ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE INFRATECH LIMITED v. AXIS BANK LIMITED ETC. ETC.

p. 336 Copy page pinpoint

A Section 3(8): “corporate debtor” means a corporate person who owes a debt to any person; Section 3(10): “creditor” means any person to whom a debt is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree-holder; B Section 3(11): “debt” means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt; Section 3(12): “default” means non-payment of debt when whole or any part or instalment of the amount of debt has become due C and payable and is not paid by the debtor or the corporate debtor, as the case may be; Section 3(30): “secured creditor” means a creditor in favour of whom security interest is created;

D Section 3(31): “security interest” means right, title or interest or a claim to property, created in favour of, or provided for a secured creditor by a transaction which secures payment or performance of an obligation and includes mortgage, charge, hypothecation, assignment and encumbrance or any other agreement or arrangement securing payment or performance of any obligation of any person: Provided that security interest shall not include a performance guarantee; Section 3(33): “transaction” includes a agreement or arrangement in writing for the transfer of assets, or funds, goods or services, from or to the corporate debtor; Section 3(34): “transfer” includes sale, purchase, exchange, mortgage, pledge, gift, loan or any other form of transfer of right, title, possession or lien; G Section 3(35): “transfer of property” means transfer of any property and includes a transfer of any interest in the property and creation of any charge upon such property; Section 5(5A): “corporate guarantor” means a corporate person who is the surety in a contract of guarantee to a corporate debtor; H

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 337 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

Section 5(7): “financial creditor” means any person to whom a A financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to; Section 5(8): “financial debt” means a debt alongwith interest, if any, which is disbursed against the consideration for the time value of money and includes- B (a) money borrowed against the payment of interest; (b) any amount raised by acceptance under any acceptance credit facility or its de-materialised equivalent; (c) any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument; (d) the amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed; (e) receivables sold or discounted other than any receivables sold on non-recourse basis; (f) any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing; Explanation.— For the purposes of this sub-clause,— (i) any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing; and F

(ii) the expressions, “allottee” and “real estate project” shall have the meanings respectively assigned to them in clauses (d) and (zn) of section 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2016);22 G (g) any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account; 22 This explanation was inserted w.e.f. 06.06.2018. H

p. 338 Copy page pinpoint

A (h) any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution; (i) the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clauses (a) to (h) B of this clause; Section 5(20): “operational creditor” means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred; Section 5(21): “operational debt” means a claim in respect of the provision of goods or services including employment or a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority; Section 5(24): “related party”, in relation to a corporate debtor, means – (a) a director or partner of the corporate debtor or a relative of a director or partner of the corporate debtor; (b) a key managerial personnel of the corporate debtor or a relative of a key managerial personnel of the corporate debtor; (c) a limited liability partnership or a partnership firm in which a director, partner, or manager of the corporate debtor or his relative is a partner; (d) a private company in which a director, partner or manager of the corporate debtor is a director and holds along with his relatives, more than two per cent of its share capital; (e) a public company in which a director, partner or manager of the corporate debtor is a director and holds along with relatives, more than two per cent of its paid-up share capital; G (f) anybody corporate whose board of directors, managing director or manager, in the ordinary course of business, acts on the advice, directions or instructions of a director, partner or manager of the corporate debtor; (g) any limited liability partnership or a partnership firm whose partners or employees in the ordinary course of business, acts on

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 339 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

the advice, directions or instructions of a director, partner or manager of the corporate debtor; (h) any person on whose advice, directions or instructions, a director, partner or manager of the corporate debtor is accustomed to act; B (i) a body corporate which is a holding, subsidiary or an associate company of the corporate debtor, or a subsidiary of a holding company to which the corporate debtor is a subsidiary; (j) any person who controls more than twenty per cent of voting rights in the corporate debtor on account of ownership or a voting agreement; C

(k) any person in whom the corporate debtor controls more than twenty per cent of voting rights on account of ownership or a voting agreement; (l) any person who can control the composition of the board of D directors or corresponding governing body of the corporate debtor; (m) any person who is associated with the corporate debtor on account of — (i) participation in policy making process of the corporate debtor; or E (ii) having more than two directors in common between the corporate debtor and such person; or (iii) interchange of managerial personnel between the corporate debtor and such person; or F (iv) provision of essential technical information to, or from, the corporate debtor;” 12.2. The concept and consequences of preferential transactions at a relevant time are provided in Sections 43 and 44 of the Code, which may also be usefully extracted as follows:- G “Section 43. Preferential transactions and relevant time.- (1) Where the liquidator or the resolution professional, as the case may be, is of the opinion that the corporate debtor has at a relevant time given a preference in such transactions and in such manner as laid down in sub-section (2) to any persons as referred to in H

p. 340 Copy page pinpoint

A sub-section (4), he shall apply to the Adjudicating Authority for avoidance of preferential transactions and for, one or more of the orders referred to in section 44. (2) A corporate debtor shall be deemed to have given a preference, if— B (a) there is a transfer of property or an interest thereof of the corporate debtor for the benefit of a creditor or a surety or a guarantor for or on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor; and C (b) the transfer under clause (a) 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 53. (3) For the purposes of sub-section (2), a preference shall not include the following transfers— (a) transfer made in the ordinary course of the business or financial affairs of the corporate debtor or the transferee; (b) any transfer creating a security interest in property acquired by the corporate debtor to the extent that— (i) such security interest secures new value and was given at the time of or after the signing of a security agreement that contains a description of such property as security interest, and was used by corporate debtor to acquire such property; and F (ii) such transfer was registered with an information utility on or before thirty days after the corporate debtor receives possession of such property: Provided that any transfer made in pursuance of the order of a G court shall not, preclude such transfer to be deemed as giving of preference by the corporate debtor. Explanation.—For the purpose of sub-section (3) of this section, “new value” means money or its worth in goods, services, or new credit, or release by the transferee of property previously transferred to such transferee in a transaction that is neither void

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 341 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

nor voidable by the liquidator or the resolution professional under this Code, including proceeds of such property, but does not include a financial debt or operational debt substituted for existing financial debt or operational debt. (4) A preference shall be deemed to be given at a relevant time, if— B (a) It is given to a related party (other than by reason only of being an employee), during the period of two years preceding the insolvency commencement date; or (b) a preference is given to a person other than a related party during the period of one year preceding the insolvency commencement date. Section 44. Orders in case of preferential transactions.- (1) The Adjudicating Authority, may, on an application made by the resolution professional or liquidator under sub-section (1) of section 43, by an order: (a) require any property transferred in connection with the giving of the preference to be vested in the corporate debtor; (b) require any property to be so vested if it represents the application either of the proceeds of sale of property so transferred or of money so transferred; (c) release or discharge (in whole or in part) of any security interest created by the corporate debtor; (d) require any person to pay such sums in respect of benefits received by him from the corporate debtor, such sums to the liquidator or the resolution professional, as the Adjudicating Authority may direct; (e) direct any guarantor, whose financial debts or operational debts owed to any person were released or discharged (in whole or in part) by the giving of the preference, to be under such new or revived financial debts or operational debts to that person as the Adjudicating Authority deems appropriate; (f) direct for providing security or charge on any property for the discharge of any financial debt or operational debt under the order, H

p. 342 Copy page pinpoint

A and such security or charge to have the same priority as a security or charge released or discharged wholly or in part by the giving of the preference; and (g) direct for providing the extent to which any person whose property is so vested in the corporate debtor, or on whom financial B debts or operational debts are imposed by the order, are to be proved in the liquidation or the corporate insolvency resolution process for financial debts or operational debts which arose from, or were released or discharged wholly or in part by the giving of the preference: C Provided that an order under this section shall not— (a) affect any interest in property which was acquired from a person other than the corporate debtor or any interest derived from such interest and was acquired in good faith and for value; (b) require a person, who received a benefit from the preferential transaction in good faith and for value to pay a sum to the liquidator or the resolution professional. Explanation I.-For the purpose of this section, it is clarified that where a person, who has acquired an interest in property from another person other than the corporate debtor, or who has received a benefit from the preference or such another person to whom the corporate debtor gave the preference, — (i) had sufficient information of the initiation or commencement of insolvency resolution process of the corporate debtor; (ii) is a related party, it shall be presumed that the interest was acquired or the benefit was received otherwise than in good faith unless the contrary is shown. Explanation II.-A person shall be deemed to have sufficient information or opportunity to avail such information if a public announcement regarding the corporate insolvency resolution process has been made under section 13.” 12.3. As the transactions in question are the mortgage(s) of the assets of corporate debtor JIL, the concept and connotations of mortgage, H

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 343 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

as occurring in Section 58 of the Transfer of Property Act, 1882 23, could also be usefully noticed as under:- “58. “Mortgage”, “mortgagor”, “mortgagee”, “mortgage- money” and “mortgage-deed” defined.- (a) A mortgage is the transfer of an interest in specific immoveable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt, or the performance of an engagement which may give rise to a pecuniary liability. The transferor is called a mortgagor, the transferee a mortgagee; the principal money and interest of which payment is secured for the time being are called the mortgage-money, and the instrument (if any) by which the transfer is effected is called a mortgage- deed. (b) Simple mortgage.-Where, without delivering possession of the mortgaged property, the mortgagor binds himself personally to pay the mortgage-money, and agrees, expressly or impliedly, that, in the event of his failing to pay according to his contract, the mortgagee shall have a right to cause the mortgaged property to be sold and the proceeds of sale to be applied, so far as may be necessary, in payment of the mortgage-money, the transaction is called a simple mortgage and the mortgagee a simple mortgagee. (c) Mortgage by conditional sale.-Where, the mortgagor ostensibly sells the mortgaged property- on condition that on default of payment of the mortgage- money on a certain date the sale shall become absolute, or on condition that on such payment being made the sale shall become void, or on condition that on such payment being made the buyer shall transfer the property to the seller, the transaction is called a mortgage by conditional sale and the mortgagee a mortgagee by conditional sale:

