Preferential Transactions under IBC: Sections 43 and 44

A company in distress often pays its friends first. It repays a loan from a director, secures an unsecured lender, or mortgages its land for a group company's debts. Each of these may be perfectly fair in price, yet it lets one creditor jump ahead of the rest just before the collective process begins. Sections 43 and 44 allow such preferences to be reversed. This note explains the elements of a preferential transaction, the exclusions, the orders the NCLT may pass and the leading case of Anuj Jain v Axis Bank.

1. Section 43(1): Application to the NCLT

Where the liquidator or the resolution professional 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 section 43(2) to any persons, he shall apply to the NCLT for avoidance of the preferential transactions and for one or more of the orders referred to in section 44.

2. Elements of a Preference, Section 43(2)

• Deemed preference. A corporate debtor is deemed to have given a preference at a relevant time if (a) there is a transfer of its property or an interest in it for the benefit of a creditor, surety or guarantor, for or on account of an antecedent financial debt, operational debt or other liability owed by it; and (b) the transfer has the effect of putting that person in a better position than it would have been in if the assets were distributed under section 53.
• Antecedent debt. The debt must exist before the transfer; a payment made at the same time as new goods or money are received is an exchange, not a preference.
• Better position. The comparison is with a liquidation; repaying an unsecured creditor in full, or giving security to an unsecured creditor, improves its position over what it would receive under section 53.
• Intent irrelevant. The provision is a deeming fiction based on effect; unlike some foreign laws, it does not require proof that the debtor desired to prefer the creditor.

Figure 1: Testing a transaction under section 43

3. Relevant Time, Section 43(4)

• Related party. A preference given to a related party, other than one who is a related party only because of being an employee, is covered if made within two years before the reference date.
• Any other person. A preference given to anyone else is covered if made within one year before the reference date.
• Reference date. The insolvency commencement date under the original text; after the 2026 Amendment to section 43(4), the period starts two years, or one year, before the initiation date, the date of filing of the application, and ends on the insolvency commencement date (Topic 47)

4. Exclusions, Section 43(3)

Figure 2: Transfers that are not preferences

• Ordinary course of business. A transfer made in the ordinary course of the business or financial affairs of the corporate debtor or the transferee is not a preference; in Anuj Jain, the Supreme Court read the word or as and, so that the transfer must be in the ordinary course for both the debtor and the transferee.
• Security for new value. A transfer creating a security interest in property acquired by the debtor is excluded to the extent that the security secures new value, was given under a security agreement describing the property and used by the debtor to acquire it, and was registered with an information utility within thirty days after the debtor received possession of the property.
• New value. Money or its worth in goods, services or new credit, or the release by the transferee of property previously transferred; it does not include a debt substituted for an existing debt.

5. Orders under Section 44

Figure 3: Orders the NCLT may pass

• Range of orders. The NCLT may require property transferred, or property representing its proceeds, to be vested in the corporate debtor; release or discharge any security interest created by the debtor; require any person to pay sums in respect of benefits received; direct that sureties or guarantors whose obligations were released are again bound; direct the provision of security for obligations imposed by the order; and determine how far a person affected may prove in the CIRP or liquidation.
• Protection of third parties. An order does not affect an interest in property acquired from a person other than the corporate debtor in good faith and for value, nor require a person who received a benefit in good faith and for value to pay, unless that person was a party to the transaction or was a creditor of the debtor when it took place.

6. Anuj Jain v Axis Bank, 2020

• Facts. Jaypee Infratech mortgaged several hundred acres of its land to secure loans taken by its holding company, Jaiprakash Associates, from Axis Bank and other lenders; in Jaypee Infratech's CIRP, the interim resolution professional sought avoidance of the mortgages.
• Holding. In its judgment of 26 February 2020, the Supreme Court restored the NCLT's finding that the mortgages were preferential transactions: they were transfers of the debtor's property for the benefit of Jaiprakash Associates, a related party and creditor, on account of antecedent liabilities, made within the two-year period, and they improved its position compared with a liquidation.
• Ordinary course. Creating security for a holding company's debts while the debtor was itself in financial distress was not in the ordinary course of business of the debtor and the transferee.
• Status of the lenders. The lenders of Jaiprakash Associates were not financial creditors of Jaypee Infratech, since no money had been disbursed to it; a mortgage given only to secure a third party's debt does not create a financial debt owed by the mortgagor.
• Method. The Court set out a step-by-step inquiry: identify the transfer and the beneficiary, the antecedent debt, the improvement in position, the relevant time, and finally whether an exclusion applies.

7. Frequently Asked Questions

A company repays a director's unsecured loan in full eight months before its CIRP begins. Is this a preference?

Very likely. The director is a related party, the loan is an antecedent debt, full repayment puts the director in a better position than in liquidation, and eight months is within the two-year period. The director can be ordered to repay under section 44 unless an exclusion applies.

Is a payment to a supplier on normal credit terms a preference?

Ordinarily not. Regular payments to suppliers on their usual terms are made in the ordinary course of business of both the debtor and the supplier, and fall within section 43(3)(a).

Who can apply to avoid a preferential transaction?

The resolution professional or the liquidator under section 43(1). Since 2026, a creditor, member or partner may also apply under section 47 where the professional has not reported the transaction (Topic 47).

How is a preference different from an undervalued transaction?

A preference may be at full value; the wrong lies in favouring one creditor over others. An undervalued transaction is objectionable because the debtor received significantly less than the asset was worth (Topic 49).

8. Related Topics

• Topic 47: Avoidance Transactions. Definitions and look-back.
• Topic 49: Undervalued and Fraudulent Transactions. Sections 45 to 49.
• Topic 57: Section 53. The benchmark for a better position.