The National Company Law Tribunal ("NCLT") has been found to lack the authority to suo moto classify a transaction as a preferential transaction under the provisions of the Insolvency and Bankruptcy Code, 2016 ("IBC") in its decision dated May 9, 2022 ("Judgement") in the case of Sahara India v. Shri Nandkishor Vishnupant Deshpande and Others [Company Appeal (AT) (Insolvency) No. 368 of 2021.
The brief facts are that Sahara India, a registered partnership company ("Appellant"), and Royal Refinery Private Limited ("Corporate Debtor/Respondent No.2") entered into a memorandum of understanding (MOU) dated March 7, 2017 ("MOU"), pursuant to which the Appellant advanced INR 39.95 Crores to the Corporate Debtor in various tranches beginning in April 2018 and ending in February 2019 for the supply of future goods in the form of gold coins/gold ornaments The Appellant was supposed to get the Gold Coins after January 2019. The advance payments paid by the Appellant did not incur interest in accordance with the MOU's stipulations.
The NCLT refused to classify the Appellant's claim as a "financial debt" in its order dated January 7, 2021 ("Impugned Order") and treated the transaction as a preferential transaction in accordance with Section 43(2)(a) of the IBC on the grounds that the loan agreement dated April 15, 2019 executed between the Appellant and Axis Bank Limited (the "Loan Agreement") was a preferential transaction under Section 43(2)(a) of the IThe NCLT refused to classify the Appellant's claim as a "financial debt" in its order dated January 7, 2021 ("Impugned Order") and treated the transaction as a preferential transaction in accordance with Section 43(2)(a) of the IBC on the grounds that the loan agreement dated April 15, 2019 executed between the Appellant and Axis Bank Limited (the "Loan Agreement") was a preferential transaction under Section 43(2)(a) of the IBC, which is why the appellant moved forward to challenge the order.
In the instant case titled Sahara India v. Shri Nandkishor Vishnupant Deshpande and Another, the issue raised for clarification before the NCLAT was:
Whether the IBC's rules permit the NCLT to suo moto classify a transaction as a preferential transaction?
With regard to this issue, The NCLAT noted that it was an undeniable truth that the funds were received by the Corporate Debtor in a number of instalments in order to fulfil the Appellant's request for gold coins at a later time. It was also obvious that there was no interest paid on the aforementioned advance payment. Additionally, the funds were advanced at the "origination of transactions" between April 2018 and February 2019 and they met the requirements for operational debt as stated in Section 5(21) of the IBC. The Appellant and the Corporate Debtor are unrelated parties, as neither party claimed in their respective statements. According to Section 43(4)(b) of the IBC, the lookout period is one year prior to the insolvency commencement date if the parties were not connected. Due to the fact that the CIRP began in November 2019, only two payments—totalling INR 2.5 Crore and INR 2.04 Crore, respectively—from the total advance payment of INR 39.95 Crore could be considered preferential payments. The other payments—released from April 1 to June 30—would not, in any way, fall within the ambit of Section 43 of the IBC.
Citing IBC regulations, the NCLAT noted that it is abundantly evident that transfers conducted in the Corporate Debtor's regular course of business or financial affairs are not subject to preferential transactions. The NCLAT noted that the MOU signed in 2017 was intended to furnish commodities in the form of gold coins or gold jewellery, and the sequence in which the CIRP was initiated shows that the Corporate Debtor was engaged in a regular business of purchasing and reselling gold bars. As a result, the deal between the Appellant and the Corporate Debtor was "in the ordinary course of business." Additionally, because the parties are unrelated, only the transactions that occur within a year of the start of CIRP are eligible for preferential treatment, not the whole advance amount.
The NCLAT came to the judgement that the NCLT had overstepped its authority when it found that the Appellant and the Corporate Debtor were connected persons, which was outside the purview of the petition submitted to the NCLT. That is to say, outside of what is allowed under the IBC, the NCLT of its own volition categorised the parties as related parties.
The NCLAT categorically stated that,
"The Resolution Professional has not filed any application for the preferential transaction as required under Section 43(1). 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 own has recorded it as a related party which is beyond the provisions contended in the Code either explicitly or implicitly.”