Setting Aside Preferential Transactions Under Section 43 of the IBC

Vikrant D. Shetty

Oct 22

11 min read

Setting Aside Preferential Transactions Under Section 43 of the IBC

A preferential transaction under the Insolvency and Bankruptcy Code, 2016 can be set aside by the National Company Law Tribunal on an application by the resolution professional under Section 43, which reaches transfers within one year before insolvency for unrelated parties and two years for related parties, with Section 44 supplying the remedial orders. The Code prescribes no specific limitation period for filing such an application, so tribunals have applied the residual three-year period under Article 137 of the Limitation Act, 1963. This post examines that limitation controversy and whether an avoidance application survives approval of a resolution plan.

The Statutory Framework: Sections 43 and 44

Section 43: The Preferential Transaction

Section 43(1) of the IBC provides that where the corporate debtor has made a preferential transaction and the Adjudicating Authority (the NCLT) is satisfied on the application of the Resolution Professional (RP) or liquidator, it shall make an order under Section 44. A transaction is preferential if the corporate debtor has, within the relevant look-back period, transferred property or an interest in property, incurred an obligation, or created any charge, in favour of a creditor, surety, or guarantor for or on account of an antecedent financial debt, and the transfer puts the beneficiary in a better position in the event of distribution under Section 53 than it would otherwise have been.

Section 43(4) prescribes the look-back periods. For related parties (as defined in Section 5(24A)), transactions within two years preceding the insolvency commencement date fall within scope. For all other persons, the period is one year. These are not limitation periods in the strict legal sense; they define the window of scrutiny. The actual limitation period for filing the application is a separate question.

Section 44: The Remedial Orders

Section 44 sets out the orders the NCLT may make once a preferential transaction is established. The court may require any property transferred under the transaction to be vested in the corporate debtor, require any charge on property of the corporate debtor created as part of the transaction to be released, require the value of any benefit received by any person as a result of the transaction to be recovered from that person, require any sureties to be released from their obligations, and make such other orders as necessary to reverse the effect of the preferential transaction. The jurisdiction under Section 44 is expressly invoked only on a finding under Section 43, meaning the RP must first establish the preferential character of the transaction.

Limitation Period Issues: The Contested Legal Terrain

Is There a Specific Limitation Period in the IBC?

The IBC itself does not prescribe a specific limitation period for filing an application under Section 43. This omission has led to litigation on whether the Limitation Act, 1963 applies to avoidance proceedings, and if so, which article of the Schedule governs. The residual Article 137 of the Limitation Act, which provides a three-year period for applications not otherwise provided for, has been applied in several NCLT decisions. The three-year clock typically begins from the date on which the RP discovers or ought to have discovered the preferential transaction.

The 330-Day CIRP Outer Limit and Avoidance Applications

A more pressing practical issue is the relationship between avoidance applications and the CIRP timeline. Section 12 of the IBC provides for a 180-day CIRP period, extendable to 330 days, after which the process must be completed. The question of whether an avoidance application filed under Section 43 must also be decided within 330 days, or whether it survives the approval of a resolution plan, has been the subject of significant judicial attention.

The Delhi High Court in M/s Venus Recruiters Pvt. Ltd. v. Union of India addressed the question of whether an application under Section 43, filed before the resolution plan was approved, could continue to be heard after plan approval. The Court took the view that the avoidance application, while it may have been properly filed during CIRP, does not automatically survive the approval of the resolution plan. An RP cannot file avoidance applications in perpetuity, and the approval of a plan under Section 31 generally brings the avoidance proceedings to a close unless specifically preserved.

July 2025 Amendment: Evolving Landscape

The Insolvency and Bankruptcy Code (Amendment) Act, 2025, introduced significant changes to the avoidance framework. The amendments clarify timelines for filing avoidance applications and the manner in which proceeds from avoidance proceedings are to be applied. The amendments also introduced provisions to ensure that avoidance applications do not indefinitely delay the completion of CIRP. Practitioners should verify the current text as these amendments are relatively recent.

Who Can File an Avoidance Application?

Section 43(1) specifies that the application may be made by the RP or the liquidator, depending on the stage of proceedings. An operational creditor or financial creditor cannot directly file an avoidance application. However, a creditor who identifies a potential preferential transaction can and should bring it to the RP's attention. If the RP declines to file, the creditor may approach the NCLT under Section 60(5) seeking a direction.

The RP must act on any reasonable suspicion of a preferential transaction. Failure to investigate or file where there is clear prima facie evidence may expose the RP to liability for breach of duties under the IBBI (Insolvency Professionals) Regulations, 2016.

What Transactions Are Excluded From Avoidance?

