Avoidance Transactions Decoded
A, Preferential Transactions (Provisions of the Code)
# Section 43 Preferential transactions and relevant time.
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(2) A corporate debtor shall be deemed to have given a preference, if–
(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
(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.
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(4) A preference shall be deemed to be given at a relevant time, if –
(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.
Undervalued Transactions
# Section 45. Avoidance of undervalued transactions. -
(1) If the liquidator or the resolution professional, as the case may be, on an examination of the transactions of the corporate debtor referred to in sub-section (2) 1[***] determines that certain transactions were made during the relevant period under section 46, which were undervalued, he shall make an application to the Adjudicating Authority to declare such transactions as void and reverse the effect of such transaction in accordance with this Chapter.
(2) A transaction shall be considered undervalued where the corporate debtor–
(a) makes a gift to a person; or
(b) enters into a transaction with a person which involves the transfer of one or more assets by the corporate debtor for a consideration the value of which is significantly less than the value of the consideration provided by the corporate debtor, and such transaction has not taken place in the ordinary course of business of the corporate debtor.
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# Section 46. Relevant period for avoidable transactions. -
(1) In an application for avoiding a transaction at undervalue, the liquidator or the resolution professional, as the case may be, shall demonstrate that –
(i) such transaction was made with any person within the period of one year preceding the insolvency commencement date; or
(ii) such transaction was made with a related party within the period of two years preceding the insolvency commencement date.
(2) The Adjudicating Authority may require an independent expert to assess evidence relating to the value of the transactions mentioned in this section.
# Section 49. Transactions defrauding creditors. -
(1) Where the corporate debtor has entered into an undervalued transaction as referred to in sub-section (2) of section 45 and the Adjudicating Authority is satisfied that such transaction was deliberately entered into by such corporate debtor -
(a) for keeping assets of the corporate debtor beyond the reach of any person who is entitled to make a claim against the corporate debtor; or
(b) in order to adversely affect the interests of such a person in relation to the claim,
# Section 66. Fraudulent trading or wrongful trading. -
(1) If during the corporate insolvency resolution process or a liquidation process, it is found that any business of the corporate debtor has been carried on with intent to defraud creditors of the corporate debtor or for any fraudulent purpose, the Adjudicating Authority may on the application of the resolution professional pass an order that any persons who were knowingly parties to the carrying on of the business in such manner shall be liable to make such contributions to the assets of the corporate debtor as it may deem fit.
(2) On an application made by a resolution professional during the corporate insolvency resolution process, the Adjudicating Authority may by an order direct that a director or partner of the corporate debtor, as the case may be, shall be liable to make such contribution
to the assets of the corporate debtor as it may deem fit, if-
(a) before the insolvency commencement date, such director or partner knew or ought to have known that the there was no reasonable prospect of avoiding the commencement of a corporate insolvency resolution process in respect of such corporate debtor; and
(b) such director or partner did not exercise due diligence in minimising the potential loss to the creditors of the corporate debtor.
(3) Notwithstanding anything contained in this section, no application shall be filed by a resolution professional under sub-section (2), in respect of such default against which initiation of corporate insolvency resolution process is suspended as per section 10A.
Explanation. – For the purposes of this section a director or partner of the corporate debtor, as the case may be, shall be deemed to have exercised due diligence if such diligence was reasonably expected of a person carrying out the same functions as are carried out by such director or partner, as the case may be, in relation to the corporate debtor.
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B. Notes;
a. Preferential Transactions
1. Following are the caveats of Section 43;
There is a transfer of property or an interest thereof.
Transfer is for the benefit of a creditor or a surety or a guarantor.
Transfer is on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor;
A preference shall be deemed to be given at a relevant time, if –
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;
a preference is given to a person other than a related party during the period of one year preceding the insolvency commencement date.
Preference is precluded if transfer is made in the ordinary course of the business or financial affairs of the corporate debtor or the transferee;
2. Thus an application under 43 r/w section 44 to succeed, applicant (Liquidator) has to satisfy all the criterias/caveats under section 43.
That there is transfer of property or an interest thereof.
That the transfer is for the benefit of a creditor or a surety or a guarantor.
That the Transfer is on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor;
That the transfer is within the relevant time.
That the transfer has not been made in the ordinary course of the business or financial affairs of the corporate debtor or the transferee;
3 Hon’ble Supreme Court of India (26.02.2020) in Anuj Jain IRP for Jaypee Infratech Limited Vs Axis Bank Limited Etc. (Civil Appeal Nos. 8512-8527 of 2019 and other petitions)
# 20. 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:
(i). As to whether such transfer is for the benefit of a creditor or a surety or a guarantor?