23 Hereinafter also referred to as ’the Transfer of Property Act’. H

p. 344 Copy page pinpoint

A Provided that no such transaction shall be deemed to be a mortgage, unless the condition is embodied in the document which effects or purports to effect the sale. (d) Usufructuary mortgage.-Where the mortgagor delivers possession or expressly or by implication binds himself to deliver possession of the mortgaged property to the mortgagee, and authorises him to retain such possession until payment of the mortgage-money, and to receive the rents and profits accruing from the property or any part of such rents and profits and to appropriate the same in lieu of interest, or in payment of the mortgage-money, or partly in lieu of interest or partly in payment of the mortgage-money, the transaction is called an usufructuary mortgage and the mortgagee an usufructuary mortgagee. (e) English mortgage.-Where the mortgagor binds himself to repay the mortgage-money on a certain date, and transfers the mortgaged property absolutely to the mortgagee, but subject to a D proviso that he will re-transfer it to the mortgagor upon payment of the mortgage-money as agreed, the transaction is called an English mortgage. (f) Mortgage by deposit of title-deeds.-Where a person in any of the following towns, namely, the towns of Calcutta, Madras, E and Bombay, and in any other town which the State Government concerned may, by notification in the Official Gazette, specify in this behalf, delivers to a creditor or his agent documents of title to immoveable property, with intent to create a security thereon, the transaction is called a mortgage by deposit of title-deeds. F (g) Anomalous mortgage.- A mortgage which is not a simple mortgage, a mortgage by conditional sale, an usufructuary mortgage, an English mortgage or a mortgage by deposit of title- deeds within the meaning of this section is called an anomalous mortgage.” G 12.4. The provisions contained in Sections 124, 126 and 127 of the Indian Contract Act, 187224 shall also have bearing on the issues at hand and hence, the same may also be noted as follows:- “124. “Contract of indemnity” defined.- A contract by which one party promises to save the other from loss caused to him by H 24 Hereinafter also referred to as ‘the Contract Act’.

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 345 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

the conduct of the promisor himself, or by the conduct of any A other person, is called a “contract of indemnity.”

126. ‘Contract of guarantee’, ‘surety’, ‘principal debtor’ and ‘creditor’ – A ‘contract of guarantee’ is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the B ‘surety’; the person in respect of whose default the guarantee is given is called the ‘principal debtor’, and the person to whom the guarantee is given is called the ‘creditor’. A guarantee may be either oral or written.

127. Consideration for guarantee.- Anything done, or any C promise made, for the benefit of the principal debtor, may be a sufficient consideration to the surety for giving the guarantee.” WHETHER THE TRANSACTIONS IN QUESTION ARE PREFERENTIAL Broad features of rival contentions and submissions D

13Copy pinpoint13. As noticed, being aggrieved by the order so passed by NCLAT, three sets of parties have preferred these appeals. Multidimensional and wide-ranging submissions have been made by learned counsel for the respective parties, raising the issues as to whether the transactions in question could be said to be preferential and/or undervalued and/or E fraudulent, essentially within the meaning of Sections 43, 45, 49 and 66 of the Code. Elaborate submissions have also been made raising the issue as to whether the lenders of JAL, in whose favour the security interest by way of impugned transactions were created, would fall in the category of ‘financial creditors’ of the corporate debtor JIL. F

14Copy pinpoint14. Having regard to the overall circumstances, appropriate it would be to deal, at the first, with the contentions related with the issue as to whether the transactions in question are preferential transactions within the meaning of Section 43 of the Code. We may briefly summarize the contentions of the appellants, with particular focus on this issue as G infra: Interim Resolution Professional for Jaypee Infratech Limited – the appellant In C.A. No. 8512-8527 of 2019 14.1. It has been contended on behalf of the appellant Interim Resolution Professional, who moved the application for avoidance of H

p. 346 Copy page pinpoint

A the transactions in question, that the impugned transactions have the effect of putting JAL, which is an equity shareholder and an operational creditor (for an amount of Rs. 261.77 crores) of the corporate debtor JIL, in a beneficial position than it would have been in the event of distribution of assets under Section 53 of the Code vis-à-vis other creditors; and that if the transactions are held to be valid, the liability of B JAL towards its own creditors gets secured and becomes realisable from the value of the mortgaged properties whereby, JAL’s liabilities are reduced and JAL gets benefitted in exclusion of creditors of the corporate debtor JIL. It is submitted that, in the event of distribution of assets in terms of Section 53 of IBC, for the sake of argument, even if C JAL is to get full value of its shares (Rs. 995 crores), such amount is significantly less than the value of assets which have been mortgaged by way of impugned transactions for satisfaction of debts owed by JAL to its lenders. 14.1.1. It is submitted on behalf of the appellant Interim Resolution D Profession that the assets in question were released from the earlier mortgages and fresh mortgages were created during the look-back period with increased/enhanced amount of facilities as provided under each individual transaction. The said so-called re-mortgage essentially amounts to a fresh mortgage within the relevant time of two years before the date of commencement of CIRP and was not done in the ordinary course of business of JIL and hence, is hit by Section 43 of the Code. 14.1.2. It is further urged that in the exclusionary clause under Section 43(3)(a), which pertains to the transfer being made in the ordinary course of the business or financial affairs of the corporate debtor or the transferee, the expression “or” will have to be read conjunctively and not in the alternative. That is to say, the word “or” will have to be read as “and”. This is because if “or” is read textually, it would mean that an overwhelming majority of transactions like the present one, whereby banks who would accept the security interest over properties belonging to a third party, after disbursing financial facilities to its loan, would get out of the net of “preferential transactions”, even if the transfer in question is not made in the ordinary course of business of the corporate debtor. It is submitted that the intention of legislature behind enacting a provision like Section 43 is that preferential transactions are avoided so that such assets would be available either with the resolution professional or with the liquidator, as the case may be, to put the corporate debtor back on its H

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 347 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

wheels or if that is not possible, to ensure that the creditors of the corporate debtor get a fair deal. With reference to the decisions of this Court in State of Bombay v. R.M.D. Chamarbaugwala and Anr.: 1957 SCR 874 and Mazagaon Dock Ltd v. Commissioner of Income- Tax and Excess Profits Tax: 1959 SCR 848, it is submitted that on the well-known cannons of interpretation, “or” could be read as “and” if it is warranted to bring the provision in question in sync with the intention of the legislature which is to be discerned. 14.1.3. It is contended that Section 43 ought to be read keeping in mind the intention of the legislature in introducing such provision, which had been to protect the creditors against siphoning away of corporate assets by the management of the company, who have special knowledge of the company’s financial troubles by virtue of its position. India Infrastructure Finance Company Limited – the appellant in C.A.@ D No. 32881 of 2019. 14.2. This appellant is one of the entities who has advanced loan to JIL and has preferred appeal with permission, assailing the order passed by NCLAT and maintaining, inter alia, that in any case, the lenders of JAL cannot be taken as ‘financial creditors’ of JIL. While referring to the theory behind the provisions for avoidance of certain transactions, it is submitted on behalf of this appellant that the Court should consider substance rather than legal form in evaluating the true economic effect of a transaction or a set of transactions in applying the relevant provisions. On behalf of this appellant, the following submissions have been made in regard to the relevant expressions and phrases occurring in the provisions under consideration: Ordinary Course of Business F 14.2.1. It is submitted that mortgages could not have been made in the ordinary course of business of the corporate debtor JIL, as it is difficult to fathom why a subsidiary would furnish security to its parent company in the ordinary course and, on the contrary, it is the parent company which at times furnishes security on behalf of its subsidiary G since it derives economic value from the subsidiary. According to the appellant, it is difficult to appreciate that when the corporate debtor JIL was itself reeling under financial stress, why it would routinely undertake to secure the indebtedness of JAL by furnishing such high valued securities and that too when the amount of debt secured by way of H

p. 348 Copy page pinpoint

A mortgaging the assets of the corporate debtor increased from Rs. 3,000 crores to approximately Rs. 24,000 crores and the number of creditors also went up from 2 to 24 with respect to the consortium mortgage. It is submitted that even though creation of third party security is a normal practice, the creation of every third party security cannot be always deemed to have been done in the ordinary course of business; that such B ‘ordinary course’ has to be determined under the circumstances when such transactions were entered into; and, considering that JIL was declared NPA and had defaulted on its indebtedness to some of its lenders, securing of JAL’s indebtedness under such circumstances cannot be construed to have been done in the ordinary course of business of the corporate debtor JIL. The learned counsel for the appellant has referred, inter alia, to the decision in Downs Distributing Co Pty Ltd v. Associated Blue Star Stores Pty Ltd (in liq): (1948) 76 CLR 463. Relevant Period and Related Party 14.2.2. It is further submitted that the term ‘transaction’ under the Code includes an agreement or arrangement in writing for the transfer of assets, or funds, goods or services from or to the corporate debtor. The use of the word ‘include’ would signify its natural import and is to be given a wide interpretation. It is submitted that as JAL was not only ad idem to the terms of the transaction but was also the beneficiary thereof, it cannot be said that the transaction was only between the corporate debtor and the lenders of JAL; rather, the transaction was with a ‘related party’ and the look-back period would be two years. Home buyers – the appellants in C.A. No. 6777-97/2019 14.3. On behalf of the home buyers, who have invested in the projects of the corporate debtor and whose interests would be diluted if the impugned transactions are upheld, the flow of transactions in question has been referred and essentially, the same contentions have been urged with respect to Section 43 of the Code, with reliance on the decision in Downs Distributing Co (supra), that the impugned transactions were not made in the ordinary course of business of the corporate debtor JIL; and had been preferential transactions, putting JAL in a beneficial position at the cost of bona fide creditors of JIL, including the home buyers. We are not re-narrating all their contentions to avoid repetition. However, we may observe that to substantiate their arguments with respect to Section 43 of the Code, on behalf of these appellants, reliance is also H