Not every transaction within the look-back period is vulnerable. Section 43(3) provides that a transaction is not preferential if it was made in the ordinary course of the business or financial affairs of the corporate debtor or the transferee, or if it was made in pursuance of an order of a court or the Board. Payments in the ordinary course of trade between counterparties at arms' length are protected. The RP bears the burden of establishing the preferential character of the transaction.

A specific exclusion applies to transactions where the corporate debtor received new value (contemporaneous exchange for new value), though Indian courts have interpreted this narrowly and the defence is not easily established.

Interaction with the Liquidation Waterfall

Avoidance proceedings under Sections 43 and 44 are directly connected to the liquidation waterfall in Section 53. The threshold question is whether the impugned transaction placed the beneficiary in a better position than it would have occupied under the Section 53 distribution. In every avoidance application, the RP must construct a hypothetical Section 53 analysis to establish this comparative position. If the creditor would have received 70 paise in the rupee in liquidation but received full payment through the impugned transfer, the excess represents the preference.

The Test Laid Down by the Supreme Court

The framework for avoiding preferential transactions was authoritatively explained in Anuj Jain, Interim Resolution Professional for Jaypee Infratech Ltd. v. Axis Bank Ltd. [(2020) 8 SCC 401], where the Supreme Court set out a structured enquiry for Section 43. The Court required the resolution professional to identify, first, whether there was a transfer of property or an interest of the corporate debtor for the benefit of a creditor or guarantor on account of an antecedent debt, second, whether the transfer put that person in a better position than it would have occupied in the statutory waterfall, and third, whether the transfer fell within the relevant look-back period and outside the protected ordinary-course exceptions. The judgment also carefully distinguished preferential transactions from undervalued, fraudulent, and extortionate ones, each of which has its own test.

The Relevant Time and Look-Back Periods

Section 43 reaches only transactions made within a defined look-back period before the insolvency commencement date, and the period differs according to the counterparty. A preference given to a related party is caught if made within two years before commencement, while a preference to an unrelated party is caught only if made within one year, reflecting the greater suspicion that attaches to dealings with insiders. Transactions made in the ordinary course of business or finance, and certain new-value and security-creation transactions, are protected from avoidance. The resolution professional must therefore map each suspect transaction against both the look-back window and the exceptions before concluding that it is avoidable.

The Orders the Adjudicating Authority Can Make

Where a preferential transaction is established, the adjudicating authority has wide powers to reverse its effect, including directing that the property transferred be vested back in the corporate debtor, releasing or discharging security interests created by the transfer, and requiring any person to pay such sums in respect of benefits received as the authority directs. The object is to restore the estate to the position it would have occupied had the preference not been given, so that value is preserved for distribution among all creditors according to their proper rank. The duty to investigate and pursue these transactions falls on the resolution professional, and a diligent examination of the debtor's dealings in the run-up to insolvency is an important part of maximising the estate.

Frequently Asked Questions

What is the difference between a preferential transaction and a fraudulent transaction under the IBC?

A preferential transaction under Section 43 does not require proof of fraud or intent. It is a transaction that, by its effect, places one creditor in a better position than others. A fraudulent transaction under Section 49 involves deliberate concealment of assets or defrauding creditors and requires proof of intent. Both are avoidance actions, but the standard of proof and available defences differ significantly.

Can a transaction be both preferential and undervalued?

Yes. The IBC provides separate avoidance grounds for undervalued transactions (Section 45) and preferential transactions (Section 43). A single transaction, such as selling property to a related party at below-market value in the look-back period, may be challenged on both grounds simultaneously or in the alternative.

What happens to an avoidance application if the CIRP concludes with a resolution plan?

The legal position is unsettled and has generated divergent judicial views. The better-reasoned position, reflected in several NCLT and High Court decisions, is that an avoidance application does not automatically survive plan approval unless the resolution plan itself preserves it or the NCLT has specifically granted leave for it to continue. The 2025 amendments address this in part.

What is the look-back period for transactions with related parties?

Under Section 43(4)(a), the look-back period for transactions with related parties is two years preceding the insolvency commencement date. For transactions with all other persons, the period under Section 43(4)(b) is one year. The insolvency commencement date is the date of admission of the Section 7, 9, or 10 petition by the NCLT.

Can a secured creditor's transaction be set aside as preferential?

Yes. A secured creditor who received full repayment of its secured debt in the look-back period, while unsecured creditors received nothing, may be in a better position than it would have been under Section 53 liquidation distribution. If so, the RP may challenge the payment. The fact that a security interest existed does not automatically exempt the transaction from avoidance.

Who bears the burden of proof in Section 43 proceedings?

The RP bears the initial burden of establishing the key elements: the transaction was within the look-back period, the beneficiary was a creditor, surety, or guarantor, and the transaction placed the beneficiary in a better position than it would have been in liquidation. Once these are established, the burden shifts to the respondent to make out any applicable defence, such as the ordinary course of business exception.

When does the three-year limitation period for an avoidance application start running?

Because the Insolvency and Bankruptcy Code, 2016 does not fix a specific limitation period for an application under Section 43, tribunals have applied the residual three-year period prescribed by Article 137 of the Limitation Act, 1963, and the prevailing approach starts that clock from the date the resolution professional discovers, or with reasonable diligence ought to have discovered, the preferential transaction, rather than from the date of the transaction itself. This discovery-based starting point matters because a resolution professional often only uncovers historical preferential dealings well into the process, after reviewing the corporate debtor's books, so a rigid limitation running from the transfer date would defeat genuine claims before they could be investigated.

Can an avoidance application be filed after the 330-day CIRP period has expired?

The 330-day outer limit under Section 12 governs completion of the corporate insolvency resolution process itself, not the avoidance application separately, and tribunals have generally held that an avoidance application properly filed during CIRP can continue to be heard and decided even after that period expires, since investigating and proving a preferential transaction often takes longer than the resolution timeline allows. What is more contested is whether the application survives once a resolution plan is actually approved and the CIRP formally concludes, an issue on which the National Company Law Appellate Tribunal and different benches of the National Company Law Tribunal have not always agreed.

What must a resolution professional prove to establish a preferential transaction?

Following the Supreme Court's framework in Anuj Jain v. Axis Bank Ltd., the resolution professional must show three things: that there was a transfer of property or an interest of the corporate debtor for the benefit of a creditor, surety or guarantor on account of an antecedent debt; that the transfer placed the beneficiary in a better position than it would have occupied under the Section 53 liquidation waterfall; and that the transfer fell within the applicable one-year or two-year look-back period and outside the ordinary-course and new-value exceptions. All three elements must be established; a transfer that fails any one of them cannot be avoided as preferential.

Does the ordinary-course-of-business exception protect routine trade payments?

Yes, in principle. Section 43(3) excludes a transaction made in the ordinary course of the business or financial affairs of the corporate debtor or the transferee, so a routine trade payment made to a regular supplier on the debtor's normal credit terms, at arm's length, is generally protected even if it occurred within the look-back period. The resolution professional bears the burden of showing the transaction was not ordinary course, and a payment that departs from the parties' established pattern of dealing, whether in timing, amount or method, is more likely to be found preferential despite the exception.

Can the resolution professional recover money from a third party who received the preferential benefit indirectly?

Yes. Section 44 empowers the Adjudicating Authority to require the value of any benefit received by any person as a result of a preferential transaction to be recovered from that person, which extends beyond the immediate transferee to anyone who benefited from the transaction, including a person who received property or value that passed through an intermediate transferee. This allows the resolution professional to unwind the practical effect of a preference even where the corporate debtor structured the transfer through more than one recipient, provided the chain of benefit can be established on the evidence.

What happens if the resolution professional fails to investigate an obvious preferential transaction?

A resolution professional who fails to investigate or pursue a preferential transaction despite clear prima facie evidence can face liability for breach of duty under the IBBI (Insolvency Professionals) Regulations, 2016, including disciplinary proceedings by the Insolvency and Bankruptcy Board of India, and a creditor who identifies the omission can approach the National Company Law Tribunal under Section 60(5) seeking a direction that the professional act. Passivity is not a safe default; the duty to investigate suspicious pre-insolvency dealings and maximise the estate for all creditors is an active obligation, not one the resolution professional can discharge simply by not looking.

How does a preferential transaction differ from an undervalued transaction under Section 45?

A preferential transaction under Section 43 concerns a transfer that improves one creditor's position relative to what it would receive in liquidation, without regard to whether the corporate debtor received adequate value in return; an undervalued transaction under Section 45, by contrast, concerns a transfer for significantly less consideration than its worth, regardless of whether the beneficiary was a creditor at all. The two grounds can overlap on the same facts, since a transfer to a creditor at an undervalue can be attacked under both provisions, but they protect different interests: Section 43 addresses unequal treatment among creditors, while Section 45 addresses depletion of the estate through a bad bargain.

Can an approved resolution plan itself be challenged for failing to address a known preferential transaction?

A resolution plan's approval under Section 31 does not by itself validate transactions that ought to have been avoided; if a resolution professional has flagged a suspected preferential transaction and the plan does not address it, an interested party can still press the pending Section 43 application separately, since plan approval concerns the going-forward restructuring of the corporate debtor and not a blanket ratification of every pre-insolvency transaction. What the plan approval does affect is who benefits from the recovery, since amounts recovered through a successful avoidance application ordinarily accrue to the estate, and a well-drafted plan should specify how such recoveries will be distributed.