NATIONAL LAW INSTITUTE UNIVERSITY, BHOPAL

SUBJECT: INSOLVENCY AND BANKRUPTCY CODE

TOPIC- “PUFE TRANSACTIONS AND INSOLVENCY AND

BANKRUPTCY LAW”

BATCH (2018-19)

SUBMITTED TO: - SUBMITTED BY:-

Asso Prof. AMIT PRATAP SINGH NAMITA TRIPATHI

ROLL NO-2018LLM45
 ABSTRACT
The UNCITRAL Legislative Guide on Law of Insolvency provides a model structure
recommendation regarding the avoidance proceeding. Regulation 35A of CIRP Regulations,2016,
time limit of 135 days is prescribed within which Resolution Professional has to submit an application
to NCLT based upon the firm determination formed in respect of preferential and other transactions.

Insolvency Resolution Process itself has a limited time period of 180 days and if the Resolution
Profession will linger 135 days in assessment of preferential transaction of the company, then when
he will complete the other formalities.

Resolution profession has an eminent role to play in this regard as after identification of such
avoidable transaction the corpus of fund to be distributed among all the creditors’ increases.
However, the strict time line is a challenge in itself.

Further, it has to be noted Section 43 and 45 of IBC came into effect from 15th Dec., 2016 and section
25, 66, 60, 50, 18, 25 and 69 came into effect w.e.f 1st Dec., 2016. IBC has prospective legislation and
doesn’t have retrospective effect and as we discussed above Companies Act has a look back period of
just six months.

What if the transaction had materialized before the relevant provision of the IBC came into force?
Why such limited look back period of one year in case of related party and two years in case of others
is provided? What if the impugned preferential transaction is created before the period of one
year/two years?

Hence, the authority need to give attention on the look back period provided under IBC otherwise it
will defeat the one of object of the code which is balancing the interest of all the stakeholders.
 INTRODUCTION

Avoidance proceedings are one of the crucial measures in saving the value of an insolvent
entity under liquidation. The UNCITRAL (United Nation Commission on International
Trade Law) Legislative Guide on Law of Insolvency defines avoidance proceedings as
“provisions of the insolvency law that permits transactions for the transfer of assets or the
undertaking of obligations prior to insolvency proceedings to be cancelled or otherwise
rendered ineffective and any assets transferred, or their value, to be recovered in the
collective interest of creditors”.1

The avoidance proceedings are intended to target and reverse the effect of “preferential
transactions”.

Preferential and other transaction is defined under Regulation 35A of CIRP Regulations,
2016.

The following table presents a model timeline of corporate insolvency resolution process on
the assumption that the interim resolution professional is appointed on the date of
commencement of the process and the time available is hundred and eighty days:

Regulation Description of Activity Norm Timeline

Resolution Professional to Within 75 days of the T+75

form an opinion on commencement
preferential and other
transactions
Regulation 35A
Resolution Professional to Within 115 days of T+115
make a determination on the commencement
preferential and other
transactions

Resolution Professional to Within 135 days of T+135

2
file applications to NCLT for the commencement
appropriate relief.

1
www.uncitral.org/pdf/english/texts/insolven/05-80722_Ebook.pdf(last visited on 29/03/2019 at 10:00pm)
2
Regulation 40A Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate
Persons) Regulations, 2016- Modern Timeline.
It has to be noted that fix period of 135 days is provided as the ideal insolvency resolution
process period 180 days beginning from the insolvency commencement date and ending on
180th day.

Generally law specifies the rules to identify and classify transaction as preferential or
otherwise. However, courts have time and again looked for the spirit of these rules.

Preference is favor, preference is bias. So where a creditor is unduly favored by the debtor
who adversely affects the collective interest of all creditors in a liquidation scenario, it is
called preference3. Further the term “Preference” is defined in UNCITRAL guide, as a
transaction which results in a creditor obtaining an advantage or irregular payment.

The NCLT’s order in IDBI Bank Ltd. V. Jaypee Infratech Ltd4 is the first judgment to
assess the scope of preferential, undervalued and fraudulent transaction under the code. The
order has had the effect of restraining a distressed entity from making any attempt to put its
asset out of the hands of its creditors.

AVOIDABLE TRANSACTION UNDER IBC-

Law should specify the following types of transaction as avoidable transaction that are found
in most legal systems:

a) Preferential Transactions

Preferential transactions are those transactions wherein, the creditor received a larger
percentage of its claim from the debtor’s assets than other creditors of the same rank or class.

