Definition
A transaction — payment, transfer of property, or creation of security — made by a corporate debtor to a creditor within the look-back period that gives that creditor a better outcome than they would have received in the event of liquidation — voidable by the Resolution Professional or Liquidator.
A preferential transaction under Section 43 IBC prejudices the general body of creditors by favouring one creditor over others. Key elements: (a) a transfer of property/interest; (b) for the benefit of a creditor, surety, or guarantor; (c) in respect of an antecedent debt; (d) within the look-back period (12 months for non-related parties; 24 months for related parties); (e) the transfer puts the beneficiary in a better position than they would have been in liquidation under Section 53. Transactions not avoidable: those made in the ordinary course of business; those creating new value (new money advanced in exchange for security); and those where the debtor had no intent to prefer. The RP or Liquidator files an application before the NCLT to set aside the preferential transaction.
Statutory Definition
Section 44(1), Insolvency and Bankruptcy Code, 2016: 'The Adjudicating Authority may, on an application made by the resolution professional, 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 vested in the corporate debtor representing the application of proceeds of sale of property transferred in connection with the giving of the preference; (c) release or discharge (in whole or in part) any security interest created by the corporate debtor in connection with the giving of the preference; (d) require any person to pay such sums in respect of benefits received by him from the corporate debtor, as the Adjudicating Authority may direct.'
Etymology & Origin
From 'preferential' (favouring one over others, from Latin 'praeferre' — to prefer, to carry before) + 'transaction' (a commercial dealing). A preferential transaction 'prefers' — favours — one creditor over others by paying them out-of-turn.
Full Legal Analysis
Preferential Transaction: The Out-of-Turn Payment
Imagine a company approaching insolvency: it has 10 creditors, including its promoter’s uncle who lent it Rs. 5 crores. As the company’s finances deteriorate, it repays the uncle in full — while the other creditors wait. In liquidation, the uncle would only have gotten 40 cents on the dollar like everyone else; instead, he got 100 cents. This is a preferential transaction — and the IBC allows the RP or Liquidator to reach back and take that money back into the liquidation estate.
What Makes a Transaction Preferential?
Three cumulative conditions: (a) Transfer for antecedent debt: The corporate debtor paid off an existing debt — not a contemporaneous exchange of value. Paying a supplier for goods just delivered is not preferential (it’s a contemporaneous exchange); paying an old outstanding invoice to a related party is. (b) Beneficial position: The recipient creditor is better off than they would have been in liquidation (under Section 53). (c) During look-back period: The transaction occurred within 12 months (non-related) or 24 months (related party) before the CIRP commencement date.
Protection for Ordinary Course Transactions
Not all payments during the look-back period are preferential: (a) Payments in the ordinary course of business (routine supplier payments, employee salaries) are generally not preferential; (b) New money extended — where the transaction creates new value for the corporate debtor (a creditor advances fresh funds in exchange for security) — is not preferential; (c) Transactions that do not actually improve the creditor’s position vs. liquidation — because the creditor was already secured for the full amount anyway — are not preferential.
“A preferential transaction is an injustice to all other creditors — one person gets paid in full while others wait in line only to get partial recovery. The IBC’s claw-back says: fairness in insolvency means everyone takes their agreed share; using the final months to pay some in full while others are short-changed will not stand.”
This Term in Indian Statutes
Insolvency and Bankruptcy Code, 2016, 2016
"The Adjudicating Authority may, on an application made by the resolution professional, require any property transferred in connection with the giving of the preference to be vested in the corporate debtor."
Preferential transaction set-aside: Section 44 NCLT order vesting property back in corporate debtor; ordinary course and new value exceptions
