IBC | Difference Between 'Avoidance Transactions' & 'Fraudulent Or Wrongful Trading'
The Supreme Court, in its recent decision in Piramal Capital and Housing Finance Ltd v. 63 Moons Technology explained the key difference between how the Insolvency and Bankruptcy Code 2016 deals with avoidance transactions and transactions relating to fraudulent or wrongful trading.
Notably, under the IBC 2016, 'avoidance transactions' are specific transactions conducted by a corporate debtor prior to insolvency proceedings that are deemed detrimental to the interests of creditors. These include (1) Preferential transactions, (2) Undervalued transactions, (3) Extortionate Credit transactions; (4) Fraudulent transactions.
The bench of Justice Bela Trivedi and Justice SC Sharma noted that there was a fundamental distinction between Avoidance Applications under Chapter III and the Applications in respect of Fraudulent Trading or Wrongful Trading under Chapter VI.
Firstly, the ambit of avoidance applications comes under the duties of the resolution professional (RP) .The RP can file an application for avoidance of transactions in accordance with Chapter III as part of his/her larger duty to 'preserve and protect the assets of the corporate debtor, including the continued business operations'.
Under S.26 of the IBC, filling of an Avoidance Application under Clause (j) of sub section (2) of Section 25 by the RP will not affect the insolvency proceedings.
Secondly, the aspect of 'Fraudulent trading or wrongful trading' within the corporate debtor entity has been separately dealt with under S. 66 under Chapter 4.
As per S.66(1) the Adjudicating Authority can order individuals who knowingly engaged in fraudulent business activities during the CIRP or Liquidation process to contribute to the assets of the Corporate Debtor (CD), based on an application from the Resolution Professional.
PIRAMAL CAPITAL AND HOUSING FINANCE LIMITED (FORMERLY KNOWN AS DEWAN HOUSING FINANCE CORPORATION LIMITED) v. 63 MOONS TECHNOLOGIES LIMITED & OTHERS |
