The Supreme Court while upholding the order given by National Company Law Tribunal (NCLT) cancelling the mortgages made by Jaypee Infratech Ltd (JIL) to secure debts of its holding company Jaiprakash Associates Ltd (JAL),  also discussed the issue of ‘preferential transaction’ under the Insolvency and Bankruptcy Code, 2016 (IBC).

The NCLT bench of Ahemdabad had allowed the application filed by Interim Resolution Professional appointed by JIL in order to seek avoidance of mortgage transactions regarding 758 acres of land as being ‘preferential, undervalued and fraudulent’ in accordance with sections 43, 45 and 66 of IBC. This order had been set aside by National Company Law Appellate Tribunal in the previous year.

The bench comprising of Justice A M Khanwilkar and Justice Dinesh Maheshwari set aside the order given by NCLAT and restored the original order passed by NCLT. They also listed a set of questions for consideration while determining the issue of ‘preferential transaction’. These questions included deciding whether such a transaction is beneficial for the creditor, the surety or the guarantor, whether it is for or on the account of an antecedent financial or operational debt o other liabilities, and whether it would have the effect of [putting such creditor, surety or guarantor in a beneficial position in the vent of distribution of assets.

The court also noted that for such a preference to become avoidable, it ought to be given in the period specified in Sec 43 of the Code. They also observed that the intention of the IBC is such that it seeks to disprove or disregard such transactions which falls within the scope of Sec. 43. It also endeavours to ensure that any property that would have been lost by reason of such a transaction is brought back to the corporate debtor and to remove any encumbrance to bring the corporate debtor back on its wheels as well as equitable and just distribution of its assets.

The consideration of the facts of the case were such that the Court concluded that the said mortgages amounted to preference given to a ‘related party during a relevant time’. They court also held that a person having only security interest cannot be regarded as its financial creditor.

In the present case, the court held that the lenders of JAL based on the strength of mortgages in question may fall in the category of secured creditors and it cannot be said that the corporate debtor owes them any ‘financial debt’ within the meaning of the code and hence such lenders of JAL do not fall in the category of ‘financial creditors’ of the corporate debtor  JIL.

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Link for Judgement: Anuj Jain for Jaypee Infratech Ltd. v. Axis Bank Ltd.