- Apprentice Lawyer
- Legal Jobs
The NCLAT has set aside an order passed by the NCLT which directed Jaiprakash Associates Ltd (JAL) to return land worth around Rs 5,900 to its subsidiary, Jaypee Infratech Ltd (JIL) which is undergoing corporate insolvency resolution.
The 858 acres of land belonged to JIL but was mortgaged to a consortium of banks which included ICICI Bank, Axis Bank, Standard Chartered Bank, SBI and others against a loan advanced to JAL. The Allahabad Bench of the NCLT had earlier passed an order holding that the mortgages created by JIL in favour of the lenders of JAL, amounted to preferential, undervalued and fraudulent transactions under the Insolvency and Bankruptcy Code (IBC). The NCLT had found that the mortgages were created deliberately at a time when JIL was headed into insolvency.
The NCLAT Judgement was passed by a two-member bench headed by Chairperson Justice SJ Mukhopadhaya in an appeal preferred by the consortium of banks who had advanced the loan to JAL.
The Appellants challenged the Adjudicating Authority i.e NCLT’s finding that the transaction i.e. mortgages amounted to ‘preferential transactions’, ‘undervalued transactions’ as well as ‘fraudulent trading or wrongful trading’ under provisions of the IBC. Appellants submitted that the Adjudicating Authority ignored the nature and character of a mortgage while passing the order.
Stressing upon their “right to payment”, the Appellants submitted that a ‘mortgage debt’ was covered by the definition of ‘debt’ under Section 3(11) IBC and was a liability or obligation in respect of a claim, which is due from the Corporate Debtor or a mortgagor (which was JIL in the present case).
The Resolution Professional for JIL defended the order and claimed that the land was mortgaged by the directors of JIL to the Appellants to secure the loan of its related party, JAL, in utter disregard to their fiduciary duties at a time when JIL itself was in the middle of an immense financial crunch.
After recording the submissions by the parties, the NCLAT analysed all the relevant sections under IBC.
With respect to the contention of ‘preferential transactions’ under Section 43 IBC, the NCLAT held that since the interest on the property of the Corporate Debtor was not created in favour of the Appellants against a financial debt owed by the Corporate Debtor, Section 43(2)(a) would not be attracted. Therefore, the mortgage could not be annulled on the ground of preferential transaction in terms of Section 43 (2)(a), it said. As Section 43(2)(a) was not attracted, the question of applicability of clause (b) of sub-section (2) of Section 43 also did not arise, it was added.
The NCLAT further observed that as apparent from the facts, the mortgages were made in favour of the Appellants “in ordinary course of the business and financial affairs of the transferee”. They were, therefore, exempted from the ambit of Section 43(2).
The NCLAT also held that Section 45 which dealt with ‘avoidance of undervalued transactions’ would also not be applicable on the ground that the transaction was not related to any payment due from the ‘Corporate Debtor’.
Contentions of ‘fraudulent trading’ were also rejected on the ground that the transactions were made in the ordinary course of business.
“In the present case, we have noticed that the transactions in question i.e. mortgage(s) were made in favour of the ‘Banks and Financial Institutions’ by the ‘Corporate Debtor’ (‘Jaypee Infratech Limited’) in the ordinary course of business of the ‘Corporate Debtor’. The Appellants- Banks and Financial Institutions have given loans to the holding Company namely— ‘Jaiprakash Associates Limited’. 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’.”
In absence of any contrary evidence, the NCLAT held that the creation of mortgages was not fraudulent.
The NCLAT further stated that in absence of allegations of under Section 49 IBC that the transaction was made to defraud the creditors, the NCLT was not empowered to pass an order under Section 51.
The NCLAT thus set aside the order passed by the Adjudicating Authority and ordered,
“In view of such findings, the Appellants- ‘Axis Bank Ltd.’, ‘Standard Chartered Bank’, ‘ICICI Bank Ltd.’, ‘State Bank of India’, ‘Jai Prakash Associates Ltd.’, ‘Bank of Maharashtra’, ‘United Bank of India’, ‘Central Bank of India’, ‘UCO Bank’, ‘Karur Vyasa Bank (P) Ltd.’, ‘L&T Infrastructure Finance Company Ltd.’, ‘Canara Bank’, ‘Karnataka Bank Ltd.’, ‘IFCI Ltd.’, ‘Allahabad Bank’, ‘Jammu & Kashmir Bank’ and ‘The South Indian Bank Ltd.’ are entitled to exercise their rights under the ‘I&B Code’.”
Axis Bank was represented by Senior Advocate Sudipto Sarkar along with a team from AZB & Partners – Anindita Roy Chowdhury, Abhishek Singh, Abhijnan Jha.
Standard Chartered was represented by Senior Advocate Amit Sibal with Advocates Parag Maini, Abhimanyu Chopra.
ICIC Bank was represented by Senior Advocate Ramji Srinivasan with Shardul Amarchand Mangaldas lawyers – Misha, Shantanu Chaturvedi, Charu.
SBI was represented by Advocates Sanjay Kapur, Bharath Gangadhar, Megha Karnwal.
Bank of Maharashtra was represented by Advocates Divyanshu Goyal, Swati Jain.
United Bank of India, Canara Bank, Allahabad Bank and UCO Bank was represented by Advocates Rajiv S Roy, Avrojyoti Chaterjee, Abhijit S Roy, Jayasree Saha.
Central Bank was represented by Advocates Jasvinder Singh, Shipra Shukla.
Karur Vysya Bank was represented by Advocates Vijay Kumar, Shashant Prabhakar.
L&T was represented by Senior Advocate Ramji Srinivasan with Advocate Varun Singh.
Karnataka Bank was represented by Advocates Siddhant Surya, Sanjay Bajaj.
IFCI was represented by Advocates Shweta Bharti, Sukrit Kapoor, Shuchi Sejwar.
J&K Bank was represented by Advocates Syed A Abid, A. Gupta, Prateek Khaitan.
The South Indian Bank was represented by Advocates Parag Maini , Abhimanyu Chopra.
Respondents were represented by Senior Advocate Sanjeev Sen with Advocates Jannahvi Bhasin, Sanjay Bhatt, Niharika Sharma, Mahfooz Nazki.
Read the Judgement: