Section 44 [Orders in case of Preferential Transactions] of the Insolvency and Bankruptcy Code, 2016 (IBC) provides the relief or consequential orders that the Adjudicating Authority (i.e., NCLT) may pass after determining a transaction to be a “Preferential Transaction” under Section 43. The main purpose of Section 44 is to reverse the effect of any Preferential Transaction that was carried out by the Corporate Debtor (CD) before the insolvency commencement date, to restore the Corporate Debtor to its pre-preferential state and ensure equitable treatment of all creditors.
Bare Text of Section 44 – IBC.
“44. (1) The Adjudicating Authority, may, on an application made by the resolution professional or liquidator under sub-section (1) of section 43, by an order:
(a) require any property transferred in connection with the giving of the preference to be vested in the corporate debtor;
(b) require any property to be so vested if it represents the application either of the proceeds of sale of property so transferred or of money so transferred;
(c) release or discharge (in whole or in part) of any security interest created by the corporate debtor;
(d) require any person to pay such sums in respect of benefits received by him from the
corporate debtor, such sums to the liquidator or the resolution professional, as the Adjudicating Authority may direct;
(e) direct any guarantor, whose financial debts or operational debts owed to any person were released or discharged (in whole or in part) by the giving of the preference, to be under such new or revived financial debts or operational debts to that person as the Adjudicating Authority deems appropriate;
(f) direct for providing security or charge on any property for the discharge of any financial debt or operational debt under the order, and such security or charge to have the same priority as a security or charge released or discharged wholly or in part by the giving of the preference; and
(g) direct for providing the extent to which any person whose property is so vested in the corporate debtor, or on whom financial debts or operational debts are imposed by the order, are to be proved in the liquidation or the corporate insolvency resolution process for financial debts or operational debts which arose from, or were released or discharged wholly or in part by the giving of the preference:
Provided that an order under this section shall not—
(a) affect any interest in property which was acquired from a person other than the corporate debtor or any interest derived from such interest and was acquired in good faith and for value;
(b) require a person, who received a benefit from the preferential transaction in good faith and for value to pay a sum to the liquidator or the resolution professional.
Explanation I.—For the purpose of this section, it is clarified that where a person, who has acquired an interest in property from another person other than the corporate debtor, or who has received a benefit from the preference or such another person to whom the corporate debtor gave the preference, —
(i) had sufficient information of the initiation or commencement of insolvency resolution process of the corporate debtor;
(ii) is a related party, it shall be presumed that the interest was acquired or the benefit was received otherwise than in good faith unless the contrary is shown.
Explanation II. —A person shall be deemed to have sufficient information or opportunity to avail such information if a public announcement regarding the corporate insolvency resolution process has been made under section 13.”
If the NCLT holds that a transaction was preferential and not covered under exceptions in Section 43(3), it may:
1. Reversal the Preferential Transaction:
Section 44(1)(a) -allows the Adjudicating Authority to take action to undo the effect of a preferential transaction. The court can order that property transferred as part of the preferential transaction be returned to the corporate debtor.
For Example: –The Company H owns a commercial property. Three months before insolvency proceedings begin, it transfers the property to Creditor Y to settle a previous debt, even though other creditors remain unpaid. The Resolution Professional (RP) identifies this as a preferential transaction under Section 43, as it:
- Was made to a creditor,
- Related to an old (past) debt, and
- Took place shortly before insolvency.
The NCLT agrees and passes an order under Section 44(1)(a), directing Creditor Y to return the property to the corporate debtor. This ensures the asset is brought back into the debtor’s estate for equitable distribution among all creditors.
2. Recovery of value of Transferred Property.
Section 44(1)(b) -If the transferred property has been sold or converted into money, the equivalent amount must be returned to the Corporate Debtor. It directs the recipient (beneficiary of preference) to pay back the benefit received or compensate for the loss.