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 349 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

placed on the interim report of the Bankruptcy Law Reforms Committee A (February 2015) and the decision of this Court in Macquarie Bank Ltd. v. Shilpi Cable Technologies Ltd.: (2018) 2 SCC 674. The respondents

15Copy pinpoint15. The contesting respondents have refuted the contentions of the appellants with essentially similar submissions that the transactions in question cannot be termed as preferential transactions within the meaning of Section 43 of the Code. 15.1. The respondents, particularly the lenders of JAL, while maintaining a consistent stand that the transactions in question are not preferential and do not fall under Section 43 of the Code, have submitted that they being the bankers and financial institutions, are regularly engaged in the business of extending loans and other facilities which form the backbone of economic growth; and taking of such securities, including third party security, is one of the normal and ordinary feature of their business and dealings, particularly that of corporate money lending. D According to these respondents, if at all such third party securities are avoided on the allegation of being preferential, it is likely to have a devastating effect on the entire economy because the bankers and financial institutions would then be left high and dry; and for future dealings, they shall have no alternative but to restrict their activities only to the direct party securities which would, in turn, result in retardation and regression. It is submitted that in a given case, the borrower may not be able to offer matching security to secure the entire advance requisite for its business and growth; and legally it is not impermissible between the related companies that one may provide security towards the loan/advance/facility obtained by the other. According to the respondents, the scheme of the Code, and particularly its Part II, has never been to allow the processes of insolvency resolution or liquidation to operate detrimental to the interests of the financers like themselves (lenders of JAL). It is contended that on the true scope of the provisions contained under Section 43 of the Code, with reference to the intent and object, the transactions in question, representing the security and guarantee extended by the corporate debtor JIL, cannot be construed as preferential, particularly when they were entered into in the ordinary course of business and financial affairs of the corporate debtor as also the transferees. H

p. 350 Copy page pinpoint

A 15.2. Apart from expressing such concerns about likely prejudice to themselves and to the economy if the transactions in question are held preferential, a variety of contentions have been advanced on behalf of the respondents, while refuting those of the appellants. We may briefly summarize the leading contentions on behalf of the contesting respondents while omitting repetitions. B Axis Bank 15.3. While maintaining that the impugned transactions cannot be considered as preferential within the meaning of Section 43 of the Code, the principal contentions on behalf of this respondent are as under: - C a. The transactions did not occur within the ‘relevant time’. 15.3.1. It is contended that the ‘relevant time’ in the present circumstances could be only one year as the transfer of property interest was to this respondent, which is a Bank and an unrelated party. It is further contended that, in any event, the land parcels were mortgaged on 24.02.2015, which is beyond even the two years formulation, the relevant time being from 10.08.2015 to 09.08.2017. The subsequent re- execution of the mortgage deeds on 15.09.2015 and then again on 29.12.2016 cannot be considered to be a substantive event since the nature and identity of the security remained the same and no fresh encumbrances were created. The re-mortgage was done to reflect the increase in the amount of facilities and number of members in the consortium. It is not the case that the existing facilities were paid, the mortgage satisfied, and fresh facilities were created for which a fresh mortgage was required.

F b. Without prejudice to the above, the ingredients of Section 43(2) are not met. 15.3.2. It is further submitted that Sections 43/44 of the Code are expropriating provisions as they affect concluded transactions and have the potential to render void the transfers of property done through the transactions which are otherwise legitimate and hence, such provisions G must be strictly construed. The decisions of this Court in Devinder Singh & Ors v. State of Punjab & Ors: (2008) 1 SCC 728 and Nareshbhai v. Union of India : (2019) SCC Online SC 1027 have been relied upon.

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 351 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

15.3.3. It is submitted that the requirements set out under Section A 43(2) must be strictly construed and in the instant case, the two prongs under Section 43(2) have not been satisfied. With reference to UNCITRAL Legislative Guide on Insolvency Law at para 177, it is submitted that as per Section 43(2)(a), a preference could only be given to an existing creditor such that he is preferred over other creditors but in this matter, the security was provided for the benefit of the respondent bank, which did not have a pre-existing creditor-debtor relationship with the corporate debtor. Further, the security was provided on account of the debt obligations of JAL, and not any antecedent debt obligations of the corporate debtor. 15.3.4. It is further submitted, without prejudice to the above, that even if JAL is taken to be a creditor within the meaning of Section 43(2)(a), then the requirements of Section 43(2)(b), the second prong of the two-fold requirement for a transaction to be a preference, are not met. It is submitted that the transfer in the instant case has no effect whatsoever on the relative position of JAL in the distribution waterfall – D it remains an operational creditor without any security interest. c. Without prejudice to the above, security was provided in the ordinary course of business. 15.3.5. While pointing out that Section 43(3)(a) carves out exception for the transactions made in the ordinary course of business or financial affairs of either the corporate debtor or the transferee, it is contended that no material particulars/evidence have been produced to show that the provision of the security was not in the ordinary course of business of the corporate debtor. On the contrary, according to the respondent, (i) creation of third party security is an established commercial business practice; (ii) the corporate debtor has continuously disclosed details of the security in its annual reports beginning from the financial year ending 31.03.2015 and thus, creation of security was known to all and disclosed in public documents; and (iii) no evidence of dissent from any existing creditor of the corporate debtor has been shown at the time of creation of the security. The transaction in question, according to the respondent, had been in the ordinary course of business of the corporate debtor and remains unexceptionable. 15.3.6. It is further contended that the provision of security was also in the ordinary course of business of the respondent who is a H

p. 352 Copy page pinpoint

A scheduled commercial bank and is duly authorized by statute to carry out the business of commercial lending on a secured basis [per Section 6(1)(a) of the Banking Regulation Act, 1949]; and is statutorily entitled to seek credit enhancement on account of outstanding debts by way of creation of security interests by borrowers or their related entities. For this reason too, with the transaction being in the ordinary course of business of the transferee i.e., the respondent, it cannot be termed as a preferential transaction. 15.3.7. It is yet further submitted that the contention of IRP that the corporate debtor ought not to have given the security as its accounts had turned NPA with certain banks is fallacious as it conflates the concepts of ‘NPA’ and ‘willful defaulter’ and ignores that the security was given to the respondent even before the account turned NPA qua certain banks. With reference to the interim report of the Bankruptcy Law Reforms Committee issued in February 2015, it is submitted that as per the said report, avoidance transactions relate to ‘willful defaulters’ D and not ‘NPAs’. It is further argued that the distinctive position of a willful defaulter and an NPA is also indicated in Section 29A of Code, where Section 29A(b) provides that a willful defaulter can never be a resolution applicant whereas, Section 29A(c) provides that a company whose account has become non-performing may only be disqualified if the account has remained non-performing for a period of one year. It is submitted that RBI Master Circular on asset classification issued in July 2015 and June 2019 set out that an account may turn NPA qua a particular bank if the debts are not being serviced regularly but this does not mean that a particular company’s accounts would have turned non-performing qua all its lenders. It is also submitted that the other account of corporate debtor with this respondent turned NPA only in 2017, i.e., much after the creation of security in question. It is further contended that a company’s account may easily become standard if, inter alia, the company regularizes its payment timelines or if lenders decide to revise the company’s repayment obligations. Reliance is placed on the decisions of this Court in Keshavlal Khemchand & Sons Pvt. Ltd. & Ors v. Union G of India & Ors: (2015) 4 SCC 770 and State Bank of India v. Jah Developers Pvt. Ltd. & Ors.: (2019) 6 SCC 787. d. Section 44 does not come into operation unless a transaction is made out to be preferential under Section 43.

