Back
Is Fraudulent Intent Required for Preferential Transactions? NCLT Delhi Answers for
In a significant clarification of the law governing preferential transactions under the , the has held that a creditor or the resolution professional need not establish fraudulent intent to have a transaction declared preferential under Section 43. The ruling, delivered by a bench comprising President Justice Anupinder Singh Grewal and Technical Member Ravindra Chaturvedi, reinforces the objective nature of the provision, which operates through a once the statutory ingredients are satisfied.
The decision arose from an filed by C.A. Manjit Anjna, the assignee of the not readily realizable assets of , a corporate debtor undergoing . The case underscores the stringent scrutiny that transactions entered into during the face, and provides a clear roadmap for insolvency professionals seeking to claw back value for the benefit of all creditors.
Under Section 43
Section 43 of the IBC defines a "" as one where the corporate debtor transfers its property or undertakes an obligation towards an antecedent financial or operational debt, and such transaction has the effect of placing the creditor in a more beneficial position than it would have been in the event of a distribution of assets under Section 53. The provision applies to transactions entered into within one year (for related parties) or six months (for unrelated parties) prior to the initiation of CIRP.
Crucially, the NCLT bench emphasized that Section 43(2) does not require any proof of fraudulent intent. The court observed:
"It is pertinent to note that under Section 43(2), there is no need to prove any fraudulent intent for a transaction to be held preferential. Section 43 operates by virtue of a
: once the ingredients set out in clauses (a) and (b) of sub-section (2) are established, the transaction is liable to be treated as a
with attendant consequences, irrespective of whether it was in fact intended or even anticipated to be so."
This observation aligns with the broader legislative intent behind the IBC, which prioritizes of assets and discourages any attempt by a corporate debtor to favor certain creditors over others during the preceding insolvency.
The Payments in Question
' CIRP commenced on , following a petition filed by (now merged with ) under Section 7. During the process, the transaction auditor, , identified two payments that warranted closer examination.
The first payment was a sum of ₹2 lakh made to Manish Kumar Tripathi, an unsecured creditor, during the financial year 2018-19. The second was a payment of ₹11.50 lakh to during the financial year 2017-18, which was directed towards pre-existing outstanding dues.
The assignee of the corporate debtor's assets, C.A. Manjit Anjna, sought a declaration that both payments constituted preferential transactions and should be reversed under Section 44 of the IBC. The suspended director of , Bharat Sharma, opposed the application, arguing that the payments were made in the . He also raised objections on grounds of delay and non-joinder of necessary parties.
Court's Reasoning and Application of Law
The NCLT bench closely examined the facts in light of the statutory framework. It noted that no material or documentary evidence was produced by the suspended director to support the defence that the payments were made in the . Referring to the judgment in , the bench held that the exclusion under Section 43(3)(a) did not apply.
Both payments fell within the one-year applicable under Section 43(4). The ₹2 lakh payment to Tripathi was found to be towards an . Since Tripathi was an unsecured creditor, the payment placed him in a more beneficial position than he would have occupied in a distribution of assets under Section 53, where unsecured creditors typically recover only a fraction of their dues.
Similarly, the ₹11.50 lakh payment to was made towards an . The court held that this payment also gave an advantage over other creditors of the same class. The under Section 43(2) was therefore triggered for both transactions.
Consequences and Directions
Section 44 of the IBC empowers the adjudicating authority to order the reversal of a . The NCLT accordingly declared both payments as preferential under Section 43. It directed Manish Kumar Tripathi to pay ₹2 lakh jointly and severally with the two suspended directors of to the assignee. Similarly, was directed to pay ₹11.50 lakh jointly and severally with the two suspended directors.
This ensures that the beneficiaries of the preferential treatment cannot escape accountability, even if the directors are unable to pay. The order also serves as a deterrent against collusive arrangements between corporate debtors and select creditors during the vulnerable period.
Impact on Insolvency Practice
The ruling provides much-needed clarity for resolution professionals, transaction auditors, and legal practitioners dealing with avoidance applications. By confirming that fraudulent intent is not a prerequisite, the NCLT has streamlined the evidentiary burden. Insolvency professionals can now focus on establishing the objective elements—existence of an antecedent debt, the transfer within the , and the preferential effect—without needing to prove subjective intent.
This approach is consistent with the IBC's overarching objective of maximizing value for all creditors and ensuring fairness in the distribution of assets. It also aligns with international best practices in insolvency law, where preferential transactions are often evaluated on a .
However, the decision also underscores the importance of maintaining proper records and documentation. Corporate debtors and their directors cannot rely on vague assertions of ordinary course dealings. The absence of documentary evidence will weigh heavily against them, as seen in this case.
Conclusion
The NCLT Delhi's judgment in the case reaffirms the robust framework of the IBC in combating preferential treatment of creditors. By removing the requirement of fraudulent intent, the tribunal has strengthened the hands of resolution professionals and liquidators in recovering assets for . Legal practitioners advising corporate debtors must now be acutely aware that even well-intentioned payments to creditors during the may be reversed if they confer a disproportionate benefit. The ruling is a timely reminder that the IBC's are designed to protect the collective interest of all stakeholders, not just those who act swiftly to secure payment.
