Section 43 [Preferential transactions and relevant time] of the Insolvency and Bankruptcy Code (IBC) plays a pivotal role in identifying and avoiding preferential transactions that undermine the principle of creditor equality. Such transactions, if left unchecked, can distort the distribution framework laid down under Section 53, by allowing certain creditors to recover more than their fair share at the cost of others. By empowering the resolution professional or liquidator to reverse these unfair transfers, Section 43 ensures that the insolvency process remains equitable, transparent, and consistent with the Code’s objective of maximising value for all stakeholders.
Section 43(1) of the IBC – Deemed Preferential Transactions.
Section 43(1) of the IBC lays the foundational power to identify and reverse preferential transactions undertaken by a corporate debtor prior to insolvency. Section 43(1) empowers the Adjudicating Authority (NCLT), on application by the resolution professional or liquidator, to declare certain transactions as void if they are found to be preferential under the conditions set out in Section 43(2), and do not fall under the exclusions in Section 43(3).
Bare Text of Section 43(1) – IBC.
(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.
It is to be noted that relief against any preferential transaction—once it is declared as such under Section 43—is granted through one or more of the orders specified under Section 44 of the IBC. These remedies are intended to reverse the effects of the preferential transaction and restore the corporate debtor’s estate for the benefit of all creditors.
Section 43(2) of the IBC – Deemed Preferential Transactions.
The introductory phrase “A corporate debtor shall be deemed to have given a preference, if—” under Section 43(2) of IBC establishes a legal fiction or deeming provision. This means that where the specified conditions are satisfied—namely, a transfer of property in respect of an antecedent debt, for the benefit of a creditor, surety, or guarantor, resulting in a more favourable position than they would have received in liquidation—the transaction is presumed to be preferential. This presumption, however, is subject to rebuttal through established exceptions (such as transfers made in the ordinary course of business or for new value) or other justifications available under the Code.
A transaction is deemed to be preferential under Section 43(2) of the Insolvency and Bankruptcy Code, 2016, only if both of the following conditions are satisfied:
(a) The transaction involves the transfer of property or interest thereof by the corporate debtor for the purpose of discharging an antecedent debt—i.e., a debt that existed prior to the transaction; and
(b) The transaction results in the creditor, surety, or guarantor receiving more than what they would have otherwise received in the event of liquidation, as per the waterfall mechanism under Section 53 of the Code.
Only when both limbs of this test are met does the transaction qualify as a preferential transaction, subject to the exclusions laid down under Section 43(3) and the relevant look-back periods under Section 43(4).
Bare Text of Section 43(2) – IBC.
“(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.”
When a corporate debtor transfers its asset to discharge a past debt or liability and such a transaction constitutes a transfer in respect of an antecedent debt—that is, a debt which arose prior to the date of transfer and also if the transfer results in the creditor, surety, or guarantor receiving a greater recovery than what they would have received in the event of liquidation under Section 53 of the IBC, it amounts to a preferential transaction. This is particularly relevant where such transfer disturbs the pari passu principle, thereby placing one creditor in a more beneficial position than others similarly placed in the liquidation hierarchy.
By perusal clause (a) of Section 43(2), there must be a transfer of property or any interest therein, and such transfer must be in relation to a past debt [i.e., a liability that existed prior to the transaction]. Additionally, the transfer must be for the benefit of a creditor, surety, or guarantor, meaning that the recipient should be a party with pre-existing claims or obligations—whether directly (as a creditor) or indirectly (as a surety or guarantor). The term past debt encompasses various liabilities, including financial debt (such as loans and credit facilities), operational debt (such as trade payables and employee dues), and other liabilities (including statutory dues and contractual obligations).
Clause (b) of Section 43(2) clarifies that the creditor or guarantor gets more money or benefit from the company than they would have received if the company’s assets were sold and shared equally during liquidation. The creditor or guarantor is paid more than they would have gotten if the company had gone into liquidation and its assets were divided among all creditors.
Example: Let us consider a scenario where a company, within one year preceding the insolvency commencement date, repays an unsecured loan of ₹1 crore to a related party, while other creditors remain unpaid. This constitutes a transfer of property (cash), made in respect of an antecedent debt (the loan having been taken at an earlier date). The transaction is clearly for the benefit of a creditor (the related party lender) and places them in a preferential position, since in the event of liquidation, unsecured creditors typically receive little to no recovery under the waterfall mechanism set out in Section 53 of the IBC. Thus, the repayment satisfies the elements of a preferential transaction under Section 43(2) of the Code and may be vulnerable to avoidance if other conditions under Section 43 are met.