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 353 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

15.3.8. It is further submitted that the jurisdictional condition of A exercising power under Section 44 is the finding that a transaction is preferential under Section 43, as is evident from the heading of Section 44 i.e., ‘Orders in cases of preferential transactions’; and, for the transaction in question being not preferential under Section 43, no orders could be made under Section 44. B Standard Chartered Bank 15.4. Most of the contentions urged on behalf of this respondent are analogous to the contentions noticed in the preceding paragraphs and, therefore, we are not repeating the same. It is maintained on behalf of this respondent that in whatever way the relevant time is reckoned C for the purpose of Section 43 of the Code, its transactions would not fall therein because the initial mortgage in favour of this respondent was made in the year 2012, which is beyond the two years formulation. The further submission is that the subsequent conversion of registered mortgage into an equitable mortgage on 04.11.2015 and thereafter, re- conversion from equitable mortgage to registered mortgage on D 24.05.2016, in relation to the same subject property as a security, cannot be considered as a fresh creation of mortgage and hence, the transaction in question does not fall within relevant time. ICICI Bank E 15.5. Again, for most of the contentions on behalf of this respondent being similar in nature, we are not repeating the same. However, we may notice that with reference to Section 43(4) of the Code, it has been contended that since this respondent bank is an unrelated party to both the corporate debtor and JAL, the relevant look-back period would be one year and not two years. It is submitted that the mortgages were F created on 15.09.2015 and the same property was re-mortgaged on 29.12.2016, which is much before the look-back period of one year and thereby, this transaction could not be challenged as being preferential. The decisions of the Bombay High Court in Monarch Enterprises v. Kishan Tulpule & Ors : (1992) 74 Comp Case 89 (Bom) and that of G Madras High Court in IDBI Bank Ltd. v. The Administrator, Kothari Orient Finance Ltd., the Official Liquidator & S. Ramaiah : (2009) 152 Comp Case 282 (Mad) have been referred while submitting that a mere transfer of the assets within the look-back period would not make the transaction preferential except when it is coupled with the intent to prefer one creditor over the other. Further, for contending that H

p. 354 Copy page pinpoint

A the impugned transactions were made in the ordinary course of business of both the respondent Bank and the corporate debtor, the Annual Reports of corporate debtor JIL have been referred with the submissions that the mortgaged properties were disclosed as ‘inventories’ for the corporate debtor being a real estate company; and hence, dealing with the ‘inventories’/‘stock-in-trade’ is in the ordinary course of business. B 15.5.1. It is further submitted that there is no relation between the financial position of the corporate debtor and the impugned transaction for another reason that as on the date of commencement of insolvency proceedings, the corporate debtor had 740 acres of unencumbered land, which could have been used to create security for the creditors of corporate debtor. While pointing out that 11 out of 13 lenders of the corporate debtor JIL are also a part of the consortium of JAL lenders whose loans were secured by mortgages made by the corporate debtor, it is submitted that prior to 15.09.2015, when the questioned Consortium of Mortgages was created, only Jammu and Kashmir Bank had declared the corporate debtor as NPA, which was followed by the other lenders declaring the corporate debtor as NPA. It is contended that prior to the said declaration, the transactions with this respondent had been made as also the mortgages created on 15.09.2015, which had also secured the interests of Jammu and Kashmir Bank and, therefore, the impugned transactions could not be said to be preferential. E Other respondent-lenders 15.6. Broadly speaking, similar submissions as noted above have been made on behalf of other respondent-lenders while maintaining that the impugned transactions are covered by the exclusion clause under F Section 43 inasmuch as the transfers had been made in the ordinary course of business of the corporate debtor as also the transferees; and that for the purpose of Section 43 of the Code, the relationship between the respondent-lenders and JIL ought to be looked into rather than assuming JAL to be the primary transferee. It has also been argued, while relying on the decision of this Court in Purbanchal Cables & G Conductors Pvt. Ltd. & Ors v. Assam State Electricity Board & Ors : (2012) 7 SCC 462, that the provisions of Section 43 of the Code, by their very nature, would come into operation at least one year after the enactment of the Code i.e., it would have only the prospective effect and cannot be given retrospective effect so as to operate over any period H prior to the enactment.

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 355 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

Jaiprakash Associates Ltd. (JAL) A 15.7. As noticed, this respondent JAL is the holding company of corporate debtor JIL; and the transactions in question had been for securing the loans/facilities obtained by this respondent. Even while broadly adopting the contentions advanced by other respondents, further submissions have been made on behalf of this respondent to assert on the credence of the transactions in question. With reference to its relationship with JIL, it is contended on behalf of this respondent that being the holding company, JAL had been providing financial, technical and strategic support to JIL in various ways being: (i) Investment made in 99,50,00,000 shares of JIL (paid up value Rs. 995 crores) at its very nascent stage, which means contribution of substantial funds for the business of JIL without interest; (ii) Pledge of its 70,83,56,087 equity shares held in JIL in favour of the lender of JIL; (iii) Promoter Support Agreement to meet the Debt Service Reserve Account (DSRA) obligation of JIL towards its lenders; and (iv) Bank Guarantees of Rs. 212 crores in aggregate to meet the DSRA obligation of JIL for the financial assistance obtained by JIL. It is submitted that such dealings/ transactions by JAL in favour of JIL depict the nature of business relationship between JAL and JIL and makes it amply clear that the impugned transactions were done in the ordinary course of business and financial affairs of JIL. It is further submitted that the mortgage of 858 acres of land made in favour of lenders of JAL fall within the ambit of E Section 186 of Companies Act, 201325 and is not unauthorized. 15.7.1. It is contended that avoidance of preferential transactions applies to a case where the company’s accounts has become stressed and there is a strong likelihood of it going into liquidation but in the present case, it is a matter of record that the accounts of JIL had been categorised as NPA only to an extent of 29.04% whereas the remaining accounts were still ‘standard’. According to the respondent JAL, this fact was specifically pleaded at the stage of opposing the application filed before the NCLT for initiating CIRP against JIL but JIL gave its consent for CIRP on the bona fide belief that it would be able to restructure its loans and get back the management of JIL. The submission is that, in the given economic scenario, JIL was not in any such stress or problem that it could not have continued with the existing mortgages for securing the facilities advanced to JAL by the lender banks and financial institutions. 25 Hereinafter also referred to as ‘the Act of 2013’. H

p. 356 Copy page pinpoint

A Insolvency and Bankruptcy Code, 2016: historical background, objects, scheme and structure of the relevant parts

16Copy pinpoint16. The basic issue raised in the matter being related with the effect and operation of Section 43 of the Code, concerning ‘Preferential transactions and relevant time’, appropriate it shall be to comprehend the principles underlying the concept of ‘preferential transactions’. A little insight into the objects sought to be achieved by the Insolvency and Bankruptcy Code, 2016 and its historical background shall be apposite. 16.1. As noticed from Preamble, the Code came to be enacted to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons and even of partnership firms and individuals in a time bound manner; the objectives, inter alia, being for maximisation of value of assets of such persons and balance of interest of all the stakeholders. 16.1.1. In the case of Swiss Ribbons Private Limited and Anr. D v. Union of India and Ors.: (2019) 4 SCC 1726, this Court had the occasion to traverse through the historical background and scheme of the Code in the wake of challenge to the constitutional validity of various provisions therein. One part of such challenge had also been founded on the ground that classification between ‘financial creditor’ and ‘operational creditor’ was discriminatory and violative of Article 14 of the Constitution E of India.27 This ground as also several other grounds pertaining to various provisions of the Code were rejected by this Court after elaborate dilation on the vast variety of rival contentions and the provisions so contained in the Code were upheld as valid. In the course of such distillation, this Court took note, inter alia, of the pre-existing state of law as also the F objects and reasons for enactment of the Code. While observing that the focus of the Code was to ensure revival and continuation of the corporate debtor, where liquidation is to be availed of only as a last resort, this Court pointed out that on its scheme and frame work, the Code was a beneficial legislation to put the corporate debtor on its feet, and not a mere recovery legislation for the creditors. This Court said,- G 26Hereinafter also referred to as the case of ‘Swiss Ribbons’. 27The law declared by this Court in this case of Swiss Ribbons, while rejecting the contentions that the classification between ‘financial creditor’ and ‘operational creditor’ was discriminatory and violative of Article 14, shall have some bearing on the issues at hand, particularly in relation to the second issue on the claim of the respondent-lenders for being treated a financial creditors of JIL, as shall be noticed hereafter later.

