Corporate Debtor's repayments to promoter-director and related parties during CIRP look-back period found outside ordinary course of business under IBC Section 43; Respondents directed to repay with interest within 30 days.
In a significant ruling dated October 16, 2026, the National Company Law Tribunal (NCLT), Mumbai Bench, has held that payments totaling over Rs. 2.85 crore made by Nirmangold Alloys Pvt. Ltd. (the Corporate Debtor) to related parties during the Corporate Insolvency Resolution Process (CIRP) look-back period were preferential transactions under Section 43 of the Insolvency and Bankruptcy Code, 2016 (IBC). The tribunal directed the respondents-comprising the promoter-director and his wife, among others-to jointly or severally refund the amount along with interest at the State Bank of India's Prime Lending Rate plus 2% within 30 days.
The case arose from an Interlocutory Application (IA (IBC) No. 2595 of 2022) filed by the Resolution Professional (RP), Harish Kant Kaushik, seeking avoidance of certain transactions carried out during the CIRP period, which commenced on November 22, 2021. The RP alleged that the Corporate Debtor had made payments and adjustments in favor of related parties, including the promoter-director Mr. Bhushan Pundlikrao Patil (Respondent No. 1), his wife Mrs. Anita Bhushan Patil (Respondent No. 3), and other related entities without proper consent from the secured creditor and outside the ordinary course of business, thereby conferring preferential benefits.
Key Findings of the Tribunal:
1. Preferential Transactions under Section 43 IBC: The tribunal found that the payments and adjustments amounting to Rs. 87,25,174/- to Respondent No. 3 and Rs. 1,98,18,635/- to Respondent No. 1 were preferential transactions. These were transfers made for the benefit of related parties during the two-year look-back period preceding insolvency commencement and placed them in a more beneficial position than other creditors, violating IBC provisions.
2. Burden of Proof on Respondents for Ordinary Course of Business Exception: The respondents claimed the transactions were in the ordinary course of business as per Section 43(3)(a). However, the tribunal emphasized that such exception is not to be presumed. The respondents failed to produce invoices, purchase orders, delivery challans, bank statements, or other supporting documents establishing the transactions as ordinary course business dealings. Mere assertions of business exigencies or accounting adjustments were held insufficient.
3. Accounting Adjustments Constituted Satisfactions of Antecedent Debt: The reduction of the unsecured loan account of Respondent No. 1 from Rs. 4.36 crore to Rs. 2.38 crore through book entries, including transfer of receivables and vehicles, was held to be a transfer for the creditor's benefit and could not be excluded simply because no direct cash payment was made.
4. Exclusion of Transactions Outside Look-back Period: A payment of Rs. 40 lakh to Respondent No. 9 made on April 10, 2019, predated the two-year look-back period applicable to related parties (commencing from November 22, 2019). Hence, this transaction was excluded from being treated as preferential.
5. Transaction Audit Report's Advisory Role Affirmed: Despite objections raised by respondents regarding the transaction auditor's alleged mechanical approach and inaccuracies, the tribunal held that the audit report serves an advisory function. The Resolution Professional independently formed an opinion considering all facts, making challenges solely based on alleged defects in the report untenable.
6. Relief Granted: The tribunal partly allowed the application, directing Respondents No. 1 and 3 to repay Rs. 2.85 crore jointly or severally with interest at SBI PLR plus 2% from the date of each transaction until realization. No relief was granted against Respondent No. 9 or Respondent No. 7 as the applicant did not press claims against them.
Background and Context:
Nirmangold Alloys Pvt. Ltd. entered CIRP on November 22, 2021. The Resolution Professional appointed a transaction auditor to investigate payments made during the relevant period. The audit report identified payments and accounting adjustments to related parties that appeared to confer preferential benefits contrary to IBC provisions. The secured creditor had imposed restrictions on liquidation of unsecured loans and reduction of quasi-capital without consent, which were allegedly violated.
The respondents contended that the payments were either in the ordinary course of business or accounting adjustments, supported the corporate debtor during difficult times (including COVID-19 disruptions), and denied any preferential intent. They challenged the reliability of the transaction audit report and asserted that some payments were routed through related entities as part of legitimate business arrangements.
Legal Analysis and Precedents:
The NCLT relied on the plain language of Section 43 of the IBC, which defines preferential transactions as transfers made for the benefit of a creditor towards antecedent debts during a relevant period that place such creditor in a better position than others. Section 43(3)(a) provides exceptions only for transfers made in the ordinary course of business, with the burden on the respondents to prove such ordinary course status.
The tribunal referred to the Guidance Note on related party transactions by the Institute of Company Secretaries and a recent NCLAT judgment (Sahyog Infrastructure Pvt. Ltd. v. Anuj Agarwal, 2023) that the ordinary course of business must be determined contextually, based on factors like business objectives, frequency, historical practice, and commercial rationale.
The Supreme Court's decision in Anuj Jain v. Axis Bank Ltd. (2020) was also cited, which affirms that preferential transactions can be avoided to ensure equitable treatment of creditors during insolvency.
Conclusion:
The NCLT Mumbai Bench has underscored the importance of transparent, documented transactions during insolvency proceedings and held related party payments outside ordinary business practices liable for reversal. The ruling reinforces that related party transactions during the CIRP look-back period must be carefully scrutinized, and mere assertions of business necessity or accounting adjustments are insufficient to escape scrutiny under the IBC.
Bottom Line:
Insolvency and Bankruptcy Code, 2016 - Preferential transactions - Repayment/adjustment of antecedent dues in favour of related parties during look-back period, without proof that such transactions were in ordinary course of business, is avoidable under Section 43 - Mere plea of business exigency or book adjustment is insufficient - Transaction outside relevant look-back period cannot be treated as preferential.
Statutory provision(s):
Insolvency and Bankruptcy Code, 2016 - Section 43, Section 44, Section 60(5)