For Example: – Company G owns a valuable piece of machinery. One month before insolvency proceedings, it transfers the machinery to Creditor M in satisfaction of an old debt. Soon after, Creditor M sells the machinery for ₹15 lakhs and uses the money. Later, the Resolution Professional identifies the transfer as a preferential transaction under Section 43, as it was made just before insolvency to favor one creditor over others. Upon confirmation, the NCLT declares the transaction void under Section 43 and passes an order under Section 44(1)(b), directing Creditor M to pay ₹15 lakhs (the value received from the sale of the asset) to the Resolution Professional.
3. Release or discharge any security.
Section 44(1)(c) -If a security interest was created in connection with the preferential transaction, the court can also order its release or discharge.
For Example: – Company E is in financial trouble and owes ₹25 lakhs to Creditor Z. One month before insolvency, it grants Creditor Z a security interest (a charge over machinery) to secure an old unsecured debt. Later, the Resolution Professional challenges this as a preferential transaction under Section 43, because:
- The security was granted shortly before insolvency,
- It relates to a past debt, and
- It gives Creditor Z a better position than other unsecured creditors.
The NCLT, upon finding this to be a preferential transaction, may pass an order under:
- Section 44(1)(a) – to restore the position as if the preference hadn’t been given,
- Section 44(1)(c) – to discharge the charge on the machinery, i.e., cancel the security interest created in favor of Creditor Z.
This ensures that Creditor Z returns to an unsecured status, aligning with the principle of equitable distribution among creditors.
4. Revert/Repay any benefit received.
Section 44(1)(d) -The Adjudicating Authority may order the beneficiary of the preferential transaction to repay the benefits received to the liquidator or resolution professional.
For Example: Company F owes ₹60 lakhs to Creditor A. Two months before entering insolvency, Company F makes a payment of ₹25 lakhs to Creditor A, while other creditors remain unpaid. This payment gives Creditor A a preferential position over other similarly placed creditors. The Resolution Professional challenges the payment as a preferential transaction under Section 43. After examining the transaction, the NCLT declares it preferential and, under Section 44(1)(d), orders Creditor A to repay ₹25 lakhs to the Resolution Professional. This amount is added back to the corporate debtor’s estate, ensuring that all creditors are treated fairly in the insolvency process.
5. Restore Liability.
Section 44(1)(e) –If a guarantor’s liability (financial or operational debt) was reduced or wiped out because of a preferential transaction, the NCLT can restore that liability—either fully or partially—by creating a new or revived debt, as it sees fit.
Example: 1- Financial Debt Guarantee- Suppose Company A takes a loan from Bank X, and Mr. Y acts as the guarantor for that loan. Just before entering insolvency, Company A repays the loan to Bank X. As a result, Mr. Y’s guarantee is cancelled, since the debt has been settled. Later, the NCLT determines that the repayment was a preferential transaction—an unfair payment made to give Bank X an advantage over other creditors. In such a case, under Section 44(1)(e) of the IBC, the NCLT can restore Mr. Y’s guarantee. It can declare that the repayment was unfair and order that Mr. Y remains liable for the loan, either fully or partially, as the court finds appropriate.
Example: 2- Operational Debt Guarantee- Company B owes ₹10 lakhs to a supplier, Creditor Z, and its director, Mr. K, has given a personal guarantee for the debt. Just before the company enters insolvency, it makes a sudden repayment of the entire ₹10 lakhs to Creditor Z.
As a result, Mr. K’s personal guarantee is discharged, since the debt is considered settled Later, the NCLT finds that the repayment was a preferential transaction, made to unfairly favour Creditor Z over other creditors. In this situation, under Section 44(1)(e) of the IBC, the NCLT can revive Mr. K’s guarantee and hold him liable for the debt once again, either fully or partially, since the earlier discharge of liability was based on an unfair transaction.
Example: 3- Group Company Arrangement- Company- C borrows ₹1 crore from a bank, and its sister company D acts as a guarantor. Just before Company C enters insolvency, it pays off part of the loan (say ₹40 lakhs). This reduces Company D’s liability as a guarantor. But the NCLT later finds this partial repayment to be a preferential transaction. The NCLT can restore Company D’s liability.
