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Preferential Transactions under IBC

PREFERENTIAL TRANSACTIONS UNDER THE INSOLVENCY AND BANKRUPTCY CODE,  2016

Section 43 to 51 incorporates “avoidable transactions” under the Insolvency and Bankruptcy Code of 2016 (hereinafter referred to as the “Code”). As entailed in the Code, there are three types of avoidable transactions such as preferential transactions, undervalued transactions and extortionate credit transactions.

PREFERENTIAL TRANSACTION[1]

Section 43 of the Code provides for the preference given by the Corporate Debtor during or before the commencement of Insolvency Resolution Process. The section tries to invalidate the transactions which involves the transfer of property or interest given for the benefit of creditor, surety, guarantor on account of debt or liabilities, which have the effect of putting such creditor in a better position than other creditors.

The Hon’ble Supreme Court of India in Anuj Jain Interim Resolution Professional for Jaypee Infratech Limited v. Axis Bank Limited and others[2]  opined that preferential transactions are one of the four categories of “avoidable” transactions under the Code. The Apex Court further held that a holding company can be an operational creditor and is capable of raising finance based on mortgage, vis-a-vis making it the ultimate beneficiary thereof.   The said judgment proved to be a milestone in the interpretation of avoidable transactions.

Section 43 of the Insolvency and Bankruptcy Code, 2016 states that:-

Preferential transaction [Section 43(2)]Transaction not deemed “preferential” [Section 43(3)]
The transaction includes transfer of property/ interestThe transfer is made in the interest of creditor, surety or guarantorThe transfer is made in respect of an antecedent debt, i.e. a prior debtThe transfer would prove beneficial to such a creditor, surety or guarantor in distribution of assets in the event of liquidation.The transfer puts the creditor, surety or guarantor at a better position  Transaction made in the ordinary course of business/ financial affairsTransaction resulting in enhancement of security interest of the corporate debtor  

RELEVANT TIME (LOOK BACK PERIOD) IN PREFERENTIAL TRANSACTIONS[3]

  • In case of a Related Party [4], two years before commencement of insolvency of the corporate debtor
  • In case where the party is not a related one, one year before commencement of insolvency of the corporate debtor.   

DEEMED ‘PREFERENTIAL’[5] TRASANCTIONS

An application can be made specifically by either an insolvency resolution professional or a liquidator to the National Company Law Tribunal (NCLT) in case he decides that a corporate debtor is given preference at a relevant time and can pass one or more orders. Some of the orders as entailed in Section 44 of the Code are mentioned herein under:

  • Transferred property to be vested in Corporate Debtor
  • Discharge of any security interest created by Corporate Debtor
  • Payment of money by person (who received benefits from the Corporate Debtor) towards liquidator or insolvency professional, as directed
  • Direct for a security or charge to be put on a property for discharge of a debt (financial or operational.

[1] Section 43 Insolvency and Bankruptcy Code, 2016

[2] Civil Appeal Nos. 8512-8527 of 2019

[3] Section 43(4) Insolvency and Bankruptcy Code, 2016

[4] Section 2(24)  Insolvency and Bankruptcy Code, 2016

[5] Section 44 Insolvency and Bankruptcy Code, 2016

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