Section 165 of the Insolvency and Bankruptcy Code, 2016: Preference Transactions
Section 165 deals with transactions by which a bankrupt places a creditor, surety or guarantor in a better position than that person would otherwise have occupied in bankruptcy. It empowers the bankruptcy trustee to seek orders from the Adjudicating Authority, subject to specified time periods and conditions.
What is a preference transaction?
Under Section 165(8), a preference arises where a person is a creditor, surety or guarantor for a debt of the bankrupt, and the bankrupt does or permits something that places that person in a better position in the event of bankruptcy than if the act had not occurred. Whether a transaction is avoidable depends on the additional statutory requirements in Section 165.
Section 165: Subsection-by-subsection explanation
Section 165(1): Application by bankruptcy trustee
The bankruptcy trustee may apply to the Adjudicating Authority for an order if the bankrupt has given a preference to any person.
Section 165(2): Preferences involving associates
A transaction giving preference to an associate must have occurred during the two years ending on the date of the bankruptcy application.
Section 165(3): Other preferences
For preferences not covered by subsection (2), the relevant period is six months ending on the date of the bankruptcy application.
Section 165(4): Bankruptcy-trigger requirement
The transaction falling within subsection (2) or (3) must also have caused the bankruptcy process to be triggered, as stated in the provision.
Section 165(5): Orders available
The Adjudicating Authority may (a) declare the preference transaction void; (b) direct that transferred property vest in the bankruptcy trustee as part of the estate; and (c) make another appropriate order restoring the position that would have existed without the preference.
Section 165(6): Desire to prefer
An order under subsection (5) cannot be made unless the bankrupt was influenced by a desire to produce the beneficial effect described in Section 165(8)(b).
Section 165(7): Presumption for associates
Where the preferred person was an associate of the bankrupt when the preference was given, the relevant desire is presumed, except where the person is an associate solely because of being the bankrupt's employee.
Section 165(8): Statutory test
The preferred person must be a creditor, surety or guarantor of a debt of the bankrupt, and the bankrupt's act or omission must improve that person's position upon bankruptcy compared with the position without the act or omission.
Look-back periods under Section 165
| Recipient of preference | Relevant period | Additional conditions |
|---|---|---|
| Associate of bankrupt | Two years before bankruptcy application | Section 165(4), (6) and (7) |
| Other creditor, surety or guarantor | Six months before bankruptcy application | Section 165(4) and (6) |
The relevant date is the date of the application for bankruptcy, not automatically the date of the bankruptcy order.
Illustrative example
Suppose an individual facing bankruptcy transfers valuable property to repay a connected creditor shortly before applying for bankruptcy. If the transfer improves that creditor's bankruptcy position, the trustee may investigate whether the associate look-back period, bankruptcy-trigger requirement and other conditions of Section 165 are met. The transfer is not automatically void; an appropriate order must be sought.
Related legal provisions
Section 164: Addresses undervalued transactions, including transfers for inadequate consideration. Section 166: Regulates the effect of orders under Sections 164 and 165, including protections subject to statutory conditions for certain good-faith recipients. These personal-bankruptcy provisions should not be confused with Section 43, which concerns preferential transactions involving corporate debtors.
Read the Insolvency and Bankruptcy Code, 2016 overview, the Section 164 guide, and the official text of the Code on India Code.
Frequently asked questions
Does every payment before bankruptcy amount to a preference?
No. The statutory definition and all applicable conditions must be assessed, including the recipient's position, relevant period, triggering of bankruptcy and desire to prefer.
What is the period for transactions with associates?
Section 165(2) specifies the two years ending on the date of the application for bankruptcy.
Can a preference transaction be reversed?
The bankruptcy trustee may apply to the Adjudicating Authority, which can make orders described in Section 165(5), subject to the Code, including Section 166.
Official sources
- India Code: Insolvency and Bankruptcy Code, 2016
- IBBI: Insolvency and Bankruptcy Code, 2016 (consolidated text)
- IBBI: Legal framework and updates
This article explains the statutory framework for general information. For a particular case, verify commencement, notifications, amendments and applicable regulations, and seek professional advice.