(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?
# 25.5. Looking to the scheme and intent of the provisions in question and applying the principles aforesaid, we have no hesitation in accepting the submissions made on behalf of the appellants that the said contents of clause (a) of sub-section (3) of Section 43 call for purposive interpretation so as to ensure that the provision operates in sync with the intention of legislature and achieves the avowed objectives. Therefore, the expression “or”, appearing as disjunctive between the expressions “corporate debtor” and “transferee”, ought to be read as “and”; so as to be conjunctive of the two expressions i.e., “corporate debtor” and “transferee”. Thus read, clause (a) of sub-section (3) of Section 43 shall mean that, for the purposes of sub-section (2), a preference shall not include the transfer made in the ordinary course of the business or financial affairs of the corporate debtor and the transferee. Only by way of such reading of “or” as “and”, it could be ensured that the principal focus of the enquiry on dealings and affairs of the corporate debtor is not distracted and remains on its trajectory, so as to reach to the final answer of the core question as to whether corporate debtor has done anything which falls foul of its corporate responsibilities.
# 25.6.1. Thus, the enquiry now boils down to the question as to whether the impugned transfers were made in the ordinary course of business or financial affairs of the corporate debtor JIL. It remains trite that an activity could be regarded as ‘business’ if there is a course of dealings,which are either actually continued or contemplated to be continued with a profit motive.
4. Property has been defined as;
# Section 3 (27) “property” includes money, goods, actionable claims, land and every description of property situated in India or outside India and every description of interest including present or future or vested or contingent interest arising out of, or incidental to, property;
5.1. Assignment of Debt by a Creditor
Transfer/assignment of debt by a creditor to a third person does not contemplate transfer of property or an interest thereof of the corporate debtor. A creditor thus transfers/assigns his assets, not the assets of the CD. Important - Flow of Financial Transaction; First Debit then Credit
5.2. Assignment of Debt by CD.
On the contrary if CD asks/facilitates a debtor of CD to pay/assign the dues of CD to the creditor of the CD, this will fall under the definition of preferential transaction.
Case Law;
i). Hon’ble Supreme Court in Anuj Jain IRP for Jaypee Infratech Limited Vs Axis Bank Limited Etc. (Civil Appeal Nos. 8512-8527 of 2019 and other petitions) has observed that;
# 18. ……. 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 (section 43 & 44) 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.
# 18.2. 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,.............
# 19. 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.
5. Duties and responsibilities of RP in CIRP as per section 25 w.r.t. section 43
# 28.1. Looking to the legal fictions created by Section 43 and looking to the duties and responsibilities per Section 25, in our view, for the purpose of application of Section 43 of the Code in any insolvency resolution process, what a resolution professional is ordinarily required to do could be illustrated as follows:
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5. In yet further step, such of the scanned and scrutinised transactions that are found covered by clause (a) of sub-section (2) of Section 43 shall have to be examined on another touchstone as to whether the transfer in question 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 per Section 53 of the Code. If answer to this question is in the affirmative, the transaction under examination shall be deemed to be of preference within a relevant time, provided it does not fall within the exclusion provided by sub-section (3) of Section 43.
[ Link Synopsis ]
ii). NCLT Chennai-1 (26.02.2021) in Mr. T.V. Balasubramanian Vs M/s. Kushal Traders & Anr. [MA/745/ 2019 in CP (IB)/1037/ 2018] held that;
# 17. After a detailed discussion by the Hon’ble Supreme Court of India in relation to the provisions of Section 43 of IBC, 2016 the following has been culled out at Paragraph No.28.1 for the benefit of the Resolution Professional as well as for the benefit of this Authority to ascertain a transaction as preferential which reads as follows:-
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3. Having thus obtained two sub-sets of transactions to scan, the steps thereafter would be to examine every transaction in each of these sub-sets to find: (i) as to whether the transaction is of transfer of property or an interest thereof of the corporate debtor; and (ii) as to whether the beneficiary involved in the transaction stands in the capacity of creditor or surety or guarantor qua the corporate debtor. These steps shall lead to shortlisting of such transactions which carry the potential of being preferential.
4. In the next step, the said shortlisted transactions would be scrutinised to find if the transfer in question is made for or on account of an antecedent financial debt or operational debt or other liability owed by the corporate debtor. The transactions which are so found would be answering to clause (a) of sub-section (2) of Section 43.
