the Insolvency and Bankruptcy Code, 2016.
11.2. The Transaction Audit Report establishes that M/s Rakesh Metal is a related party, being controlled by the brother of the suspended directors, and the impugned adjustment of receivables was effected within two years preceding the Insolvency Commencement Date (25.02.2020). The Respondents have not disputed the relationship or the factum of such adjustment.
11.3. Section 43(2) of the Code contemplates a preferential transaction where: (i) there is a transfer of the property or an interest thereof of the Corporate Debtor; (ii) the transfer is for the benefit of a creditor, surety or guarantor on account of an antecedent financial or operational debt or other liability; and (iii) such transfer has the effect of putting such creditor, surety or guarantor in a beneficial position than it would have occupied in the distribution of assets under Section 53 of the Code. Upon examination of the material placed on record, all the aforesaid statutory ingredients stand satisfied.
11.4. The mere execution of the Board Resolution dated 24.02.2017 or Memorandum of Understanding dated 31.03.2017 does not by itself amount to the transfer contemplated under Section 43. The relevant transfer occurred only when the receivables were actually assigned and appropriated towards discharge of the antecedent liability during the statutory look-back period.
11.5. The Respondents have failed to establish that the impugned transaction falls within the exceptions contemplated under Section 43(3) of the Code. No cogent evidence has been produced to demonstrate that the transfer was made in the ordinary course of business or formed part of a transaction creating a permissible security interest protected by the Code.
11.6. The Corporate Debtor was legally entitled to collect the receivables from the debtors, but it assigned it receivables to a related party and prevented receipt of money in its bank accounts, which could have been paid/appropriated by the bank. The account had already become NPA on 31.03.2016. Therefore, the corporate debtor instated of collecting the money and routing the transactions through its bank account assigned the receivables to its related party which was used to pay its dues. The Corporate Debtor has given preference in payment to its related party in comparison to other creditors including the banks. It is a transfer of property or rights to receive in favour fo the related party and the transaction by-passed its accounts.
11.7. The Hontble Supreme Court in Anuj Jain, Interim Resolution Professional for Jaypee Infratech Ltd. v. Axis Bank Ltd., (2020) 8 SCC 401, has held that once the statutory ingredients of Section 43 are established, the burden shifts upon the beneficiary to prove that the transaction falls within the statutory exceptions. The Respondents have failed to discharge such burden.
11.8. The objective of Sections 43 and 44 is to preserve the assets of the Corporate Debtor and prevent depletion of the insolvency estate by conferring an undue advantage upon a particular creditor immediately preceding insolvency. The impugned transaction has the effect of preferring a related party over other stakeholders and defeats the pari passu distribution envisaged under the Code.
11.9. Accordingly, this Adjudicating Authority holds that the settlement of the loan account of M/s Rakesh Metal by adjustment of receivables during the relevant look-back period constitutes a preferential transaction within the meaning of Section 43 of the Insolvency and Bankruptcy Code, 2016. Issue No. (1) is answered in favour of the Applicant and against the Respondents.
12. Findings on Issue No. (2): Whether the payments of Rs.49,89,129/- made to the related parties constitute preferential transactions under Section 43 of the Insolvency and Bankruptcy Code, 2016?
12.1 The Applicant contends that during the statutory look-back period of two years preceding the Insolvency Commencement Date, the Corporate Debtor made payments aggregating to Rs.49,89,129/- to related parties. The Transaction Auditor has identified these payments as preferential transactions under Section 43 of the Insolvency and Bankruptcy Code, 2016.
12.2 The recipients of the impugned payments are admittedly related parties of the Corporate Debtor. Such payments were made after the Corporate Debtor had already been classified as Non-Performing Asset (NPA) on 31.03.2016, when it was under severe financial stress and unable to meet its obligations towards other creditors. The information given above shows that the current liabilities remained same as on 31.03.2019 in comparison to 31.03.2016 but non-current reduced and that because of payments to persons other than bank including related parties.
12.3 The Respondents have merely asserted that the payments represented reversal of investment entries or repayment of advances. However, no ledger accounts, journal entries, vouchers, bank records or other contemporaneous documentary evidence have been produced to substantiate the said plea. Mere assertions, unsupported by evidence, cannot rebut the findings recorded in the Transaction Audit Report. Otherwise, also if the Corporate Debtor is in financial distress, then all creditors may face losses equally but in this case related parties paid but banks and other creditors were not paid and is a clear case of preference given to related parties.
12.4 Section 43 of the Code requires the Adjudicating Authority to examine whether the impugned transaction has the effect of placing the creditor, surety or guarantor in a more beneficial position than it would have occupied under Section 53 of the Code. The payments to related parties, in the facts of the present case, clearly resulted in such preferential treatment.
12.5 The Respondents have also failed to establish that the impugned payments were made in the ordinary course of business or financial affairs of the Corporate Debtor and the recipients. The burden of proving the applicability of the exception under Section 43(3) lies upon the party claiming its benefit, which has not been discharged in the present case.