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 357 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

“27. As is discernible, the Preamble gives an insight into what is sought to be achieved by the Code. The Code is first and foremost, a Code for reorganisation and insolvency resolution of corporate debtors. Unless such reorganisation is effected in a time-bound manner, the value of the assets of such persons will deplete. Therefore, maximisation of value of the assets of such persons so that they are efficiently run as going concerns is another very important objective of the Code. This, in turn, will promote entrepreneurship as the persons in management of the corporate debtor are removed and replaced by entrepreneurs. When, therefore, a resolution plan takes off and the corporate debtor is brought back into the economic mainstream, it is able to repay its debts, which, in turn, enhances the viability of credit in the hands of banks and financial institutions. Above all, ultimately, the interests of all stakeholders are looked after as the corporate debtor itself becomes a beneficiary of the resolution scheme—workers are paid, the creditors in the long run will be repaid in full, and shareholders/investors are able to maximise their investment. Timely resolution of a corporate debtor who is in the red, by an effective legal framework, would go a long way to support the development of credit markets. Since more investment can be made with funds that have come back into the economy, business then eases up, which leads, overall, to higher economic growth and development of the Indian economy. What is interesting to note is that the Preamble does not, in any manner, refer to liquidation, which is only availed of as a last resort if there is either no resolution plan or the resolution plans submitted are not up to the mark. Even in liquidation, the liquidator can sell the business of the corporate debtor as a going concern. (See ArcelorMittal28 at para 83, fn 3)

28. It can thus be seen that the primary focus of the legislation is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation. The Code is thus a beneficial legislation which puts the corporate debtor back on its feet, not being a mere recovery legislation for creditors. The interests of the corporate debtor have, therefore, been bifurcated and

28 ArcelorMittal India (P) Ltd. v. Satish Kumar Gupta & Ors: (2019) 2 SCC 1 H

p. 358 Copy page pinpoint

A separated from that of its promoters/those who are in management. Thus, the resolution process is not adversarial to the corporate debtor but, in fact, protective of its interests. The moratorium imposed by Section 14 is in the interest of the corporate debtor itself, thereby preserving the assets of the corporate debtor during the resolution process. The timelines within which the resolution process is to take place again protects the corporate debtor’s assets from further dilution, and also protects all its creditors and workers by seeing that the resolution process goes through as fast as possible so that another management can, through its entrepreneurial skills, resuscitate the corporate debtor to achieve all these ends.” 16.2. Keeping in view the objectives, discernible from the Preamble as also from the Statement of Objects and Reasons of the Code and the observations of this Court, we may now take an overview of the scheme and structure of the relevant parts of the Code. Part I thereof contains the provisions regarding title, extent, commencement and application of the Code as also defines various expressions used and employed in the Code. Different provisions have come into force on different dates, as permissible under proviso to sub-section (3) of Section 1. Part II of the Code deals with insolvency resolution and liquidation for corporate persons. Chapter I of Part II makes provision for its applicability and also defines various expressions used in this Part (Sections 4 and 5). Chapter II of Part II contains the provisions for corporate insolvency resolution process in Sections 6 to 32 whereas Chapter III of this Part II contains the provisions for liquidation process in Sections 33 to 54 29. 16.3. Though the provisions relating to ‘preferential transactions and relevant time’ (in Section 43 of the Code) occur in Chapter III of Part II, relating to liquidation process, but such provisions being for avoidance of certain transactions and having bearing on the resolution process too, by their very nature, equally operate over the corporate insolvency resolution process, and hence, the resolution professional is obligated, by virtue of clause (j) of sub-section (2) of Section 25 of the Code, to file application for avoidance of the stated transactions in accordance with Chapter III. That being the position, Section 43 of the Code comes into full effect in CIRP too.

29Sections 4 to 33 came into force on 01.12.2016 whereas Section 33 to 54 came into force on 15.12.2016.

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 359 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

Preferential transaction at a relevant time: concept and connotations

17Copy pinpoint17. Having regard to the questions involved, a brief insight into the theory relating to avoidance of certain transactions as being preferential would be pertinent at this stage. B 17.1.The basic concept of ‘preference’ as per the law dictionaries and lexicons is the act of ‘paying or securing to one or more of his creditors, by an insolvent debtor, the whole or part of their claims, to the exclusion of the rest’.30 We may usefully take note of the meaning, definition and basic ingredients of ‘preference’ and ‘preferential transfer’, as defined in Black’s Law Dictionary31: C “preference. (15c) 1. The favouring of one person or thing over another. 2. The person or thing so favoured. 3. The quality, state, or condition of treating some persons or things more advantageously than others. 4. Priority of payment given to one or more creditors by a debtor; a creditor’s right to receive such D priority. 5. Bankruptcy. PREFERENTIAL TRANSFER. insider preference. (1981) A transfer of property by a bankruptcy debtor to an insider more than 90 days before but within one year after the filing of the bankruptcy petition. E

liquidation preference. (1936) A preferred shareholder’s right, once the corporation is liquidated, to receive a specified distribution before common shareholders receive anything. voidable preference .See PREFERENTIAL TRANSFER” F *** *** *** “preferential transfer. (1874) Bankruptcy. A prebankruptcy transfer made by an insolvent debtor to or for the benefit of a creditor, thereby allowing the creditor to receive more than its G proportionate share of the debtor’s assets; specif., an insolvent debtor’s transfer of a property interest for the benefit of a creditor who is owed on an earlier debt, when the transfer occurs no more than 90 days before the date when the bankruptcy petition is filed 30 P. Ramanatha Aiyar’s Advanced Law Lexicon (5 th Ed.-Vol 3, p.4002) 31 10th Edition – pp. 1369 and 1370 H

p. 360 Copy page pinpoint

A or (if the creditor is an insider) within one year of the filing, so that the creditor receives more than it would otherwise receive through the distribution of the bankruptcy estate. Under the circumstances described in 11 USCA §547, the bankruptcy trustee may, for the estate’s benefit, recover a B preferential transfer from the transferee. – Also termed preference; voidable preference; voidable transfer; preferential assignment; preferential debt payment….” 17.2. It could be readily noticed that as far back as from 15th century, the concept of ‘preference’ has been taken note of and the principles relating to avoidance of certain preferences have evolved, particularly in the fields of mercantile laws and more particularly in the laws governing insolvency and bankruptcy32; and definitively from 1874, various jurisdictions have defined, described and dealt with ‘preferential transfer’ as being the transaction where an insolvent debtor makes transfer to or for the benefit of a creditor so that such beneficiary would receive more than what it would have otherwise received through the distribution of bankruptcy estate. Section 547 of US Bankruptcy Code provides for the circumstances in which a bankruptcy trustee may, for the benefit of the estate in question, recover a preferential transfer from the transferee. Section 239 of the UK Insolvency Act, 1986 also provides for the same measures for avoidance of preference given to any person at the relevant time. The time factor also plays a crucial role in such measures of avoidance. This ‘relevant time’ for the purpose of avoidance of preferential transactions is now commonly referred to as the ‘look- back’ period. Significantly, when the preferential transaction is with an unconnected party, the look-back period is comparatively lesser than that of the transaction with a connected party, who is referred to as ‘insider’ or ‘related party’33 32 It may in the passing be observed that ‘an insolvency’ essentially refers to financial distress, i.e., financial state in which a person or entity is unable to pay its dues or meet with other akin obligations. Insolvency may be temporary in character. ‘A bankruptcy’, G on the other hand, essentially refers to the legal process to regulate as to how an insolvent entity shall pay off his dues. As noticed, the primary focus of IBC is ‘to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation ’. In other words, insolvency resolution is the main object; and liquidation with bankruptcy is the last resort. 33 We may also indicate that any attempt by an insolvent, of alienating or encumbering the assets in favour of one person so as to cause harm to the interest of a bona fide

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 361 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

17.3. Coming now to the corporate personalities, it is elementary that by the very nature and legal implications of incorporation, ordinarily, several individuals and entities are involved in the affairs of a corporate person; and impact of the activities of a corporate person reaches far and wide, with the creditors being one of the important set of stakeholders. If the corporate person is in crisis, where either insolvency resolution is to take place or liquidation is imminent; and the transactions by such corporate person are under scanner, any such transaction, which has an adverse bearing on the financial health of the distressed corporate person or turns the scales in favour of one or a few of its creditors or third parties, at the cost of the other stakeholders, has always been viewed with considerable disfavour34. C creditor had been sternly dealt with by the legislature even in relation to the individuals,as could be readily noticed from the provisions contained in the erstwhile Presidency - Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920. These enactments stand repealed by IBC but the relevant provisions therein give an insight into the concepts. Section 56 of the Act of 1909 provided thus: “56. Avoidance of preference in certain cases. - (1) Every transfer of property, every payment made, every obligation incurred, and every judicial proceeding taken or suffered by any person unable to pay his debts as they became due from his own money in favour of any creditor, with a view of giving that creditor a preference over the other creditors, shall, if such person is adjudged insolvent on a petition presented within three months after the date thereof, be deemed fraudulent and void as against the official assignee. (2) This section shall not affect the rights of any person making title in good faith and for valuable consideration through or under a creditor of the insolvent.” The relevant part of Section 69 of the Act of 1920 had been as under: “69. Offences by debtors. – If a debtor, whether before or after the making of an order of adjudication, - *** *** *** (c) fraudulently with intent to diminish the sum to be divided among his creditors or to give an undue preference to any of his creditors, - F (i) has discharged or concealed any debt due to or from him, or (ii) has made away with, charged, mortgaged or concealed any part of his property of any kind whatsoever, he shall be punishable on conviction with imprisonment which may extend to one year.” 34 In relation to the corporate personalities, the concept of ‘fraudulent preference’, earlier embodied in Section 531 of the Companies Act, 1956 now occurs in its modified G form in Sections 328 and 329 of the Companies Act, 2013. Tersely put, fraudulent preference means parting with assets of the corporate person in favour of one or a few of its creditors, which has the effect of defeating the claim of other creditors. Per Section 329 of the Act of 2013, any transfer of property by a company, other than that in the ordinary course of business, if made within a period of one year before presentation of a petition for winding up by the Tribunal and not in good faith and for valuable consideration, is regarded as void against the liquidator. Per Section 328 of the Act of H

p. 362 Copy page pinpoint

A 17.4. Noteworthy distinctive features, in the scheme of the Companies Act, 2013 and Insolvency and Bankruptcy Code, 2016,as regards preferences in relation to the corporate personalities, are that while Section 328 of the Act of 2013 deals with fraudulent preference and Section 329 thereof deals with transfers not in good faith but, on the other hand, in the Code, separate provisions are made as regards the B transactions intended at defrauding the creditors (Section 49 IBC) as also for fraudulent trading or wrongful trading (Section 66 IBC). The provisions contained in Section 43 of the Code, however, indicate the intention of legislature that when a transaction falls within the coordinates defined therein, the same shall be deemed to be a preference given at a C relevant time and shall not be countenanced. Therefore, intent may not be of a defence or support of any preferential transaction that falls within the ambit of Section 43 of the Code. 17.5. At this juncture, we may usefully refer to paragraph 177 of UNCITRAL Legislative Guide on Insolvency Law, as referred to and D relied upon by learned counsel for the respondent as also paragraphs 178 and 179 thereof, to indicate the basic theory and principles governing the provisions under consideration. In the said Guide, while dealing with the topic of treatment of assets on commencement of insolvency proceedings, it is stated broadly on the theory of avoidance of preferential transactions as follows: E “(c) Preferential transactions (i) Criteria