As may be inferred from section 43 5 of Insolvency and Bankruptcy Code, 2016 (IBC) in
order to establish that the transaction is a preferential transaction, it is important to bring the
following to the force:
(i) there is a property or there is interest in the property;
(ii) such property(ies) is transferrable;
(iii) transfer operated for the benefit of a creditor a guarantor;
(iv) transfer is for or on account of an antecedent financial debt or operational debt or
other liabilities owed by the corporate debtor;
(v) transfer has the effect of putting such creditor or a surety or a guarantor in a
beneficial position than it would have been in the event of a distribution of assets
being made in accordance with section 536.

Exception has been carved out where transfer made in the ordinary course of the business7 or
financial affairs.

3
www.ibbi.gov.in/orders/nclt?title=jaypee&date=&nclt (last visited on 28/03/2019 at 7:00pm)
4
CA No 26/2018 in Company Petition No (IB) 77/AD/2017.
5
Section 43 of IBC- Avoidance of preferential transactions.
6
Section 53 of IBC- Distribution of assets.
 b) Undervalued Transactions

Transactions would generally be avoidable where the value received by the debtor as the
result of the transaction with a third party was either nominal or non-existent.

As may be inferred from section 45 8 in order to establish that the transaction is a preferential
transaction, it is important to bring the following to the force:

(i) gift to a person;

(ii) the transfer of one or more assets for a consideration the value of which is
significantly less than the value of the consideration.

Such transaction has not taken place in the ordinary course of business 9.

c) Extortionate Credit Transactions

If the borrower has been party to an extortionate credit transaction and which is not in
accordance with the law, and such that involved receipt of financial or operational debt.

As per section 5010, extortionate credit transactions are such transactions involving the receipt
of financial or operational debt during the period within two years preceding the insolvency
commencement date.

Further, any debt extended by any person providing financial services which is in accordance
to the provision of law for the time being in force in relation to such debt shall in no event be
considered as an extortionate credit transaction.11

As per section 5112 of IBC whenever, an application for avoidance of credit transactions is
made to the Adjudicating Authority13 under section 50, it has to satisfy itself that the terms
require exorbitant payments to be made by the corporate debtor. Where it is so satisfied, the
Adjudicating Authority can make the following orders with respect to the transactions:

a. restore the position which existed prior to such impugned transaction;

b. set aside the whole or part of the debt created on account of the such impugned
transaction;
c. modify the terms of such impugned transaction;

7
Ordinary course of business defined in UNCITRAL guide as- transactions consistent with both:
(i) the operation of the debtor’s business prior to insolvency proceedings; and (ii) ordinary business terms.
8
Section 45 of IBC - Avoidance of undervalued transactions.
9
Refer supra note 5
10
Section 50 of IBC- Extortionate credit transaction.
11
Explanation to Section 50 of IBC.
12
Section 51 of IBC- Orders of Adjudicating Authority in respect of extortionate credit transactions.
13
Section 5 (1) of IBC- “Adjudicating Authority” means National Company Law Tribunal constituted under
section 408 of the Companies Act, 2013 (18 of 2013).
 d. require any person who is/was a party to the transaction;
e. require any security interest that was created as part of the extortionate credit
transaction to be relinquished in favor of the liquidator or the resolution professional.

d) Transaction Defrauding Creditors

Transactions intended to defeat, hinder or delay creditors involve the debtor transferring
assets to any third party with the intention of putting them beyond the reach of creditors.

As per section 49 of IBC, where the Adjudicating Authority is satisfied that corporate debtor
has entered in undervalued transaction (as discussed above) for deliberately keeping assets of
the company beyond the reach of any person who is entitled to make a claim or in order to
adversely affect the interest of such a person in relation to the claim.

Exception has been carved out where any interest in property which was acquired or a benefit
from the transaction was received in good faith.

Avoidable Transaction: Set aside by NCLT

Section Heading Time frame Consequences

43 Preferential Related Party14 - NCLT may order to release or discharge (in

Transaction preceding 2 years whole or in part) of any security interest
Unrelated Party - created by the corporate debtor or require
preceding 1 year any person to pay such sums in respect of
benefits received by him from the corporate
debtor, such sums to the resolution
professional.
45 Undervalue Related Party - NCLT may declare such transactions as
Transaction preceding 2 years void and reverse the effect of such
Unrelated Party - transaction
preceding 1 year
49 Transaction No time limit NCLT shall pass an order to restore and
Defrauding specified protect the interest of such persons who are
Creditors victim of such transaction.

50 Extortionate preceding 2 years NCLT can pass an order to restore modify,

Credit set aside the terms of transaction or require
Transaction any person to repay any amount received by
such person

14
Section 5(24) of IBC – Related Party.
There might be overlap in between such transactions as discussed above.

Preferential
Transaction

Undervalued Fradulent
Transaction Transaction

The Companies Act also has this concept of fraudulent preference wherein the look-
back period is six months.