12.6 The object of the avoidance provisions under the Code is to preserve the assets of the Corporate Debtor for equitable distribution amongst all stakeholders and to prevent depletion of the insolvency estate through preferential dealings with select creditors or related parties. Accepting the Respondents’ contention, in the absence of cogent evidence, would defeat the legislative intent underlying Sections 43 and 44 of the Code.
12.7 Accordingly, this Tribunal holds that the payments aggregating to Rs.49,89,129/- made to the related parties during the relevant look-back period satisfy the requirements of Section 43 of the Insolvency and Bankruptcy Code, 2016 and constitute preferential transactions liable to be avoided under Section 44 of the Code. Issue No. (2) is answered in favour of the Applicant.
13. Findings on Issue No. (3): Whether the sale of the MIDC land in favour of M/s Rishabh Enterprises constitutes an undervalued transaction under Section 45 of the Insolvency and Bankruptcy Code, 2016?
13.1 The Applicant has challenged the sale of the MIDC land at Navi Mumbai on the ground that it was transferred for a consideration substantially lower than its fair market. value. The Transaction Auditor, relying upon the valuation reports of two IBBI Registered Valuers (Mr. Parag Seth valued at Rs 80,55,000 and Mr. Ramesh Jain at Rs 84,58,000), assessed the average market value at Rs.82.56 lakhs, whereas the property was sold for Rs.50 lakhs, resulting in an undervaluation of Rs.32.56 lakhs.
13.2 Section 45 of the Code contemplates avoidance where the Corporate Debtor makes a gift or transfers one or more assets for a consideration significantly less than the value of such assets and the transaction is not undertaken in the ordinary course of business. The valuation reports together with the Transaction Audit Report establish that the impugned transfer satisfies the statutory requirements.
13.3 The Respondents have sought to justify the sale by contending that the property was sold under financial distress to avoid forfeiture by MIDC and that the purchaser discharged MIDC dues. However, no contemporaneous documentary evidence has been produced to demonstrate that the reduced sale consideration reflected the true realizable or distress value of the property or that the alleged additional liabilities formed part of the contractual consideration. The Corporate Debtor had paid Rs 30 lakhs to MIDC in 2010 for purchasing the land.
13.4 The contention that the purchaser incurred approximately Rs.17 lakhs towards MIDC charges does not, by itself, establish that the sale consideration represented the fair value of the property. Such expenditure, even if incurred, cannot substitute or enhance the consideration reflected in the registered conveyance unless supported by reliable documentary evidence linking the payments to the agreed sale price.
13.5 The Respondents have also failed to produce any independent valuation report or expert evidence to rebut the valuation relied upon by the Applicant. Mere denial of the Transaction Audit Report, without credible material disproving the valuation adopted by two registered valuers, is insufficient to dislodge the Applicant’s case.
13.6 The Hon’ble Supreme Court in Anuj Jain, IRP for Jaypee Infratech Ltd. v. Axis Bank Ltd., (2020) 8 SCC 401 has explained that the avoidance provisions under the Code are intended to protect the insolvency estate from transactions that diminish the value available to creditors.
13.7 In view of the valuation reports, the Transaction Audit Report, and the absence of any convincing rebuttal by the Respondents, this Adjudicating Authority is satisfied that the transfer of the MIDC land for Rs.50 lakhs, as against its assessed value of Rs.82.56 lakhs, constitutes an undervalued transaction within the meaning of Section 45 of the Insolvency and Bankruptcy Code, 2016. Accordingly, Issue No. (3) is answered in the affirmative and in favour of the Applicant.
14. Findings on Issue No. (4): Whether the Applicant is entitled to the reliefs sought?
14.1 We find that the Applicant has placed on record the Transaction Audit Report, valuation reports, books of account, financial records and supporting documents establishing the impugned transactions. The Respondents have failed to produce any cogent documentary evidence sufficient to dislodge the material relied upon by the Applicant.
14.2 The Transaction Audit Report has identified the impugned transactions after examination of the financial records of the Corporate Debtor. Mere denial of the findings or criticism of the audit methodology, unsupported by contrary evidence, cannot rebut the documentary material placed on record. The transaction auditor had identified various other transactions as suspicious but the Liquidator after due consideration did not include in the Application justifying, he formed his opinion, based on the facts, as required in section 43 of the Code. Section 35(1)(i) of the Code empowers the Liquidator to seek assistance from the professionals. Transaction and Forensic Audit is a specialised job and the Liquidator sought assistance from the Auditor to examine the transactions of the Corporate Debtor as stated in section 45 of the Code.
14.3 The Respondents have contended that the transactions were undertaken in the ordinary course of business and pursuant to commercial arrangements. However, no contemporaneous records or independent evidence have been produced to establish that the transactions satisfy the statutory exceptions under the Insolvency and Bankruptcy Code, 2016.
14.4 The plea that the sale of the MIDC land represented a distress sale to avoid forfeiture also remains unsubstantiated. The Respondents have not produced any independent valuation or material demonstrating that the consideration reflected the fair market or realizable value of the property on the date of transfer.