5. In yet further step, such of the scanned and scrutinised transactions that are found covered by clause (a) of sub-section (2) of Section 43 shall have to be examined on another touchstone as to whether the transfer in question 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 per Section 53 of the Code. If answer to this question is in the affirmative, the transaction under examination shall be deemed to be of preference within a relevant time, provided it does not fall within the exclusion provided by sub-section (3) of Section 43.
6. In the next and equally necessary step, the transaction which otherwise is to be of deemed preference, will have to pass through another filtration to find if it does not answer to either of the clauses (a) and (b) of sub-section (3) of Section 43. After the resolution professional has carried out the aforesaid volumetric as also gravimetric analysis of the transactions on the defined coordinates, he shall be required to apply to the Adjudicating Authority for necessary order/s in relation to the transaction/s that had passed through all the positive tests of sub-section (4) and sub-section (2) as also negative test of sub-section (3).
6. Transaction which can can neither be considered as preferential transaction nor undervalued transaction;
Provision of doubtful debts; As this transaction does not contemplate transfer of property of the CD, the same can neither be considered as undervalued transaction or preferential transaction.
Technical Write off of Bad & Doubtful Debts; As this transaction does not contemplate transfer of property of the CD, the same can neither be considered as undervalued transaction or preferential transaction.
Transfer/assignment of the Debt by the Creditor; As this transaction does not contemplate transfer of property of the CD, the same can neither be considered as undervalued transaction or preferential transaction.
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C. # Section 44. Orders in case of preferential transactions. -
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(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;
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Provided that an order under this section shall not -
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(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, -
(a) had sufficient information of the initiation or commencement of insolvency resolution process of the corporate debtor;
(b) 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.
Blogger’s comments; Section 44 does not contemplate any action against the promoters/directors of the CD. Actions contemplated in this section are all against the person receiving the benefit from the preferential transactions. Proviso to section 44 provides protection to a such person (non related party) receiving the benefit in good faith for value, prior to the date of commencement of the CIRP.
From the explanation I & II in the proviso of section 44, as above presumption of good faith will be in favour of the person who received a benefit from the preferential transaction, provided he is not a related party & the transaction was not done after the public announcement.
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D. Undervalued Transactions under Section 45; The provisions of this section are attracted when there is a transfer of property or an interest thereof of the corporate debtor for a consideration the value of which is significantly less than the value of the consideration provided by the corporate debtor, and such transaction has not taken place in the ordinary course of business of the corporate debtor.
2. Transactions defrauding creditors. -
# Section 49.
(1) Where the corporate debtor has entered into an undervalued transaction as referred to in sub-section (2) of section 45 and the Adjudicating Authority is satisfied that such transaction was deliberately entered into by such corporate debtor -
(a) for keeping assets of the corporate debtor beyond the reach of any person who is entitled to make a claim against the corporate debtor; or
(b) in order to adversely affect the interests of such a person in relation to the claim,
3. Ingredients;
Transfer of property or an interest thereof of the corporate debtor for a consideration the value of which is significantly less.
Such a transaction has not taken place in the ordinary course of business of the corporate debtor.
An undervalued transaction to attract the provisions of Section 49, the intent is important as determined by the Adjudicating Authority.
4. Significant variation in the valuations has been defined under Explanation to regulation
35(1)(b) of CIRP regulations as under;
(ii) “significantly different” means a difference of twenty-five per cent. in liquidation value under an asset class and the same shall be calculated as (L1-L2)/L1, where,
L1= higher valuation of liquidation value
L2= lower valuation of liquidation value.
5. Hon’ble Supreme Court in Anuj Jain IRP for Jaypee Infratech Limited Vs Axis Bank Limited Etc. (Civil Appeal Nos. 8512-8527 of 2019 and other petitions) has observed that;
# 29.1. However, we are impelled to make one comment as regards the application made by IRP. It is noticed that in the present case, the IRP moved one composite application purportedly under Sections 43, 45 and 66 of the Code while alleging that the transactions in question were preferential as also undervalued and fraudulent. In our view, in the scheme of the Code, the parameters and the requisite enquiries as also the consequences in relation to these aspects are different and such difference is explicit in the related provisions.
As noticed, the question of intent is not involved in Section 43 and by virtue of legal fiction, upon existence of the given ingredients, a transaction is deemed to be of giving preference at a relevant time.
However, whether a transaction is undervalued requires a different enquiry as per Sections 45 and 46 of the Code and significantly, such application can also be made by the creditor under Section 47 of the Code. The consequences of undervaluation are contained in Sections 48 and 49. Per Section 49, if the undervalued transaction is referable to sub-section (2) of Section 45, the Adjudicating Authority may look at the intent to examine if such undervaluation was to defraud the creditors.
