Alok is a dealer in Eyewear, Spectacles and other eye accessories in India for the last 10 years based in Gurgaon. His vision was to transform the way people see and experience the world. He is a frequent traveller and v

CS Professional · Insolvency and Bankruptcy - Law and Practice · PYQS · June 2024
Alok is a dealer in Eyewear, Spectacles and other eye accessories in India for the last 10 years based in Gurgaon. His vision was to transform the way people see and experience the world. He is a frequent traveller and visited many countries to expand his business. Gulshan is one of the cousins of Alok and a resident of South Africa. Alok has a very good relations with his cousin and during his visit to South Africa in 2015 he started a showroom in partnership with his cousin in South Africa. Alok has a very big showroom in India also. He used to import spectacles and other accessories from South Africa. With the increasing demand of more and more spectacles, goggles etc., business is reaching greater heights and he made a huge profit. His business was a growing business going very well. Since there was huge demand, the business went well and profits got multiplied in 3 to 4 years. In the year 2019 some differences developed between both the cousins and Alok decided to quit from the partnership. He was also a director of Padmavat Solutions Private Limited and its associate company. Shekhawat Solutions Private Limited where he used to get the sitting fee for attending the Board Meetings. In India also due to entry of online selling platform and other sales promotion strategies of the competitors, there were lots of changes in the market situation in India and his business started running into losses. He raised loans worth ₹ 10 Crore in the year 2019 to finance the working capital requirement of the business. He managed for another one year (year 2020) to run the business out of the retained earnings of the business. However due to the impact of COVID 19 and other reasons the demand declined rapidly and later on he started making defaults. He defaulted in making payment to his creditors and Insolvency proceedings commenced and a repayment plan was approved. Alok failed to follow the repayment plan and filed for bankruptcy on 1st April, 2022 which was admitted on 10th April, 2022. A Bankruptcy order was passed and Gopal Gupta, an Insolvency Professional was appointed as a Bankruptcy Trustee. Gopal Gupta started investigation of the affairs of the Bankrupt. He observed that on 7th April, 2022, Alok Gupta sold his shop to Kapil Kalra for ₹ 50 Lakh and gifted this amount to his major son. As per Bankruptcy Trustee, he has some doubt that this transaction is not allowed as per Insolvency and Bankruptcy Code, 2016. The Bankruptcy Trustee further asked Alok to prepare the list of the assets and hand over to the bankruptcy trustee. As per the list of the assets, Alok informed as below: Alok stated that he has been entrusted by his friend Arun to look after his property in Delhi currently valued at ₹ 1 Crore as Arun is staying in UK. Alok has ₹ 50 Lakh in provident fund, pension fund and the gratuity fund of the employees. Alok has a residential flat worth ₹ 2 Crore in his name. He has an antique paintings and silver household utensils and other valuable items worth ₹ 50 Lakh which have not been encumbered. He has also unencumbered insurance policy worth of ₹ 50 Lakh. He has also the father's inherited property now in his name worth ₹ 5 Crore. While bankruptcy proceedings were going on, Alok further decided to start a new business of kids garments by forming a new company in the name of "Kids Paradise Pvt. Ltd." and engage himself in the formation and management of Kids Paradise Pvt Ltd. (Under Incorporation). Based on the above facts, answer the following questions: Whether the doubt of the Bankruptcy Trustee about the sale of his shop to Kapil Kalra for ₹ 50 Lakh and gift to his son has any relevance as per the Insolvency and Bankruptcy Code, 2016. Describe with reference to the provisions of Insolvency and Bankruptcy Code, 2016?

Answer & Explanation:

As per Section 164(1) of the Insolvency and Bankruptcy Code, 2016 (Code), the bankruptcy trustee may apply to the adjudicating authority for an order under that section in respect of an undervalued transaction between a bankrupt and any person. As per Section 164(2) of the Code, the undervalued transaction should have a) been entered into during the period of two years ending on the filing of the application for bankruptcy; and b) caused bankruptcy process to be triggered. As per Section 164(3) of the Code, a transaction between a bankrupt and his associate entered into during the period of two years preceding the date of making of the application for bankruptcy shall be deemed to be an undervalued transaction under this section. Section 164(4) of the Code provides that on the application of the bankruptcy trustee, the adjudicating authority may a) Pass an order declaring an undervalued transaction void: b) Pass an order requiring any property transferred as a part of an undervalued transaction to be vested with the bankruptcy trustee as a part of the estate of the bankrupt; and c) Pass any other order it thinks fit for restoring the position to what it would have been if the bankrupt had not entered into the undervalued transaction. As per Section 164(5) the order under Section 164(4)(a) shall not be passed if it is proved by the bankrupt that the transaction was undertaken in the ordinary course of business of the bankrupt. However, the provisions of Section 164(5) shall not be applicable to undervalued transaction entered into between a bankrupt and his associate under Section 164(3). Sale of shop by Alok to Kalra has not taken place in the ordinary course of business of Alok and Gifting that sale proceeds to son (being relative, fall under the definition of "Associate" under section 79(2) of the Code) will attract provisions of section 164(3). Thus, Gift to his son will amount to undervalued transaction under the provisions of Insolvency and Bankruptcy Code, 2016.

Topics: Bankruptcy for Individuals and Partnership Firms

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