Introduction
The Insolvency and Bankruptcy Code, 2016 (Code) recognises the concept of “avoidable transactions”. Under the Code, certain transactions of the corporate debtor may be questioned especially if such transactions have resulted in the corporate debtor disposing its assets within a defined period prior to the commencement of the rescue process. Such transactions include preferential transactions, undervalued transactions, transactions to defraud creditors and exorbitant transactions. The resolution professional / liquidator is required to identify such avoidable transactions over the course of the insolvency resolution process and file an application before the insolvency tribunal to reverse such transactions. The main objective behind these provisions is to ensure that the assets of the corporate debtor are available for its resolution as a going concern and result in value maximisation of the corporate debtor.
In the case of Arvind Garg, Liquidator of Carnation Auto India Pvt. Ltd. v. Jagdish Khattar & Ors. (Carnation Auto case), an interesting issue arose on whether the legal representatives of a deceased director of the corporate debtor can be impleaded in the proceedings concerning avoidable transactions.
Facts of the case
In the present case, Carnation Auto India Pvt. Ltd. (Corporate Debtor) underwent corporate insolvency resolution process followed by liquidation. The liquidator filed an application before the National Company Law Tribunal (NCLT) seeking reversal of certain avoidable transactions, which were allegedly fraudulent and were aimed to diminish the value of the Corporate Debtor’s assets. However, this application was dismissed, and an appeal was preferred by the liquidator before the National Company Law Appellate Tribunal (NCLAT). In the appeal, Jagdish Khattar (Director) and his sons were the respondents. However, during the pendency of the proceedings before the NCLAT, the Director passed away. Subsequently, the liquidator filed an application for impleading the widow of the Director as his legal representatives in the proceedings concerning avoidable transactions. It was the liquidator’s case that until and unless the legal heirs of the deceased Director were brought on record, no effective order could be passed in the proceedings concerning avoidable transactions.
Ruling by NCLAT
It was argued in the NCLAT on behalf of the widow that she should not be impleaded in the proceedings concerning avoidable transactions since (i) such proceedings are against the personal actions of the Director, and (ii) she had no role to play in the affairs of the Corporate Debtor. However, the NCLAT took note of the definition of ‘legal representative’ under the Code of Civil Procedure, 1908 (CPC) – the procedural law related to the administration of civil proceedings in India. The NCLAT observed that under the CPC, a person who, in law, represents the estate of a deceased person is the legal representative of that deceased person. The NCLAT went on to note that since the estate of the Director had passed on to his widow, she was his legal representative. Further the NCLAT also noted that the widow was also a legal heir under the succession laws. Accordingly, the NCLAT permitted the liquidator’s application for impleading the widow as an accused.
The NCLAT was of the view that since the outcome of the proceedings concerning avoidable transactions would impact the estate of the Director which is presently in the hands of the widow, she should be impleaded in the present case.
Our thoughts
Under the Code, there are certain parameters and enquiries for determining each of the avoidable transaction. For instance, ‘intention’ is not relevant for a transaction to be categorised as a preferential transaction, but for fraudulent transaction, there must be an intent to defraud creditors of the corporate debtor. It follows that as long as an individual is in possession of property on account of avoidable transaction, the NCLT can reverse such transactions, and it need not find wrongdoings by the person in possession of the property. In the present case, the NCLAT noted that any outcome of the proceedings concerning avoidable transactions would have impacted the estate of the Director, which is presently in the hands of the widow, and therefore, it was necessary that she should be impleaded in the present case.
From a policy perspective, the decision in the Carnation Auto case is a welcome one and long overdue. It would come to the aid of insolvency professionals in cases where the erstwhile management personnel of the corporate debtor may have siphoned assets, the benefit of which is enjoyed by the legal representatives of such management personnel. This judgement will ensure that funds of the corporate debtor dissipated through such avoidance transactions are returned to the corporate debtor, irrespective whether the assets obtained through such funds are presently with the party alleged to have indulged in avoidable transactions or their legal heirs. However, the question of impleading legal heirs should be answered on a case-to-case basis, considering whether the heir is a beneficiary of the avoidable transaction or has in his / her possession assets gained through such avoidance transactions.
Authors: Souvik Ganguly and Altamash Qureshi
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