6. Restore security interest or charge.
Section 44(1)(f) –If a security or charge (like a mortgage or lien) on a company’s property was removed or reduced because of a preferential transaction, then the NCLT can order that a new security or charge be placed again on the same or another property. This new security will have the same level of priority as the one that was wrongly removed.
Example: 1- Reinstated of Charge- If a company removed a bank’s mortgage on a property just before insolvency to favour that bank, and the NCLT later finds it was a preferential transaction, it can order that the mortgage be reinstated—with the same priority as before.
Example: 2- Restoring Charge on Another Asset- Company B gave a charge (security) on its warehouse to Creditor Y for a ₹10 lakh loan. A few weeks before insolvency, it removes that charge to favour Creditor Y. The NCLT finds this to be a preferential transaction. If the warehouse is no longer available, the NCLT can order a new charge on another property of Company B—say, its office building—with same priority as the original.
7. Determination of claim arising from transaction.
Section 44(1)(g) -The Adjudicating Authority may decide how claim arising from preferential transactions should be treated in the insolvency or liquidation process.
Example: 1- Company A is facing financial trouble and is about to enter the insolvency process. It owes ₹50 lakhs to Creditor X. Just 2 months before insolvency, Company A pays ₹20 lakhs to Creditor X. Later, this payment is declared a preferential transaction under Section 43 of the IBC, as it gave Creditor X an unfair advantage over other creditors.
Under Section 44(1)(a) and (d), the NCLT orders Creditor X to return the ₹20 lakhs to the company through the Resolution Professional. Now, under Section 44(1)(g), since Creditor X had to return the money, the NCLT can allow him to file a claim in the insolvency process. This could be:
- For the full ₹50 lakhs originally owed, or
- Only for the ₹20 lakhs he returned,
depending on what the NCLT considers fair in the situation.
Example: 2- Repayment to a Related Party- Company B is undergoing financial stress and owes ₹30 lakhs to its sister company, Company C (a related party under the IBC). Just 1 month before insolvency proceedings begin, Company B repays ₹10 lakhs to Company C. The Resolution Professional challenges the transaction as a preferential transaction under Section 43, as it involved a related party and was made within the look-back period of 2 years (for related parties). The NCLT, under Section 44(1)(a) and (d), orders Company C to return ₹10 lakhs to the corporate debtor’s account. Later, under Section 44(1)(g), Company C seeks to file a claim. However, since it is a related party and the payment was made within a suspicious time frame, NCLT may choose to allow a claim only for ₹10 lakhs (the amount returned) or deny it altogether, depending on whether allowing the claim would unfairly impact unrelated creditors.
Example :3- Payment to an Unsecured Creditor- Company D owes ₹40 lakhs to multiple unsecured creditors. Two months before insolvency, it pays ₹15 lakhs to Creditor Y, who had been pressuring for immediate payment. No similar payments were made to other unsecured creditors. The payment is found to be a preferential transaction under Section 43, as it puts Creditor Y in a better position than other similarly placed unsecured creditors.
The NCLT, under Section 44(1)(a) and (d), directs Creditor Y to refund ₹15 lakhs to the Resolution Professional. Under Section 44(1)(g), NCLT allows Creditor Y to file a claim in the Corporate Insolvency Resolution Process (CIRP). Depending on the fairness of the situation:
- The claim may be admitted for ₹40 lakhs (the original debt), or
- It may be restricted to ₹15 lakhs, the amount Creditor Y had returned.
Proviso to Section 44(1), IBC – Protection for bona fide third parties.
The proviso to Section 44(1) ensures fairness and protection for parties who acted in good faith and for value. It lays down two important safeguards:
(a) Protection of Third-Party Property Rights.
No order under Section 44(1) shall affect any interest in property that was:
- Acquired from a person other than the corporate debtor, and
- Acquired in good faith and for value, or
- Any interest derived from such an interest.
