NCLAT Ruling in Sidharth Jain vs. SBI: Key Takeaways on Section 43

 

In the recent case of Sidharth Bharatbhushan Jain & Others vs. State Bank of India & Others, the National Company Law Appellate Tribunal (NCLAT) addressed a crucial issue concerning preferential transactions under Section 43 of the Insolvency and Bankruptcy Code (IBC). The case revolved around the unpaid debts of M/s Pratap Associates, a related party to the appellants, and whether these transactions fell within the applicable look-back period for preferential treatment. The NCLAT ultimately set aside the earlier ruling by the NCLT, highlighting the importance of adhering to specified timeframes in insolvency proceedings.

To learn more about the case, its implications, and the final ruling, read the full blog.

Background:

This case involves Sidharth Bharatbhushan Jain & Others versus State Bank of India & Others, decided by the National Company Law Appellate Tribunal (NCLAT) on October 14, 2024. Sidharth Bharatbhushan Jain and others were shareholders and directors of Sysco Industries Ltd. State Bank of India, Siemens Financial Services Pvt. Ltd., and Paisalo Digital Ltd. are financial institutions involved in the case. Sysco Industries Ltd was engaged in business activities and had supplied goods to various clients, including M/s Pratap Associates. M/s Pratap Associates is a Hindu Undivided Family (HUF) firm associated with Sidharth Bharatbhushan Jain and is considered a related party due to its ownership ties. Essentially, it’s a business entity operated by the Jain family, making it closely connected to Sysco Industries.

Pratap Associates owed Sysco Industries Ltd. a significant amount of ₹7.78 crores for the goods supplied. This debt was not paid by Pratap Associates before Sysco Industries entered the insolvency process. On September 8, 2021, Sysco Industries Ltd. was admitted into the CIRP, Once a company enters CIRP, certain protections and processes kick in, including a review of the company's past financial transactions to ensure that creditors are treated fairly. One of the key provisions during this review is Section 43, which addresses preferential transactions.

Section 43 of the IBC is designed to prevent a debtor from favoring one creditor over others shortly before entering insolvency. If a debtor pays a related party (like Pratap Associates) in a way that puts them in a better position than other creditors, that transaction can be challenged as preferential.

Following the initiation of CIRP, the Resolution Professional (RP) (an appointed professional to manage the insolvency process) reviewed Sysco Industries' past transactions. The RP identified that goods were supplied to Pratap Associates and that the debt remained unpaid. The RP then decided to file an application under Section 43 to recover the outstanding amount, arguing that the unpaid debt constituted a preferential transaction favoring a related party, which should be reversed.

The Issue:

In the case of Sidharth Bharatbhushan Jain & Others vs. State Bank of India & Others, the main issue revolves around the unpaid debt owed by M/s Pratap Associates to Sysco Industries Ltd. and whether the transactions between these parties constituted a preferential transfer under Section 43 of the Insolvency and Bankruptcy Code (IBC). 

Section 43 of the IBC allows the RP to challenge transactions that favor one creditor over others if they occurred within a specific time frame before insolvency. In this case, since Pratap Associates is a related party, the relevant look-back period is two years before the commencement of the CIRP. This means that transactions made up to September 8, 2019 could be scrutinized. The RP filed an application claiming that the transaction where goods were supplied to Pratap Associates constituted a preferential transfer because it favored a related party without equitable treatment of other creditors.

The National Company Law Tribunal (NCLT) examined the RP's application. They considered the following:

• The amount of ₹7.78 crores was indeed outstanding, and Pratap Associates did not deny this debt.
• The goods supplied by Sysco Industries to Pratap Associates constituted property (as defined under the law), which supports the claim of a preferential transaction.
• The NCLT noted that it is common for managements to strip assets before insolvency, leaving the creditors at a disadvantage.

The NCLT ruled in favor of the RP and ordered the appellants (the directors and shareholders) to pay back the outstanding amount of ₹7.78 crores to Sysco Industries. This amount was to be distributed among all creditors fairly, ensuring that no single creditor was favored unfairly.

The appellants (Sidharth Bharatbhushan Jain and others) contended that the transaction involving the goods supplied to Pratap Associates occurred before May 23, 2018. They argued that since this was more than two years before the CIRP began, it should not be classified as a preferential transaction under Section 43. They claimed that since the debt arose from a transaction that took place more than the allowable look-back period, it was not valid for scrutiny under the provisions of Section 43.

Final Ruling:

The National Company Law Appellate Tribunal (NCLAT) made a significant decision regarding the claims made against the appellants concerning unpaid debts owed by a related party, M/s Pratap Associates.

The NCLAT set aside the earlier order made by the National Company Law Tribunal (NCLT), which had directed the appellants to pay back ₹7.78 crores to Sysco Industries for distribution among creditors. The reasoning behind this decision was that the outstanding amount owed by Pratap Associates dated back to more than two years before the commencement of the Corporate Insolvency Resolution Process (CIRP) on September 8, 2021. Since this debt arose from transactions that occurred before May 23, 2018, it fell outside the two-year look-back period established by Section 43 of the Insolvency and Bankruptcy Code (IBC). Thus, the NCLAT concluded that Section 43 could not be applied in this case.

By setting aside the NCLT’s order, the NCLAT effectively ruled that the appellants were not liable for the repayment of the ₹7.78 crores based on the claim of preferential treatment. This ruling underscores the importance of adhering to the specified look-back periods in the context of insolvency transactions, ensuring that the rules are applied fairly and consistently.

Although the NCLAT dismissed the claims under Section 43, it did not leave the respondents (State Bank of India and others) without recourse. The tribunal allowed the respondents to pursue alternative actions under other provisions of the law. One notable provision mentioned was Section 66 of the IBC. Section 66 addresses fraudulent or wrongful trading. It allows the resolution professional or liquidator to take action against directors or shareholders if it is found that they engaged in actions that have the intent to defraud creditors or that have been carried out to the detriment of creditors.

Conclusion:

In summary, the final ruling of the NCLAT established that the claims against the appellants under Section 43 were invalid due to the timing of the transactions, effectively protecting them from having to repay the debt owed by the related party. However, the tribunal also ensured that the respondents had the opportunity to pursue other legal avenues, particularly if there were indications of fraudulent activities associated with the financial dealings of Sysco Industries. This ruling highlights the balance between protecting creditors’ rights and ensuring that the rules governing insolvency processes are applied correctly.