[ Link Synopsis ]
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E. Fraudulent trading or wrongful trading. - Section 66.
(1) If during the corporate insolvency resolution process or a liquidation process, it is found that any business of the corporate debtor has been carried on with intent to defraud creditors of the corporate debtor or for any fraudulent purpose, the Adjudicating Authority may on the application of the resolution professional pass an order that any persons who were knowingly parties to the carrying on of the business in such manner shall be liable to make such contributions to the assets of the corporate debtor as it may deem fit. . . . . .
Basic Ingredients;
First, transaction shall be entered into with an object to defraud the creditors,
Second, such parties shall be in know of such intention, and to pass an order under this section, it has to be seen that director/partner of the corporate debtor is for sure aware of the fact that commencement of CIRP is inevitable and
Lastly, it has to be proved that such director or partner has not exercised due diligence in minimising the potential loss to the creditors of the Corporate debtor.
Payments made to the creditors cannot be brought under the caption of either fraudulent trading or wrongful trading,
i). Supreme Court (26.02.2020) in Anuj Jain IRP for Jaypee Infratech Limited Vs Axis Bank Limited Etc. (Civil Appeal Nos. 8512-8527 of 2019 and other petitions) has observed that;
# 29.1. However, we are impelled to make one comment as regards the application made by IRP. It is noticed that in the present case, the IRP moved one composite application purportedly under Sections 43, 45 and 66 of the Code while alleging that the transactions in question were preferential as also undervalued and fraudulent. In our view, in the scheme of the Code, the parameters and the requisite enquiries as also the consequences in relation to these aspects are different and such difference is explicit in the related provisions.
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On the other hand, the provisions of Section 66 related to fraudulent trading and wrongful trading entail the liabilities on the persons responsible therefore. We are not elaborating on all these aspects for being not necessary as the transactions in question are already held preferential and hence, the order for their avoidance is required to be approved; but it appears expedient to observe that the arena and scope of the requisite enquiries, to find if the transaction is undervalued or is intended to defraud the creditors or had been of wrongful/ fraudulent trading are entirely different. Specific material facts are required to be pleaded if a transaction is sought to be brought under the mischief sought to be remedied by Sections 45/46/47 or Section 66 of the Code.
As noticed, the scope of enquiry in relation to the questions as to whether a transaction is of giving preference at a relevant time, is entirely different. Hence, it would be expected of any resolution professional to keep such requirements in view while making a motion to the Adjudicating Authority.
[ Link Synopsis ]
ii). NCLAT (10.10.2022) in Mrs. Renuka Devi Rangaswamy, RP of M/s. Regen Infrastructure and Services Pvt. Ltd. Vs. M/s. Regen Powertech Pvt. Ltd. [Comp. (AT) (CH) (Ins) No. 357 / 2022 & IA/814/2022] held that;
In the present case, the reason given by the Respondent in respect to transfer of assets among its group companies appears to be plausible and cannot be brought under Section 66 (1) of IBC, 2016.
Fraud is a sensitive and serious allegation and the authority claiming such allegation is duty bound to provide the copies of the report concerning the allegations even before issuing the Show-cause notice.
Therefore, non-disclosure of the report of the transaction audit conducted by the RP of the Corporate Debtor is sufficient for this Tribunal to dismiss the present application since it amounts to gross violation of principles of natural justice.
It must be borne in mind that whenever a ‘Fraud’ on a ‘Corporate Debtor’ is committed, in the course of carrying ‘business’, it does not necessarily mean that the ‘business’ is being carried on with an intent to ‘defraud’ the ‘Creditors’.
In this connection, this ‘Tribunal’ pertinently, points out that if the ‘Directors’ of a ‘Company’ had acted on a bona-fide belief that the ‘Company’ will recover from its ‘Financial Set Back’ / ‘Difficulties’ / ‘Problems’, then, it will not be liable for the ‘Act’ / ‘Offence’ of ‘Fraudulent Trading’, in the considered opinion of this ‘Tribunal’.
The aspect of `Fraud’ is the cementing platform for a `Liability’. An element of Dishonesty’, is to be `Proved’ and the `Aspect of Dishonesty’, cannot be inferred, when the `Conduct of the concerned Individuals’ is `Receptive’ of more than one explanation,
A company may actually be insolvent at a given time; but its directors may bona fide hold a different view. Even in a case where they are aware of the true position, they may still think that all was not lost and that they would be able to stem the rot by further borrowings and improving the business.
‘Transfer of Asset’ among / within the ‘Group Companies’, will not partake the character of a ‘Fraudulent Trading’/`Wrongful Trading’, in the teeth of the ingredients of Section 66 (1) of the Insolvency & Bankruptcy Code, 2016.