Section 536 and 537 of Companies Act, 1956 provides for avoidance of transfers etc. and
avoidance of certain attachments, executions, etc. after the commencement of winding up.
Similarly, Sections 328 to 331 of Companies Act, 2013 deals with fraudulent preference or
certain transaction to be declared as void under the Act.

Further, time period of such fraudulent preference time in case of related party or others does
not differ as nothing is mentioned about the same under the said Act.

PURPOSE OF AVOIDANCE PROVISIONS

There may be significant opportunities for the debtor to attempt to hide assets from creditors;
incur artificial liabilities; make donations or gifts to relatives and friends or pay certain
creditors to the exclusion of others. There may also be opportunities for creditors to initiate
strategic action to place themselves in an advantageous position. The result of such activities,
in terms of the eventual insolvency proceedings, generally disadvantages ordinary unsecured
creditors who were not party to such actions and do not have the protection of a security
interest.

Provisions dealing with avoidance powers are designed to support these collective goals,
ensuring that creditors receive a fair allocation of an insolvent debtor’s assets consistent with
established priorities and preserving the integrity of the insolvency estate. Avoidance
provisions may also have a deterrent effect, discouraging creditors from pursuing individual
remedies in the period leading up to insolvency if they know that these may be reversed or
their effects nullified on commencement.

It is important to bear in mind that many of the transactions that may be subject to avoidance
in insolvency are perfectly normal and acceptable when they occur outside that context, but
become suspect only when they occur in proximity to the commencement of insolvency
proceedings. 15

In other words, the mechanism as provided under IBC should be complied with, to achieve a
balance between the interests of all stakeholders. It become questionable if some transactions
or carried on or done in complete disregard to the interest of the creditors and stakeholders,
results in asset stripping. Even in some cases the creditor threatens the debtor to give them
priority over other creditors and stakeholders.

Role of Resolution Professional under PUFE Transactions

Regulation 39(2) of CIRP Regulations, 2016 requires the Resolution Professional 16 to submit
to the committee of creditors, all details of the transactions, if any, which falls under section
43, 45, 50 and 66 of IBC and also the order of NCLT, if any.

Provision of Regulation 39(2) read as under:

The resolution professional shall submit to the committee all resolution plans which comply
with the requirements of the Code and regulations made there under along with the details of
following transactions, if any, observed, found or determined by him:-

(a) preferential transactions under section 43;

(b) undervalued transactions under section 45;
(c) extortionate credit transactions under section 50; and
(d) fraudulent transactions under section 66,

and the orders, if any, of the adjudicating authority in respect of such transactions. 17

Section 25(1) of IBC casts a duty on Resolution Professional to preserve and protect the
assets of the corporate debtor, including the continued business operations of the corporate
debtor. In relation of the same, section 25(2)(j) of IBC casts a duty upon the Resolution
Professional to apply for avoidance of transactions in accordance with Chapter III of IBC

15
Refer supra note 1
16
Section 5(27) of IBC -“Resolution Professional” means an insolvency professional appointed to conduct the
corporate insolvency resolution process and includes an interim-resolution professional.
17
Regulation 39 of CIRP Regulation, 2016- Approval of Resolution Plan.
Section 43, 45, 50 and 66 of chapter III deals with the preferential transactions, undervalued
transactions, extortionate credit transactions and fraudulent and wrongful transactions
respectively.

Resolution profession has an eminent role to play in this regard as after identification of such
avoidable transaction the corpus of fund to be distributed among all the creditors’ increases.
This way there will be a balance between the interest of creditors and stakeholders.

International Perspective
Title 11 U.S. Code § 547 & 548 18 deals Preference & Fraudulent Transfers respectively.
19

Section 547 read as under:

The trustee may avoid any transfer of an interest of the debtor in property—

(1) to or for the benefit of a creditor;

(2) for or on account of an antecedent debt owed by the debtor before such transfer was
made;

(3) made while the debtor was insolvent20 ;

(4) made—

A. on or within 90 days before the date of the filing of the petition; or

B. between ninety days and one year before the date of the filing of the petition, if such
creditor at the time of such transfer was an insider21.

Section 548 read as under:

The trustee may avoid any transfer (including any transfer to or for the benefit of an
insider under an employment contract) of an interest of the debtor in property, or any
obligation (including any obligation to or for the benefit of an insider under an employment
contract) incurred by the debtor, that was made or incurred on or within 2 years before the
date of the filing of the petition, if the debtor voluntarily or involuntarily :-

- made such transfer or incurred such obligation with actual intent to hinder, delay, or
defraud any entity to which the debtor was or became, on or after the date that such
transfer was made or such obligation was incurred, indebted;

19
Title – Bankruptcy; Chapter 5- Creditors, the Debtor, and The Estate; Subchapter III. The Estate; Section 547-
Preference & Section 548- Fraudulent transfers and obligations.
20
11 USC § 101(32)
21
11 USC § 101(31)
 - received less than a reasonably equivalent value in exchange for such transfer or
obligation; and

A voidable preference is a transfer to a creditor for an antecedent debt made within 90 days
before filing the petition commencing the case, where the debtor is insolvent, the effect of
which is to give the creditor more than what he will receive under Chapter 7 liquidation case.