177. Preferential transactions may be subject to avoidance where: (a) the transaction took place within the specified suspect period; F (b) the transaction involved a transfer to a creditor on account of a pre-existing debt; and (c) as a result of the transaction, the creditor received a larger percentage of its claim from the debtor’s 2013, if a company has given preference to one of its creditors or a surety or a guarantor for any of the debts or other liabilities and the company does or suffers anything which has the effect of putting that person in a better position in the event of G company going into liquidation than the position he would have been in but for such preference prior to six months of making winding up application, the Tribunal, on being satisfied that the transaction was of a fraudulent preference, may order for restoring the position to what it would have been if the preference had not been given. More particularly, as regards transfer of property, it is provided in sub-section (2) of Section 328 that if the transaction is made six months before winding up application, the H Tribunal may declare such transaction invalid and restore the position.

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 363 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

assets than other creditors of the same rank or class (in other words, a preference). Many insolvency laws also require that the debtor was insolvent or close to insolvent when the transaction took place and some further require that the debtor have an intention to create a preference. The rationale for including these types of transaction within the scope of avoidance provisions is that, when they occur very close to the commencement of proceedings, a state of insolvency is likely to exist and they breach the key objective of equitable treatment of similarly situated creditors by giving one member of a class more than they would otherwise legally be entitled to receive. C

178. Examples of preferential transactions may include payment or set-off of debts not yet due; performance of acts that the debtor was under no obligation to perform; granting of a security interest to secure existing unsecured debts; unusual methods of payment, for example, other than in money, of debts that are due; payment of a debt of considerable size in comparison to the assets of the debtor; and, in some circumstances, payment of debts in response to extreme pressure from a creditor, such as litigation or attachment, where that pressure has a doubtful basis. A set-off, while not avoidable as such, may be considered prejudicial when it occurs within a short period of time before the application for commencement of the insolvency proceedings and has the effect of altering the balance of the debt between the parties in such a way as to create a preference or where it involves transfer or assignment of claims between creditors to build up set-offs. A set-off may also be subject to avoidance where it occurs in irregular circumstances, such as where there is no contract between the parties to the set-off. (ii) Defences

179. One defence to an allegation that a transaction was preferential may be to show that, although containing the elements of a preference, the transaction was in fact consistent with normal commercial practice and, in particular, with the ordinary course of business between the parties to the transaction. For example, a payment made on receipt of goods that are regularly delivered and paid for may not be preferential, even if made within proximity to the commencement of insolvency proceedings. This approach H

p. 364 Copy page pinpoint

A encourages suppliers of goods and services to continue to do business with a debtor that may be having financial problems, but which is still potentially viable. Other defences available under insolvency laws include that the counterparty extended credit to the debtor after the transaction and that credit has not been paid (the defence is limited to the amount of the new credit); that the counterparty gave new value for which it was not granted a security interest; the counterparty can show that it did not know a preference would be created; that the counterparty did not know or could not have known that the debtor was insolvent at the time of the transaction; or that the debtor’s assets exceeded its liabilities at the time of the transaction. Some of these latter defences, in particular those involving the intent of the parties to the transaction, suffer from the disadvantage of being difficult to prove and may make avoidance proceedings complex, unpredictable and lengthy.” Analysing Section 43 of the Code

18Copy pinpoint18. In the backdrop of the foregoing, we may now scrutinise Sections 43 and 44 of the Code. Section 44 provides for the consequences of an offending35 preferential transaction i.e., when the preference is given at a relevant time. Under Section 44, the Adjudicating Authority may pass such orders as to reverse the effect of an offending preferential E transaction. Amongst others, the Adjudicating Authority may require any property transferred in connection with giving of preference to be vested in the corporate debtor; it may also release or discharge (wholly or in part) any security interest created by the corporate debtor. The consequences of offending preferential transaction are, obviously, drastic and practically operate towards annulling the effect of such transaction. F Looking to the contents, context and consequences, we are at one with the contentions urged on behalf of the respondents with reference to the decisions in Devinder Singh (supra) and other cited cases, that these provisions need to be strictly construed. However, even if we proceed on strict construction of Section 43 of the Code, the underlying principles and the object cannot be lost sight of. In other words, the construction has to be such that leads towards achieving the object of these provisions. 18.1. Looking at the broad features of Section 43 of the Code, it is noticed that as per sub-section (1) thereof, when the liquidator or the 35Note: Here the expression ‘offending’ is only to denote the unacceptability of such transaction and not any criminality.

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 365 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

resolution professional, as the case may be, is of the opinion that the corporate debtor has, at a relevant time, given a preference in such transactions and in such manner as specified in sub-section (2), to any person/persons as referred to in sub-section (4), he is required to apply to the Adjudicating Authority for avoidance of preferential transactions and for one or more of the orders referred to in Section 44. If twin conditions specified in sub-section (2) of Section 43 are satisfied, the transaction would be deemed to be of preference. As per clause (a) of sub-section (2) of Section 43, the transaction, of transfer of property or an interest thereof of the corporate debtor, ought to be for the benefit36 of a creditor or a surety or a guarantor for or on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor; and as per clause (b) thereof, such transfer ought to be of the effect of putting such creditor or surety or guarantor in beneficial position than it would have been in the event of distribution of assets under Section

53. 37 18.2. However, merely giving of the preference and putting the beneficiary in a better position is not enough. For a preference to become an offending one for the purpose of Section 43 of the Code, another essential and rather prime requirement is to be satisfied that such event, of giving preference, ought to have happened within and during the specified time, referred to as “relevant time”. The relevant time is reckoned, as per sub-section (4) of Section 43 of the Code, in two ways: E (a) if the preference is given to a related party (other than an employee), the relevant time is a period of two years preceding the insolvency commencement date; and (b) if the preference is given to a person other than a related party, the relevant time is a period of one year preceding such commencement date. In other words, for a transaction F to fall within the mischief sought to be remedied by Sections 43 and 44 of the Code, it ought to be a preferential one answering to the requirements of sub-section (2) of Section 43; and the preference ought to have been given at a relevant time, as specified in sub-section (4) of Section 43. G 18.3. However, even if a transaction of transfer otherwise answers to and comes within the scope of sub-sections (4) and (2) of Section 43 36It may be intended benefit or may even be unintended benefit 37Section 53 IBC makes provision for distribution of the proceeds from sale of the liquidation assets, in case of liquidation of the corporate debtor. H

p. 366 Copy page pinpoint

A of the Code, it may yet remain outside the ambit of sub-section (2) because of the exclusion provided in sub-section (3) of Section 43. 18.4. Sub-section (3) of Section 43 specifically excludes some of the transfers from the ambit of sub-section (2). Such exclusion is provided to: (a) a transfer made in the ordinary course of business or financial affairs of the corporate debtor or transferee38; (b) a transfer creating security interest in a property acquired by the corporate debtor to the extent that such security interest secures new value and was given at the time specified in sub-clause (i) of clause (b) of Section 43(3) and subject to fulfilment of other requirements of sub-clause (ii) thereof. The meaning of the expression “new value” has also been explained in this provision. Indicting parts – deemed preference at a relevant time

19Copy pinpoint19. In order to understand and imbibe the provisions concerning preference at a relevant time, it is necessary to notice that as per the charging parts of Section 43 of the Code i.e., sub-sections (4) and (2) thereof, a corporate debtor shall be deemed to have given preference at a relevant time if the twin requirements of clauses (a) and (b) of sub- section (2) coupled with the applicable requirements of either clause (a) or clause (b) of sub-section (4), as the case may be, are satisfied.

E 19.1. To put it more explicit, the sum total of sub-sections (2) and (4) is that a corporate debtor shall be deemed to have given a preference at a relevant time if: (i) the transaction is of transfer of property or the interest thereof of the corporate debtor, for the benefit of a creditor or surety or guarantor for or on account of an antecedent financial debt or operational debt or other liability; (ii) such transfer has the effect of putting such creditor or surety or guarantor in a beneficial position than it would have been in the event of distribution of assets in accordance with Section 53; and (iii) preference is given, either during the period of two years preceding the insolvency commencement date when the beneficiary is a related party (other than an employee), or during the period of one year preceding the insolvency commencement date when the beneficiary is an unrelated party.

38Whether the expression “or”, as occurring in between the expressions ‘corporate debtor’ and ‘transferee’ in clause (a) of sub-section (3) of Section 43, is to be read as “and” has been one of the significant questions raised in this matter and shall be dealt with hereafter later.