[ Link Synopsis ]
iii). NCLT Chennai (06.02.2019) in The Resolution Professional for M/s. Orchid Pharma Limited Vs. M/s. Hospira Healthcare India Pvt. Ltd & Others [MA/87/IB/2018 in CP/540/IB/2017] held that;
The elementary difference between section 66 and other avoidance transactions is, fraudulent intention to defraud the creditors has to be proved by the person asserting such allegation. Intention is the element of difference in this section.
it is pertinent to note that the person filing this kind of application, with an imputation of fraud, has to give all the details disclosing how these Respondents Mhave committed fraud in respect to the transaction impugned before this Bench, not only that, the RP has to prove that these answering Respondents committed fraud as detailed in the application.
One more aspect that should not be ignored from reading of section 66 is, it is a qualified section with multiple caveats to invoke this subject matter jurisdiction, first, transaction shall be entered into with an object to defraud the creditors, second, such parties shall be in know of such intention, and to pass an order under this section, it has to be seen that director/partner of the corporate debtor is for sure aware of the fact that commencement of CIRP is inevitable and lastly, it has to be proved that such director or partner has not exercised due diligence in minimising the potential loss to the creditors of the Corporate debtor.
On the top of it, in explanation to section 66 of the Code, it has been laid down that presumption lies in favour of the director/partner that he has exercised due diligence as expected from a person carrying such function, to rebut this statutory presumption, sufficient material has to be placed.
One thing is evident from this section that burden is cast upon the RP to prove that fraud is committed by the director/partner, unless it is proved the presumption remains in force in favour of the director/partner.
[ Link - Synopsis ]
iv). NCLT Chennai (10.01.2019) in Mr. Ramkumar SV Vs. M/s. Serum Institute of India Limited [MA/92/ 1B/2018 in CP/540/IB/CB/2017] Held that;
To say it is a preferential transaction, it has to be tested u/s.43 of the Code, to say it is fraudulent trading, it has to be tested u/s.66 of the Code.
As to Section 66 is concerned, here the case is that R1 is creditor to the Corporate Debtor company, therefore the Corporate Debtor was under obligation to make payment to R1 herein. If at all payment has been made other than in ordinary course of business, at the most it could be considered as a preferential transaction but not as a fraudulent transaction because payment was made towards the Creditor.
Payments made to the creditors and such payments cannot be brought under the caption of either fraudulent trading or wrongful trading, moreover legislature normally will not provide overlapping jurisdiction under two heads,
[ Link - Synopsis ]
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F. Interplay of Section 66(2)(b) with section 10 & section 43
# Section 66. Fraudulent trading or wrongful trading. -
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(2) On an application made by a resolution professional during the corporate insolvency resolution process, the Adjudicating Authority may by an order direct that a director or partner of the corporate debtor, as the case may be, shall be liable to make such contribution
to the assets of the corporate debtor as it may deem fit, if-
(a) before the insolvency commencement date, such director or partner knew or ought to have known that the there was no reasonable prospect of avoiding the commencement of a corporate insolvency resolution process in respect of such corporate debtor; and
(b) such director or partner did not exercise due diligence in minimising the potential loss to the creditors of the corporate debtor.
The fact that CD’s net worth has turned negative, should put directors or partners, as the case may be, on notice of the reasonable prospect of the incipient insolvency of the company. Thus the duty is imposed on the management of the CD under section 66(2)(b) to initiate insolvency proceedings under section 10 to minimise the losses to the creditors. Directors or partners, as the case may be, can be asked to contribute towards the assets of the CD, an amount equal to the losses of the CD after the net worth of the CD turned negative.
Whenever the net worth of the CD turns negative, directors or partners, as the case may be, should take a conscious decision, preferably through board resolution/AGM to either file for insolvency proceedings under section 10 or to continue to run the business of CD on profitable prospects.
In my view, it should be made incumbent on the management/auditors to file for insolvency within 60 days, when the net worth of the company turns negative in the audited financials, and the management has not taken any steps to infuse fresh capital. Management should not be allowed to run the company on funds of creditors.
Corollary of incipient insolvency
During the period of negative net worth of the CD, any payments/refund of deposits & loan etc. to directors or partners, as the case may be, and shareholders & related parties, within the lookback period, will be treated as preferential transactions.
Disclaimer: The sole purpose of this blog is to create awareness on the subject and must not be used as a guide for taking or recommending any action or decision. A reader must do his own research and seek professional advice if he intends to take any action or decision in the matters covered in this blog.
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