The look back period provided in case of fraudulent transfer is two years. It has to be noted
that alike Indian Bankruptcy Law, there is no difference provided in US code for the related
party and others. It is same in all case.

Whereas in India the look back period for both preference and fraudulent transactions are
same, that is two years. However, in case of Related Party, it would be one year.

Cases Laws- PUFE Transactions

In IDBI Bank Ltd. V. Jaypee Infratech Ltd, the issue was decided in the favor of
Resolution Professional against JIL. It was found that JIL has by way of mortgage of
unencumbered land created security in favor of lenders of Jayprakash Associates Ltd. (JAL),
which happens to be the holding company of the JIL without any consideration.

Such transfer was made to put one the creditor, JAL in a beneficial position that it would
have been in the event of distribution of assets being made by section 53 of IBC. The
impugned transactions were both preferential and unvalued. Further, the transaction was
being undertaken during the period of two years from the date of initiation of Corporate
Insolvency Resolution Process (9th August 2017) provided under section 46(1)(ii) of the code.

In Mr. Sumit Binani, RP V Excello Fin Lea Ltd. and others, the Corporate Debtor (CD)
had taken loan from the first respondent (Excello Fin Lea Ltd.) and second respondent
(Tirumala Balaji Alloys Pvt. Ltd.). The promoters of the CD hold 99.9 % shares of the first
respondent and 50% of shares of second respondent. Though it has been in losses since long,
it repaid the loans to them. The RP filed an application under section 43 and 44 of IBC for
refund of Rs.23.48 crore and Rs.5.68 crore respectively to the CD along with interest @18%
per annum on the ground that the payments made to them fall within the ambit of preferential
transactions.

The NCLT observed that “most fundamental doctrine underlying the field of
insolvency/bankruptcy is equality of distribution of the debtor's assets among his creditors.
This objective cannot be achieved if the debtor is free to prefer favorite creditors by
distributing assets unequally shortly before onset of insolvency, if such conduct is allowed,
liquidations/bankruptcy distributions would become largely meaningless. A preference
occurs when a company pays specific creditor or group of creditors and by doing so makes
the creditor “better off” than the majority of other creditors before the company going into
insolvency.”
It Discussed comparative provisions in the US, UK and India in respect of preference. It
directed that the first respondent shall restore entire transferred amount and the second
respondent shall restore the transfers made on 28 October, 2016 and 31 March, 2017
aggregating to Rs.2.84 crore along with 12% interest till the date of realization to the CD,
within 30 days of the date of order.22

Conclusion

Time is the essence of IBC, in Regulation 35A of CIRP Regulations, 2016, time limit of 135
days is prescribed within which Resolution Professional has to submit an application to
NCLT based upon the firm determination formed in respect of preferential transaction.

Firstly, Insolvency Resolution Process itself has a limited time period of 180 days and if the
Resolution Profession will linger 135 days in assessment of preferential transaction of the
company, then when he will complete the other formalities like examination or verification of
claim etc. especially in case of those companies having complicated structure (which had n
number of subsidiary or holding companies.

Further, it has to be noted Section 43 and 45 of IBC came into effect from 15th Dec., 2016
and section 25, 66, 60, 50, 18, 25 and 69 came into effect w.e.f 1st Dec., 2016. IBC has
prospective legislation and doesn’t have retrospective effect and as we discussed above
Companies Act has a look back period of just six months.

What if the transaction had materialized before the relevant provision of the IBC came into
force? Why such limited look back period of one year in case of related party and two years
in case of others is provided? What if the impugned preferential transaction is created before
the period of one year/two years?

Why a limited time period is provided, when it may have grave repercussions? Further a
person who is a not related party 2014 may be a related party in 2015 and what if they
materialized such impugned transactions in 2014. The Resolution Professional has no access
to such transactions as those were materialized two years ago and the look back period under
IBC in case of Related Party is one year.

Hence, the authority need to give attention on the look back period provided under IBC
otherwise it will defeat the one of object of the code which is balancing the interest of all the
stakeholders.

22
www.ibbi.gov.in/QUARTERLY_NEWSLETTER_FOR_JUL_SEP_2018.pdf(last visited on 28/03/2019 at
8:00pm)