National Company Law Appellate Tribunal (NCLAT): A 2-Member Bench of Justice S.J. Mukhopadhaya (Chairperson) and Justice Bansi Lal Bhat, Member (Judicial), set aside the order of National Company Law Tribunal (Allahabad), whereby it had cancelled the mortgage of 858 acres of land worth around Rs 5900 crores made by Jaypee Infratech Ltd. (Corporate Debtor) to secure debt of Jaiprakash Associates Ltd.

Notably, Jaiprakash Associates is the holding company of JIL, which is currently under the insolvency process. The Resolution Professional of JIL filed an application before NCLT for cancelling the mortgage deeds made by the Promoters and Directors of JIL in the years 2016 and 2017 by way of which the above transaction was entered into. It was alleged that there were fraudulent and wrongful transactions within the meaning of Section 66 of the Insolvency and Bankruptcy Code, 2016. By the impugned order, NCLT allowed the said application. Aggrieved, the Banks/Financial Institutions– the creditors in whose favour the mortgage deeds were made– filed the present appeal.

The stand of the Resolution Professional was that although the mortgage of land by a company to its related party may not be forbidden under law, yet it becomes questionable if it has been done in complete disregard to the interest of creditors and stakeholders of such company (in this case, such company being JIL).

The Appellate Tribunal perused Section 66 (fraudulent trading or wrongful trading) and noted that from a bare perusal of section, it is clear that if during the Corporate Insolvency Resolution Process or Liquidation Process, it is found that any business of the Corporate Debtor has been carried on with intent to defraud its creditors or for any fraudulent purpose, the Adjudicating Authority is empowered to pass appropriate order under Section 67.

In the present case, however, the Appellate Tribunal found that the mortgages were made by JIL in the ordinary course of its business. It was observed: 

The ‘Corporate Debtor’ being one of the group company, like a guarantor, executed mortgage deed(s) in favour of the Appellants- ‘Banks and Financial Institutions’. We have seen that none of the transactions were ‘preferential transaction’ or ‘undervalued transaction’. It has not been alleged that the transactions, in question, were made to defraud the creditors in terms of Section 49 so allegation has been made that such transactions amount to ‘extortionate credit’ as defined under Section 50. Therefore, the Adjudicating Authority in the absence of any such finding is not empowered to pass an order under Section 51. Further, as we have held that the transactions were made in the ordinary course of business in absence of any contrary evidence to show that they were made to defraud the creditors of the ‘Corporate Debtor’ or for any fraudulent purpose, on mere allegation made by the ‘Resolution Professional’, it was not open to the Adjudicating Authority to hold that mortgage deeds, in question, were made by way of transactions which come within the meaning of ‘fraudulent trading’ or ‘wrongful trading’ under Section 66.

For the aforesaid reasons, the impugned order dated 16-05-2018 passed by NCLT, Allahabad insofar it relates to the appellants herein was set aside. The appellants were held entitled to exercise their rights under IBC. The appeals were accordingly disposed of. [Axis Bank Ltd. v. Resolution Professional for Jaypee Infratech Ltd., 2019 SCC OnLine NCLAT 435, decided on 01-08-2019]

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