Status as on- 23/05/2022

The Hon’ble NCLAT, Principal Bench, New Delhi in the matter of Sahara India v. Shir Nandkisho Vishnupant Deshpande and Anr. bearing CA(AT)(Ins) No. 368 of 2021 the moot proposition arose that:

1. Whether the NCLT can Suo-moto declare a transaction as a preferential transaction under Section 43 of IBC?
2. Whether the NCLT can Suo moto record a transaction as a related party transaction?

Factual Matrix

1. The Appellants, had entered a Memorandum of Understanding (MoU) with the Corporate Debtor and advanced a sum of Rs. 42,61,33,333/- for the future supply of goods. Due to the non-fulfilment of the terms of the MoU, the Appellant and the Corporate Debtor mutually decided to convert the sum advanced into an unsecured loan. Accordingly, the MoU was replaced with a loan agreement.
2. CIRP had been initiated against the Corporate Debtor, the appellant submitted its claims to the Resolution Professional (RP) as a Financial Creditor.
3. RP, however, had classified the Appellants as Operational Creditors because the sum had been advanced for the future supply of goods. The Appellants preferred an application against the decision of the RP before the NCLT
4. The NCLT observed that by executing the loan agreement, the Corporate Debtor had converted operational debt into financial debt, intending to put the Appellant in a beneficial position and Suo-moto classified the transaction as Preferential Transaction in terms of Section 43(2)(a).
5. The NCLT observed that by executing the loan agreement, the Corporate Debtor had converted operational debt into financial debt, intending to put the Appellant in a beneficial position and Suo-moto classified the transaction as Preferential Transaction in terms of Section 43(2)(a).

The ratio laid by the Hon’ble NCLAT, Principal Bench

The Hon’ble NCLAT, Principal Bench, New Delhi held that the IBC does not vest the power to NCLT to Suo-moto classify a transaction as Preferential Transaction under Section 44 r/w Section 45 of IBC.

• The NCLAT held that the Adjudicating Authority exceeded its jurisdiction while recording that the transaction as a “Preferential Transaction” without any application moved by the RP or Liquidator before AA and the same is not done in the case at hand, thereby defeating the intent envisaged under Section 44(1)
• The NCLAT also held that the IBC does not vest the power to record a transaction as a Related Party transaction without moving any appropriate application by the party.
• The NCLAT held that the Adjudicating Authority on its own has recorded the Appellant as a related party which is beyond the provisions contended in the Code either explicitly or implicitly. The Adjudicating Authority in its impugned order has exceeded its jurisdiction while recording the finding to the effect that the Appellant is a related party which is beyond scope of the petition before AA.

Conclusion

The NCLT does not vest with the power to classify a transaction as Preferential Transaction under Section 44 r/w Section 45 of IBC and even does not vest with the power to classify a transaction as a “Related Party transaction”

Disclaimer: The above article is based on the personal interpretation of the related orders and laws. The readers are expected to take expert opinions before relying upon the article. For more information, please contact us.

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