Section 44: Orders in Case of Preferential Transactions

What does Section 44 provide?

Under Section 43(1), the resolution professional or liquidator applies to the Adjudicating Authority to avoid a preferential transaction. Section 44 then gives the Authority a range of restorative orders. For corporate persons, the Adjudicating Authority is ordinarily the NCLT under Section 60. The purpose is to reverse an improper advantage and, where appropriate, restore property or value to the corporate debtor's estate.

A preference is assessed under Section 43, including the nature of the transfer, its effect compared with the distribution priority in Section 53, the statutory exceptions, and the relevant look-back period. Section 44 concerns the relief available; it does not make every pre-insolvency transfer automatically void.

Orders available under Section 44(a) to (g)

On an application by the resolution professional or liquidator under Section 43(1), the Adjudicating Authority may make one or more of the following orders:

1. Clause (a) - Return of transferred property. Require property transferred in connection with the preference to vest in the corporate debtor.
2. Clause (b) - Tracing proceeds or money. Require property representing the proceeds of sale of transferred property, or the application of transferred money, to vest in the corporate debtor.
3. Clause (c) - Release of security. Release or discharge, wholly or partly, a security interest created by the corporate debtor.
4. Clause (d) - Repayment of benefits. Require a person who benefited from the preference to pay an amount, as directed, to the liquidator or resolution professional.
5. Clause (e) - Guarantor obligations. Impose new or revived financial or operational debt obligations on a guarantor where the preference had released or discharged the relevant obligation, in whole or part.
6. Clause (f) - Replacement security. Provide security or a charge on property for obligations arising under the order, with the same priority as the security or charge that the preference had released or discharged.
7. Clause (g) - Treatment of resulting claims. Determine the extent to which affected persons may prove financial or operational debts in liquidation or the corporate insolvency resolution process, where those debts arose from or were released or discharged by the preference.

These are statutory powers exercisable by the Adjudicating Authority; the particular order depends on the transaction and the evidence before it.

Proviso: Protection of good-faith transactions for value

Section 44 limits the reach of avoidance orders in two important situations:

• Interest acquired from a person other than the corporate debtor: an order must not affect such an interest, or an interest derived from it, if acquired in good faith and for value.
• Benefit received in good faith and for value: an order must not require that recipient to pay a sum to the liquidator or resolution professional in respect of that benefit.

These protections are subject to the statutory presumptions explained below. Whether the recipient acted in good faith and provided value is a fact-sensitive inquiry.

Explanations I and II: When good faith may be presumed absent

Explanation I - Rebuttable presumption

For a person covered by the Explanation who acquired an interest from someone other than the corporate debtor or received a benefit from the preference, the law presumes that the interest or benefit was obtained otherwise than in good faith if the person:

• had sufficient information about the initiation or commencement of the corporate debtor's insolvency resolution process; or
• is a related party.

The presumption can be rebutted by showing the contrary. It should not be treated as an irrebuttable finding of misconduct.

Explanation II - Public announcement

A person is deemed to have sufficient information, or an opportunity to obtain it, where the public announcement of the corporate insolvency resolution process has been made under Section 13.

Related sections and key definitions

Section 43 - Preferential transactions and relevant time

Defines the circumstances in which a transfer constitutes a preference, statutory exceptions and the relevant periods for review.

Section 3(31) - Security interest

Defines security interests created by a transaction securing payment or performance of an obligation, subject to the statutory definition and exclusions.

Section 5(24) - Related party (corporate debtor)

Sets out categories of persons and entities treated as related parties in relation to a corporate debtor.

Section 5(8) and Section 5(21)

Define financial debt and operational debt, respectively.

Section 13 - Declaration of moratorium and public announcement

Addresses the Adjudicating Authority's directions following admission of an insolvency application, including public announcement of the process.

Section 53 - Distribution of assets

Provides the statutory order of priority for distribution of liquidation proceeds; it is the comparison point in Section 43(2)(b).

Section 60 - Adjudicating Authority for corporate persons

Identifies the NCLT as the Adjudicating Authority for insolvency resolution and liquidation of corporate persons.

For an introduction to the legislation, see The Insolvency and Bankruptcy Code 2016.

Official legal references

Check the statute, amendments, applicable rules and relevant orders before relying on any legal position:

• India Code - Insolvency and Bankruptcy Code, 2016
• Insolvency and Bankruptcy Board of India - Legal Framework
• IBBI - Notifications, regulations and circulars
• National Company Law Tribunal - Official website

This article is general legal information, not advice for a particular proceeding. The statutory text and applicable judicial decisions govern.