14.5 The Hon’ble Supreme Court in Anuj Jain, Interim Resolution Professional for Jaypee Infratech Ltd. v. Axis Bank Ltd., (2020) 8 SCC 401, has held that the existence of the statutory ingredients under Section 43 must be examined objectively and the burden thereafter shifts to establish that the transaction falls within the statutory exceptions.
14.6 The Hon’ble Supreme Court in Venus Recruiters Pvt. Ltd. v. Union of India has held that avoidance applications survive independently and require adjudication on their own merits even after approval of a resolution plan, as the purpose of such proceedings is to maximise the value of the assets available to creditors.
14.7 The Flonible Supreme Court in Swiss Ribbons Pvt. Ltd. v. Union of India, (2019) 4 SCC 17, has recognized that avoidance provisions under the Code are intended to preserve and recover the value of the Corporate Debtor for equitable distribution amongst creditors, thereby advancing the objectives of the Insolvency and Bankruptcy Code, 2016.
14.8 Accordingly, on appreciation of the pleadings, documentary evidence, Transaction Audit Report, valuation reports and the applicable provisions of the Insolvency and Bankruptcy Code, 2016, this Adjudicating Authority is satisfied that the Applicant has established the preferential transactions covered under Section 43 as well as the undervalued transaction covered under Section 45 of the Code. Consequently, the Applicant is entitled to appropriate relief under Sections 44 and 48 of the Code.
14.9 Though the Applicant has referred to Section 46 in the prayer clause, the consequential relief in respect of the undervalued transaction is liable to be granted under Section 48 of the Insolvency and Bankruptcy Code, 2016.
15. In view of the foregoing findings, the present Application deserves to be allowed. Accordingly, in exercise of the powers conferred under Sections 44 and 48 of the Insolvency and Bankruptcy Code, 2016, this Adjudicating Authority holds that the transactions aggregating to Rs.1,43,90,584/- are preferential transactions liable to be avoided under Section 44 of the Code, and that the transfer of the MIDC land resulting in diminution in value of Rs.32,56,500/- is an undervalued transaction liable to appropriate relief under Section 48 of the Code. Consequently, appropriate directions under Sections 44 and 48 of the Code are liable to be issued.
16. Accordingly, in exercise of powers under Sections 44 and 48 of the Insolvency and Bankruptcy Code, 2016, the beneficiaries/transferees of the aforesaid preferential and undervalued transactions are directed to restore the money and/or property, as the case may be, to the liquidation estate of the Corporate Debtor to the extent of the benefit derived by them, so as to restore the position which would have existed but for such transactions. The value so restored shall form part of the liquidation estate and shall be dealt with in accordance with Section 53 of the Code.
17. Therefore, the present Application is allowed in the following terms: –
i. The transactions relating to settlement of the loan account of M/s Rakesh Metal to the extent of Rs.94,01,455/- are declared to be preferential transactions under Section 43 of the Insolvency and Bankruptcy Code, 2016 and are avoided in exercise of powers under Section 44 of the Code. This money is ordered to be vested in the Corporate Debtor as per Section 44 (1)(a) of the Code.
ii. The payments aggregating to 49,89,129/- made to the related parties, namely Respondent Nos. 6 to 12, are declared to be preferential transactions under Section 43 of the Insolvency and Bankruptcy Code, 2016 and are avoided in exercise of powers under Section 44 of the Code. The Respondents to the extent they were beneficiaries of the transactions are ordered to transfer the money to the Corporate Debtor.
iii. The sale of the MIDC land in favour of M/s Rishabh Enterprises (Respondent No.5) is declared to be an undervalued transaction under Section 45 of the Insolvency and Bankruptcy Code, 2016. Consequently, appropriate relief is granted under Section 48 of the Code to restore the value lost to the Corporate Debtor to the extent of 32,56,500/-.
iv. Accordingly, the Respondent Nos.4 to 12 shall restore to the liquidation estate the money and/or property received by each of them pursuant to the impugned transactions, the aggregate value whereof is Rs.1,76,47,084/- (Rs.1,43,90,584/-Rs.32,56,500/-) together with simple interest 10.00% per annum from the date of filing of the present Application till realization, within 30 days from the date of this order.
v. Upon such restoration, the Liquidator/Assignee shall include the restored amount and property in the liquidation estate for distribution amongst the stakeholders strictly in accordance with Section 53 of the Insolvency and Bankruptcy Code, 2016.
vi. In the event of default in compliance with this order, the Applicant shall be at liberty to seek enforcement of this order by initiating appropriate execution proceedings in accordance with law before the competent forum.
18. Accordingly, A. No. 158 (AHM) 2022 in CP(IB) No. 261 of 2018 is allowed in terms of above directions. No order as to costs.
19. Registry is directed to communicate a copy of this order to the Applicant, the Respondents, the Liquidator/Assignee and the Insolvency and Bankruptcy Board of India (IBBI), forthwith. A certified copy of this order be issued, if applied for, upon compliance with all requisite formalities.