Section 43(3) of the IBC – Specific Exclusion for Preferential Transactions.
Section 43(3) of the IBC lays down specific exclusions—i.e., transactions that shall not be deemed to be preferential, even if they meet the conditions under Section 43(2). These exclusions aim to protect bona fide transactions and maintain commercial certainty.
Bare Text of Section 43(3) – IBC.
“(3) For the purposes of sub-section (2), a preference shall not include the following transfer-
(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.”
A corporate debtor shall not be deemed to have given a preference under Section 43(3)(a) of the IBC, if the transfer is made in the ordinary course of business or financial affairs of the corporate debtor or the transferee. This exclusion is intended to safeguard routine and bona fide transactions carried out in the normal course of commercial activity, even if they technically meet the conditions of a preferential transaction under Section 43(2). Examples include regular payments to suppliers, salaries to employees, or repayment of debts arising from standard business operations.
The purpose of Section 43(3)(b) of the IBC is to protect genuine, good-faith secured transactions that are backed by fresh value (i.e., new money, or its worth in goods, services or new credit), and are not intended to favour any creditor over others. This provisions encourage fresh credit and investment even when a company is under financial distress.
Section 43(3)(b) of the IBC ensures that certain transactions are excluded from being treated as preferential, specifically in cases where a creditor provides new value—such as a fresh loan, goods, or services—and, in return, receives a security interest (such as a charge or mortgage) over a newly acquired asset. Such a transaction will not be set aside, provided it is carried out transparently and registered with an information utility within the prescribed timeline i.e. within 30 days from the date the corporate debtor takes possession of the asset. The purpose is to protect lenders or suppliers who extend new credit and take security for the same in a transparent and timely manner. Timely registration with an information utility is mandatory to claim this protection.
However, the term “new value” does not include cases where an existing financial or operational debt is simply replaced or restructured—as this does not result in the debtor receiving anything truly new [Explanation to Section 43(3)]. For example, if a creditor provides a fresh loan of Rs. 50 lakh to a corporate debtor and, in return, takes a security interest over a newly acquired asset, it qualifies as “new value.” However, if the same creditor merely restructures an old unpaid loan—for instance, by executing a new agreement for the same debt—this does not qualify as new value, since no fresh money or goods are infused into the company.
Now, it is pertinent to note that a corporate debtor shall not be deemed to have given a preference under Section 43(3)(b) of the IBC, if the transfer involves the creation of a security interest (such as a charge or mortgage) over a newly acquired asset, provided all of the following conditions are met:
(i) The security interest:
- Is created to secure new value (i.e., fresh money, goods, or credit),
- Is created at the time of or after the execution of a valid security agreement that describes the property,
- The new value was used by the corporate debtor to acquire the asset that is subject to the security interest.
(ii) The transaction:
- Is registered with an information utility within 30 days from the date the corporate debtor takes possession of the asset.
Further, the proviso to Section 43(3) of IBC clarifies that even if a transfer was made because of a court order, it can still be treated as a preferential transaction under Section 43—if it meets the conditions of Section 43(2). This clause prevents misuse of court orders to give unfair advantage to certain creditors. Just because a payment or transfer is made under court direction (e.g., under a decree or recovery order), it does not shield the transaction from being challenged as preferential if:
- It relates to a past debt, and
- It puts one creditor in a better position than others in liquidation.
Section 43(4) of the IBC – Relevant time for Preferential Transactions.
Section 43(4) of the IBC lays down the “look-back” or “relevant time” periods for identifying preferential transactions. The purpose of prescribing a look-back period under Section 43(4) of the IBC is to prevent the reversal of remote or genuinely historical transactions, and instead focus scrutiny only on those transactions that occur suspiciously close to the insolvency commencement date. It focuses the scrutiny on transactions that are likely to have been made in anticipation of insolvency. Such transactions are more likely to have been carried out with the intent to prefer certain creditors over others, thereby disturbing the principle of equitable distribution and potentially frustrating the objectives of the resolution or liquidation process.
Bare Text of Section 43(4) – IBC.
(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.
A transaction is considered for avoidance as preferential only if it was made:
- Within two years before the insolvency commencement date, if the transaction was with a related party;
- Within one year before the insolvency commencement date, if the transaction was with an unrelated party.
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Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the author whatsoever and the content is to be used strictly for informational and educational purposes. While due care has been taken in preparing this article, certain mistakes and omissions may creep in. the author does not accept any liability for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon.
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