Section 43 of IBC: Preferential Transactions and Relevant Time
Section 43 of the Insolvency and Bankruptcy Code, 2016 (IBC) enables a resolution professional or liquidator to seek avoidance of certain preferential transfers made by a corporate debtor before insolvency. It identifies when a transfer amounts to a preference, the statutory exclusions, and the relevant look-back periods.
Section 43: Statutory provision
The following reproduces the substance and structure of Section 43 as contained in the original webpage, including its subsections, proviso and explanation.
43. (1) Where the liquidator or the resolution professional, as the case may be, is of the opinion that the corporate debtor has at a relevant time given a preference in such transactions and in such manner as laid down in sub-section (2) to any persons as referred to in sub-section (4), he shall apply to the Adjudicating Authority for avoidance of preferential transactions and for, one or more of the orders referred to in section 44.
(2) A corporate debtor shall be deemed to have given a preference, if-
(a) there is a transfer of property or an interest thereof of the corporate debtor for the benefit of a creditor or a surety or a guarantor for or on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor; and
(b) the transfer under clause (a) has the effect of putting such creditor or a surety or a guarantor in a beneficial position than it would have been in the event of a
distribution of assets being made in accordance with section 53.
(3) For the purposes of sub-section (2), a preference shall not include the following transfers-
(a) transfer made in the ordinary course of the business or financial affairs of the corporate debtor or the transferee;
(b) any transfer creating a security interest in property acquired by the corporate debtor to the extent that-
(i) such security interest secures new value and was given at the time of or after the signing of a security agreement that contains a description of such
property as security interest and was used by corporate debtor to acquire such property; and
(ii) such transfer was registered with an information utility on or before thirty days after the corporate debtor receives possession of such property:
Provided that any transfer made in pursuance of the order of a court shall not, preclude such transfer to be deemed as giving of preference by the corporate debtor.
Explanation.-For the purpose of sub-section (3) of this section, "new value" means money or its worth in goods, services, or new credit, or release by the transferee of property previously transferred to such transferee in a transaction that is neither void nor voidable by the liquidator or the resolution professional under this Code, including proceeds of such property, but does not include a financial debt or operational debt substituted for existing financial debt or operational debt.
(4) A preference shall be deemed to be given at a relevant time, if-
(a) it is given to a related party (other than by reason only of being an employee), during the period of two years preceding the insolvency commencement date; or
(b) a preference is given to a person other than a related party during the period of one year preceding the insolvency commencement date.
What is a preferential transaction under Section 43?
Under Section 43(2), a preference generally involves two linked requirements. First, the corporate debtor transfers property or an interest in property for the benefit of a creditor, surety or guarantor in respect of an antecedent financial debt, operational debt or other liability. Second, the transfer has the effect of putting that beneficiary in a better position than the beneficiary would occupy in a distribution under Section 53 of the IBC.
An antecedent debt is a debt or liability that already existed before the impugned transfer. A security interest is a right or interest created in property to secure payment or performance of an obligation, as described in Section 3(31) of the Code. A related party is assessed under the applicable definition in Section 5(24) of the IBC, taking account of the relevant facts and legal interpretation.
Relevant time: one-year and two-year look-back periods
The look-back period is measured backwards from the insolvency commencement date, not from the date of appointment of the liquidator. The date of a transfer, its beneficiary and the corporate debtor's relationship with that beneficiary must be examined in each case.
Transfers excluded from preference under Section 43(3)
Ordinary course of business or financial affairs
Section 43(3)(a) excludes transfers made in the ordinary course of the business or financial affairs of the corporate debtor or the transferee. Whether a transaction falls within the exclusion is fact-specific; merely describing a transaction as routine does not settle the issue.
Security interest securing new value
Section 43(3)(b) provides a limited exclusion for security interests in newly acquired property, subject to statutory conditions. The security must secure new value, relate to the acquisition of the property, and be registered with an information utility no later than 30 days after the corporate debtor receives possession of the property.
The statutory explanation defines new value to include money, goods, services, new credit or release of previously transferred property in the circumstances specified by the Code. Merely substituting one existing financial or operational debt for another does not constitute new value.
Court-ordered transfers: The proviso clarifies that a transfer made pursuant to a court order is not automatically immune from being treated as preferential.
How is a preferential transaction challenged?
- Identify the transfer: Review payments, security creation, asset transfers and supporting documents during the applicable look-back period.
- Assess Section 43(2): Determine whether the transfer relates to an antecedent liability and improves the beneficiary's position compared with Section 53 distribution.
- Check exclusions: Consider the ordinary-course and new-value exclusions in Section 43(3).
- Apply to the Adjudicating Authority: If the statutory conditions are met, the resolution professional or liquidator seeks avoidance and appropriate relief under Section 44.
For corporate persons, the Adjudicating Authority is ordinarily the National Company Law Tribunal (NCLT) under Section 60 of the IBC. Section 44 empowers it to make orders intended to reverse or address the effects of a preferential transaction, subject to the Code's protections and limitations.
Illustrative example
Suppose a corporate debtor grants security over a valuable asset to secure an older unsecured loan shortly before insolvency. If that security places the lender in a more favourable position than the lender would have had under the Section 53 distribution waterfall, the transaction may be examined under Section 43. The outcome depends on the statutory look-back period, applicable exclusions and the evidence; not every security creation is avoidable.
Related provisions of the IBC
- Section 3(31): Definition of security interest.
- Section 5(24): Related party in relation to a corporate debtor.
- Section 44: Orders that may be passed in cases of preferential transactions.
- Section 45: Avoidance of undervalued transactions, a distinct ground for challenge.
- Section 53: Distribution of assets in liquidation.
- Section 60: Adjudicating Authority for corporate persons.
Official legal references
- India Code - Central legislation, including the Insolvency and Bankruptcy Code, 2016
- Insolvency and Bankruptcy Board of India - Legal framework, regulations and amendments
- National Company Law Tribunal - Official website
Legal note: This article is a general explanation of Section 43. The current consolidated statute, applicable regulations, binding decisions and case-specific facts should be consulted before taking legal action.