It means, if a third party (not the Corporate Debtor) buys or receives property in good faith and for genuine value, their interest in the property will not be disturbed, even if the original transaction is later set aside as preferential.
(b) Protection of good-faith Beneficiaries.
No order under Section 44(1) shall require a person who received a benefit from the preferential transaction to pay money to the liquidator or resolution professional, if that person:
- Acted in good faith, and
- Gave value in return for the benefit received.
It means, if someone gained from a preferential transaction but did so without any wrongful intent and paid fair value for it, they cannot be forced to repay the benefit.
Example: -1- Company X transfers a car to Person A as repayment for an old loan. Subsequently, Person A sells the car to Person B, who purchases it in good faith, pays the full market value, and is unaware of Company X’s financial distress or impending insolvency. Later, the initial transfer from Company X to Person A is declared a preferential transaction under Section 43 of the IBC. As a result, under Section 44(1)(a), the NCLT may reverse the transaction between Company X and Person A.
However, as per the proviso to Section 44(1)(a), Person B’s ownership of the car remains protected, because:
- He acquired the property from someone other than the corporate debtor (Person A),
- He acted in good faith, and
- He paid fair value.
Furthermore, if Person A had also provided fair consideration and was unaware of the company’s insolvency or intent to prefer, he may be protected under clause (b) of the proviso to Section 44(1)—meaning he may not be required to repay the benefit received.
Example: -2- Third Party Purchaser Protected – Company A, facing financial distress, transfers a valuable machine to Creditor X as repayment for an old outstanding debt. Creditor X subsequently sells the machine to Person Y, a third party, for ₹10 lakhs—the fair market value. Person Y purchases the machine in good faith, without any knowledge of Company A’s impending insolvency. Later, the transfer from Company A to Creditor X is declared a preferential transaction under Section 43 of the IBC. Accordingly, the NCLT, under Section 44(1)(a), may pass an order reversing the transfer between Company A and Creditor X.
However, under the proviso to Section 44(1)(a):
- Person Y’s interest in the machine remains protected,
- Since Y acquired the property in good faith,
- Paid fair value, and
- Received it from a person other than the corporate debtor (i.e., from Creditor X).
This protection ensures that bona fide third parties are not unfairly penalized for transactions made without any wrongful intent or knowledge of insolvency.
Example: -3- Fraudulent Buyer not protected- Company C, just before entering insolvency, transfers a piece of land to Creditor M, who is a related party. Subsequently, Creditor M sells the land to Person P at a significantly discounted price. At the time of purchase, Person P is aware of Company C’s deteriorating financial condition and the impending insolvency. The transaction is later challenged and declared a preferential transaction under Section 43 of the IBC.
As a result, the sale to Person P is set aside by the Adjudicating Authority, because:
- P did not act in good faith,
- He did not provide fair value, and
- He had actual knowledge of the corporate debtor’s financial distress.
Therefore, the protection under the proviso to Section 44(1)—which safeguards bona fide purchasers and good-faith beneficiaries does not apply in this case.
Explanation I to Section 44 – Presumption against good faith.
This explanation introduces a presumption of bad faith in certain situations, to prevent abuse of preferential transactions during insolvency. It states that if a person:
- Acquired an interest in property from someone other than the corporate debtor, or
- Received a benefit from a person who was favoured by the corporate debtor,
and either:
1. Had sufficient information about the initiation or commencement of the CIRP of the corporate debtor, or
2. Is a related party,
then it will be presumed that such interest or benefit was not acquired in good faith, unless proven otherwise. This shifts the burden of proof onto the person receiving the benefit to prove good faith, fair value, and lack of knowledge of insolvency.
Explanation II – When is a person deemed to have sufficient information?
A person is deemed to have sufficient information or opportunity to access such information once a public announcement of the CIRP has been made under Section 13 of the IBC. This means that once the CIRP is publicly announced, all parties dealing with the Corporate Debtor—or those receiving property or benefits indirectly—are expected to be aware of the insolvency proceedings.
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