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 367 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

19.2. By way of these statutory provisions, legal fictions are created whereby preference is deemed to have been given; and is deemed to have been given at a relevant time, if the stated requirements are satisfied. Variegated features of a deeming provision have been discussed by this Court in the case of Pioneer Urban (supra) with reference to several of the past decisions, albeit in the context of such deeming expression occurring in the Explanation added to sub-clause (f) of Section 5(8) of the Code39. We may usefully extract some of the relevant passages from the said decision in Pioneer Urban as follows: 19.2.1. As regards construction of a deeming fiction, this Court pointed out the basic and settled principles in the following: C “88. In every case in which a deeming fiction is to be construed, the observations of Lord Asquith in a concurring judgment in East End Dwellings Co. Ltd. v. Finsbury Borough Council: 1952 AC 109 (HL) are cited. These observations read as follows: (AC pp. 132-133) D “If you are bidden to treat an imaginary state of affairs as real, you must surely, unless prohibited from doing so, also imagine as real the consequences and incidents which, if the putative state of affairs had in fact existed, must inevitably have flowed from or accompanied it.... The statute says that you must imagine a certain state of affairs. It does not say that, having done so, you must E cause or permit your imagination to boggle when it comes to the inevitable corollaries of that state of affairs.” These observations have been followed time out of number by the decisions of this Court. (See, for example, M. Venugopal v. Divisional Manager, LIC: (1994) 2 SCC 323 at page 329). F

94. Although a deeming provision is to deem what is not there in reality, thereby requiring the subject-matter to be treated as if it were real, yet several authorities and judgments show that a G 39Such discussion in Pioneer Urban essentially led to this Court holding that the said deeming provision was clarificatory of the true legal position as it already obtained; and was to put beyond the pale of doubt the fact that allottees are to be regarded as financial creditors within the meaning of the enacting part contained in Section 5(8)(f) of the Code. The crucial aspects relating to Section 5(8) of the Code shall be dilated hereafter during the discussion on the second issue involved in these matters. H

p. 368 Copy page pinpoint

A deeming fiction can also be used to put beyond doubt a particular construction that might otherwise be uncertain. Thus, Stroud’s Judicial Dictionary of Words and Phrases (7th Edition, 2008), defines “deemed” as follows: “Deemed”- as used in statutory definitions “to extend the denotation of the defined term to things it would not in ordinary parlance denote”, is often a convenient device for reducing the verbiage or an enactment, but that does not mean that wherever it is used it has that effect; to deem means simply to judge or reach a conclusion about something, and the words “deem” and “deemed” when used in a statute thus simply state the effect or meaning which some matter or things has-the way in which it is to be adjudged; this need not import artificiality or fiction; it may simply be the statement of an indisputable conclusion.” 19.2.2. In Pioneer Urban, this Court further extracted extensively from the decision in Hindustan Cooperative Housing Building Society D Limited v. Registrar, Cooperative Societies and Anr.: (2009) 14 SCC 302 on various features of the processes of construction of different deeming provisions in different contexts. Some of the relevant parts of such extraction (as occurring in paragraph 95 of PioneerUrban) read as follows (in SCC at pp. 524): E “ ‘… The word “deemed” is used a great deal in modern legislation. Sometimes it is used to impose for the purposes of a statute an artificial construction of a word or phrase that would not otherwise prevail. Sometimes it is used to put beyond doubt a particular construction that might otherwise be uncertain. F Sometimes it is used to give a comprehensive description that includes what is obvious, what is uncertain and what is, in the ordinary sense, impossible.’ (Per Lord Radcliffe in St. Aubyn v. Attorney General:1952 AC 15 (HL), AC p. 53)

G 14. ‘Deemed’, as used in statutory definitions [is meant] ‘to extend the denotation of the defined term to things it would not in ordinary parlance denote, is often a convenient devise for reducing the verbiage of an enactment, but that does not mean that wherever it is used it has that effect; to deem means simply H

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 369 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

to judge or reach a conclusion about something, and the words A “deem” and “deemed” when used in a statute thus simply state the effect or meaning which some matter or thing has — the way in which it is to be adjudged; this need not import artificiality or fiction; it may simply be the statement of an undisputable conclusion.’ B (Per Windener, J. in Hunter Douglas Australia Pty. v. Perma Blinds: (1970) 44 Aust LJ R 257)

15. When a thing is to be “deemed” something else, it is to be treated as that something else with the attendant consequences, but it is not that something else (per Cave, J., in R. v. Norfolk C County Court: (1891) 60 LJ QB 379). ‘When a statute gives a definition and then adds that certain things shall be “deemed” to be covered by the definition, it matters not whether without that addition the definition would have covered them or not.’ (Per Lord President Cooper in Ferguson v. McMillan D : 1954 SLT 109 (Scot))

16. Whether the word “deemed” when used in a statute established a conclusive or a rebuttable presumption depended upon the context (see St. Leon Village Consolidated School District v. Ronceray: (1960) 23 DLR (2d) 32 (Can)). E ‘…. I … regard its primary function as to bring in something which would otherwise be excluded.’ (Per Viscount Simonds in Barclays Bank Ltd. v. IRC: 1961 AC 509 at AC p. 523.) F ‘ “Deems” means “is of opinion” or “considers” or “decides” and there is no implication of steps to be taken before the opinion is formed or the decision is taken.’ [See R. v. Brixton Prison (Governor), ex p Soblen: (1963) 2 QB 243 at QB p. 315.]’” G 19.3. On a conspectus of the principles so enunciated, it is clear that although the word ‘deemed’ is employed for different purposes in different contexts but one of its principal purpose, in essence, is to deem what may or may not be in reality, thereby requiring the subject-matter to be treated as if real. Applying the principles to the provision at hand H

p. 370 Copy page pinpoint

A i.e., Section 43 of the Code, it could reasonably be concluded that any transaction that answers to the descriptions contained in sub-sections (4) and (2) is presumed to be a preferential transaction at a relevant time, even though it may not be so in reality. In other words, since sub- sections (4) and (2) are deeming provisions, upon existence of the ingredients stated therein, the legal fiction would come into play; and B such transaction entered into by a corporate debtor would be regarded as preferential transaction with the attendant consequences as per Section 44 of the Code, irrespective whether the transaction was in fact intended or even anticipated to be so. Exclusion part C 19.4. Even when the above-stated indicting parts of Section 43 as occurring in sub-sections (4) and (2) are satisfied and the corporate debtor is deemed to have given preference at a relevant time to a related party or unrelated party, as the case may be, such deemed preference may yet not be an offending preference, if it falls into any or both of the D exclusions provided by sub-section (3) i.e., having been entered into during the ordinary course of business of the corporate debtor or40 transferee or resulting in acquisition of new value for the corporate debtor. Net concentrate of Section 43

E 19.5. Thus, the net concentrate of Section 43 is that if a transaction entered into by a corporate debtor is not falling in either of the exceptions provided by sub-section (3) and satisfies the three-fold requirements of sub-sections (4) and (2), it would be deemed to be a preference during a relevant time, whether or not in fact it were so; and whether or not it were intended or anticipated to be so. F

20Copy pinpoint20. The analysis foregoing leads to the position that in order to find as to whether a transaction, of transfer of property or an interest thereof of the corporate debtor, falls squarely within the ambit of Section 43 of the Code, ordinarily, the following questions shall have to be examined in a given case: G (i). As to whether such transfer is for the benefit of a creditor or a surety or a guarantor?

40As noticed, whether this expression “or”, as occurring in between the expressions ‘corporate debtor’ and ‘transferee’ in clause (a) of sub-section (3) of Section 43, is to be read as “and” remains a question to be dealt with.

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 371 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

(ii). As to whether such transfer is for or on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor? (iii). As to whether such transfer has the effect of putting such creditor or surety or guarantor in a beneficial position than it would have been in the event of distribution of assets being made in accordance with Section 53? (iv). If such transfer had been for the benefit of a related party (other than an employee), as to whether the same was made during the period of two years preceding the insolvency commencement date; and if such transfer had been for the benefit of an unrelated party, as to whether the same was made during the period of one year preceding the insolvency commencement date? (v) As to whether such transfer is not an excluded transaction in terms of sub-section (3) of Section 43? D

21Copy pinpoint21. Having taken note of the salient features of Section 43 of the Code and the questions germane for its applicability over any transaction, we may now examine the questions calling for determination in these appeals. Obviously, if the transactions in question are to fall squarely within the mischief of Section 43, they must satisfy all the specifications and ingredients of sub-sections (2) and (4) of Section 43 and ought not to be within the exclusion provided in sub-section (3) thereof. Whether impugned transactions are preferential, falling within the ambit of sub-section (2) of Section 43 IBC

