Imp. Rulings - Ordinary Course of Business (Section 43)

Imp. Rulings - Ordinary Course of Business (Section 43)

Index; 

1. NCLT Mumbai-1 (2024.07.24) in Mr. Anish Niranjan Nanavaty Vs. RPL Aditya Power Limited  [IA 1269 OF 2020 IN CP (I&B) No. 1387 OF 2017

2. Supreme Court (2020.02.26) in Anuj Jain IRP for Jaypee Infratech Limited Vs Axis Bank Limited Etc. (Civil Appeal Nos. 8512-8527 of 2019 and other petitions)

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1). NCLT Mumbai-1 (2024.07.24) in Mr. Anish Niranjan Nanavaty Vs. RPL Aditya Power Limited  [IA 1269 OF 2020 IN CP (I&B) No. 1387 OF 2017.

# 15. Section 43(3) of the Code provides certain exceptions, whereby even a transaction falling within the mischief of Section 43(2) read with Section 43(4) of the Code are excluded from the scope of section 43 calling for orders u/s 44 of the Code. The Respondents have pleaded that the said transaction was carried out in Ordinary Course of business. The Respondent is a company engaged into business of power and is authorised to lend money not immediately required by it for its business. The Corporate Debtor is engaged in provision of cellular mobile telephony services and borrows the money for the purpose of its business to meet its short term and long term financial requirements. The question whether the transaction should be in ordinary course of business of either of party or it has to be in ordinary course of business of both the parties was decided by Hon’ble Supreme Court in case of Anuj Jain (IRB for Jaypee Infratech Ltd.) Vs. Axis Bank Ltd. reported at 2020 SCC Online SC 237 in the following words -

• “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.”

# 16. In the case of Anuj Jain (Supra), the Hon’ble Supreme Court further held that

• 28.2.2.... In other words, the whole of conspectus of sub-section (3) is that only if any transfer is found to have been made by the corporate debtor, either in the ordinary course of its business or financial affairs or in the process of acquiring any enhancement in its value or worth, that might be considered as having been done without any tinge of favour to any person in preference to others and thus, might stand excluded from the purview of being preferential, subject to fulfilment of other requirements of subsection (3) of Section 43.

# 18. In the present case, the Corporate Debtor is cellular service provider and treasury management involving allocation of funds to the business need,  lender’s repayment, investment opportunities is one of important function of its financial affairs. The Corporate Debtor borrowed from the Respondents to meet its financial requirements for its business. It is not the case of the applicant that the borrowings from the Respondent were for a purpose other than the business of the Corporate Debtor. Ordinarily, every borrower makes sure that the amounts borrowed are paid as and when it becomes due or with least delay. The loans taken from Respondents are stated to be paid in multiple tranches of odd amounts and the loan was repayable on demand. The Applicant has pleaded that the repayment of the inter corporate deposits, without a demand being raised by the Respondent, could not be said to be in Ordinary Course of business from Corporate Debtor’s perspective, since Rcom was placed in NPA category, and was delaying / not repaying the loans owed to other financial creditors, during this period. However, we note that the account of the Corporate Debtor is stated to be classified as NPA on 26.08.2016 as noted in para 28 of the order dated 15.05.2018 passed by this Tribunal admitting the Corporate Debtor in CIRP and the loan was taken from the Respondent after classification of loan account as NPA by its financial creditors and the same was repaid within short span. The sanction letter does not stipulate that the demand for repayment of the loan is to be made in writing, hence, we do not find any substance in the submission that the loan amount had not fallen due for repayment. Hence, we are of considered view that such repayment of loan was in Ordinary Course of financial affairs of the Corporate Debtor as well. Since, the impugned transaction was in Ordinary Course of financial affairs of Corporate Debtor and the Respondent, we are of considered view that it squarely falls within the exception provided in Section 43(3) of the Code.

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2). Supreme Court (2020.02.26) in Anuj Jain IRP for Jaypee Infratech Limited Vs Axis Bank Limited Etc. (Civil Appeal Nos. 8512-8527 of 2019 and other petitions)

Ordinary course of business or financial affairs

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# 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. The result of discussion in the foregoing paragraphs is that the transfers in question could be considered outside the purview of sub-section (2) of Section 43 of the Code only if it could be shown that same were made in the ‘ordinary course of business or financial affairs’ of the corporate debtor JIL and the transferees. Even if transferees submit that such transfers had been in the ordinary course of their business, the question would still remain if the transfers were made in the ordinary course of business or financial affairs of the corporate debtor JIL so as to fall within the exception provided by clause (a) of sub-section (3) of Section 43 of the Code.

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. [State of Andhra Pradesh v. H. Abdul Bakshi and Bros.: 1964 STC 644 (at p. 647).] As regards the meaning and essence of the expression ‘ordinary course of business’, reference made by the appellants to the decision of the High Court of Australia in Downs Distributing Co (supra), could be usefully recounted as under:-

-  “As was pointed out in Burns v. McFarlane the issues in sub-s. 2(b) of s. 95 of the Bankruptcy Act 1924-1933 are “(1) good faith; (2) valuable consideration; and (3) ordinary course of business.” This last expression it was said “does not require an investigation of the course pursued in any particular trade or vocation and it does not refer to what is normal or usual in the business of the debtor or that of the creditor.” It is an additional requirement and is cumulative upon good faith and valuable consideration. It is, therefore, not so much a question of fairness and absence of symptoms of bankruptcy as of the everyday usual or normal character of the transaction. The provision does not require that the transaction shall be in the course of any particular trade, vocation or business. It speaks of the course of business in general. But it does suppose that according to the ordinary and common flow of transactions in affairs of business there is a  course, an ordinary course. It means that the transaction must fall into place as part of the undistinguished common flow of business done, that it should form part of the ordinary course of business as carried on, calling for no remark and arising out of no special or particular situation.” 

(emphasis supplied)

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