22Copy pinpoint22. For the purpose of dealing with the crucial question as to whether the impugned transactions are preferential and fall within the prescription of sub-section (2) of Section 43 of the Code, appropriate it shall be to recapitulate and summarize the overall scenario of this case. 22.1. The fact that JAL, a public listed company with more than 5 lakh individual shareholders, is the holding company of the corporate debtor JIL is neither of any doubt nor of any dispute. As on 31.03.2017, JAL owned 71.64% of shares of JIL, having a value of Rupees 995 crores. The background had been that when in the year 2003, JAL was awarded the rights for construction of an expressway and a concession agreement was entered into with the Yamuna Expressway Industrial H

p. 372 Copy page pinpoint

A Development Authority, JIL was set up as a special purpose vehicle. Finance was obtained from a consortium of banks against partial mortgage of land acquired and pledge of 51% of the shareholding of JAL. Housing plans were envisaged for construction of real estate projects in two locations of the land acquired, one in Wish Town, Noida and another in Mirzapur. B 22.1.1. Shorn of other details which may not be necessary for the present purpose, relevant it is to notice that JIL was declared NPA by Life Insurance Corporation of India on 30.09.2015 and by some of its other lenders on 31.03.2016. Then, IDBI Bank Limited instituted a petition under Section 7 of the Code before NCLT, seeking initiation of Corporate C Insolvency Resolution Process against JIL, while alleging that JIL had committed a default to the tune of Rs. 526.11 crores in repayment of its dues. On 09.08.2017, NCLTpassed an order under Section 7 of the Code and appointed an Interim Resolution Professional41-42. The IRP made an application on 06.02.2018, seeking directions that the transactions entered into by the directors and promoters of corporate debtor creating mortgages of 858 acres of immovable property owned by it to secure the debts of JAL are preferential, undervalued, wrongful, and fraudulent; and hence, the security interest created by corporate debtor JIL in favour of the lenders of JAL be discharged and such properties be deemed to be vested in corporate debtor. The NCLT allowed the said application on 16.05.2018 with respect to six of the impugned transactions covering about 758 acres of land. On the appeals filed by lenders of JAL, NCLAT,by its impugned order dated 01.08.2019, set aside the order passed by NCLT and held that such lenders of JAL were entitled to exercise their rights under the Code. F 22.2. At this juncture, we may again take note of the transactions that were questioned by IRP for the purpose of the application for avoidance, which had been the following: 1. Mortgage deed dated 29.12.2016 for 167.229 acres of land (Property No. 1) executed by JIL in favour of Axis Trustee Services Limited to provide an additional G security for term loans of Rs. 21081.5 crores sanctioned as a consortium to JAL; 2. Mortgage deed dated 29.12.2016 for 167.9615 acres of land (Property No. 2), again executed by JIL in favour of Axis Trustee 41 CIRP in relation to JIL is underway by virtue of the orders passed by this Court on 09.08.2018 and 06.11.2019 (as referred to in paragraphs 6.2 and 6.3.1 - supra) 42 This date i.e., 09.08.2017 is the “insolvency commencement date” for the purpose of

H the questions under consideration

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 373 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

Services Limited to provide an additional security for term loans of A Rs.21081.5 crores sanctioned by the consortium to JAL; 3. Mortgage deed dated 07.03.2017 for 158.1739 acres of land (Property No. 3) executed by JIL in favour of IDBI Trustee-ship Services Limited for term loan of Rs.1200 crores granted by ICICI Bank to JAL; 4. Mortgage deed dated 07.03.2017 for 151.0063 acres of land (Property No. 4), B again executed by JIL in favour of IDBI Trustee-ship Services Limited for term loan of Rs.1200 crores granted by ICICI Bank to JAL; 5. Mortgage deed dated 24.05.2016 for 25.0040 acres of land (Property No. 5) executed by JIL in favour of IDBI Trustee-ship Services Limited, as additional security against the facility agreement dated 29.08.2012 between Standard Chartered Bank and JAL for Rs.400 crores and other C facilities, respectively for Rs.450 crores, Rs.538.16 crores and Rs.81.84 crores as also for working capital facility of Rs.297 crores; and 6. Mortgage deed dated 04.03.2016 for 90 acres of land (Property No. 6), executed by JIL in favour of State Bank of India for Short Term Loan Facility to JAL to the tune of Rs.1000 crores. D 22.2.1. As noticed, 09.08.2017 is the insolvency commencement date in this case. The transactions in question, even if of putting the concerned properties under mortgage with the lenders, carry the ultimate effect of working towards the benefit and advantage of the borrower i.e., JAL who obtained loans and finances by virtue of such transactions. It is true that there had not been any creditor-debtor relationship between E the lender banks and corporate debtor JIL but that will not be decisive of the question of the ultimate beneficiary of these transactions. The mortgage deeds in question, entered by the corporate debtor JIL to secure the debts of JAL, obviously, amount to creation of security interest to the benefit of JAL. F 22.2.2. Now, the capacity of JAL is admittedly that of the holding company of JIL as its largest equity shareholder (with approximately 71.64% shareholding). Moreover, JAL had admittedly been the operational creditor of JIL, for an amount of approximately Rs. 261.77 crores. JAL itself maintains that it had been providing financial, technical G and strategic support to JIL in various ways. It is the assertion that apart from making investment in terms of equity shareholding to the tune of Rs. 995 crores, JAL had pledged its 70,83,56,087 equity shares held in JIL in favour of the lenders of JIL; had also entered into Promoter Support Agreement to the lenders of JIL to meet the DSRA obligation of JIL H

p. 374 Copy page pinpoint

A towards its lenders; and had further extended Bank Guarantees of Rs. 212 crores to meet the DSRA obligation of JIL. These assertions, in our view, put JAL in such capacity that it is a related party to JIL and is a creditor as also surety of JIL. In other words, the corporate debtor JIL owed antecedent financial debts as also operational debts and other liabilities towards JAL. 22.3. In the scenario taken into comprehension hereinabove, there is nothing to doubt that the corporate debtor JIL has given a preference by way of the mortgage transactions in question for the benefit of its related person JAL (who has been the creditor as also surety for JIL) for and on account of antecedent financial debts, operational debts and other liabilities owed to such related person. In the given fact situation, it is plain and clear that the transactions in question meet with all the requirements of clause (a) of sub-section (2) of Section 43. 22.4. It is also not far to seek that in the given scenario, the requirements of clause (b) of sub-section (2) of Section 43 are also met fair and square. On behalf of the respondents, emphasis is laid on the fact that in the distribution waterfall in case of liquidation (per Section 53 of the Code), JAL, as an operational creditor, stands much lower in priority than the other creditors and stakeholders. Such submissions, in our view, only strengthen the position that by way of the impugned transfers, JAL is put in a much beneficial position than it would have been in the absence of such transfers. It has rightly been contended on behalf of the appellants that with the transactions in question, JAL has been put in an advantageous position vis-à-vis other creditors on the counts that: a) JAL received a huge working capital (approx. Rupees 30000 crores), by way of loans and facilities extended to it by the respondent-lenders; and b) by way of the transactions in question, JAL’s liability towards its own creditors shall be reduced, in so far as the value of the mortgaged properties is concerned, which is said to be approximately Rs. 6000 crores. As a necessary corollary of the beneficial and advantageous position of the related party JAL with creation of such security interest over the properties of JIL, in the eventuality of distribution of assets under Section 53, the other creditors and stakeholders of JIL shall have to bear the brunt of the corresponding disadvantage because such heavily encumbered assets will not form the part of available estate of the corporate debtor. Obviously, JAL stands dearly benefited and has derivedsuch benefits at the cost, and in exclusion, H

ANUJ JAIN INTERIM RESOLUTION PROFESSIONAL FOR JAYPEE 375 INFRATECH LTD. v. AXIS BANK LTD. [DINESH MAHESHWARI, J.]

of the other creditors and stakeholders of the corporate debtor JIL. The A applicability of clauses (a) and (b) of sub-section (2) of Section 43 of the Code is clear and complete in relation to the impugned six transactions. 22.5. Therefore, in relation to the present case, the answers to questions (i), (ii) and (iii) as referred in paragraph 20 are that: the impugned transactions had been of transfers for the benefit of JAL, B who is a related party of the corporate debtor JIL and is its creditor and surety by virtue of antecedent operational debts as also other facilities extended by it; and the impugned transactions have the effect of putting JAL in a beneficial position than it would have been in the event of distribution of assets being made in accordance with Section 53 of the C Code. Thus, the corporate debtor JIL has given a preference in the manner laid down in sub-section (2) of Section 43 of the Code. The requirements of sub-section (4) of Section 43 IBC - related party and look-back period

23Copy pinpoint23. Even when all the requirements of sub-section (2) of Section D 43 of the Code are satisfied, in order to fall within the mischief sought to be remedied by Section 43, the questioned preference ought to have been given at a relevant time. In other words, for a preference to become an avoidable one, it ought to have been given within the period specified in sub-section (4) of Section 43. The extent of ‘relevant time’ is different with reference to the relationship of the beneficiary with the corporate debtor inasmuch as, for the persons falling within the expression ‘related party’ within the meaning of Section 5 (24) of the Code, such period is of two years before the insolvency commencement date whereas it is one year in relation to the person other than a related party. The conceptions of, and rationale behind, such provisions could be noticed in the excerpts from the interim report of Law Reforms Committee, as referred on behalf of the appellants. We may usefully extract the same as under: - “c. TRANSACTIONS WITH RELATED PARTIES The law on avoidance in the UK provides for close scrutiny of transactions entered into with persons connected with the company (other than employees) by incorporating longer time periods in relation to which such transactions can be challenged. Thus, while the relevant time period for avoiding preferences is six months prior to the onset of insolvency, the time period is increased to two years in the case of persons connected with the H

p. 376 Copy page pinpoint