Preferential Transaction under Section 43 Requires Antecedent Debt and Creditor Benefit: NCLAT Partly Sets Aside Avoidance Order
- 7 hours ago
- 3 min read
The Appellate Tribunal clarified the legal framework governing preferential transactions under the Insolvency and Bankruptcy Code, emphasising that mere related party transfers do not automatically attract avoidance provisions. The ruling reinforces that strict statutory compliance—particularly the existence of antecedent debt and creditor benefit—is essential before a transaction can be invalidated during the Corporate Insolvency Resolution Process.
The National Company Law Appellate Tribunal (NCLAT), New Delhi Bench, comprising Justice N. Seshasayee, Mr. Arun Baroka, and Mr. Indevar Pandey, held that the Resolution Professional is not required to obtain Committee of Creditors’ approval for filing avoidance applications or appointing transaction auditors. Applying the principles laid down in Anuj Jain Interim Resolution Professional for Jaypee Infratech Limited v. Axis Bank Limited Etc., REEDLAW 2020 SC 02502, the tribunal distinguished between transactions with and without antecedent debt, ultimately holding that only transfers made to a related party creditor within the look-back period constituted preferential transactions, while others were outside the scope of Section 43.
The Appellants, being suspended directors of the Corporate Debtor, challenged the order of the Adjudicating Authority allowing an application under Section 43 of the Insolvency and Bankruptcy Code, whereby certain transactions were declared preferential, and recovery was directed.
It was contended that the Resolution Professional had failed to satisfy the statutory ingredients required to establish preferential transactions, as laid down by the Supreme Court in Anuj Jain Interim Resolution Professional for Jaypee Infratech Limited v. Axis Bank Limited Etc., REEDLAW 2020 SC 02502. The Appellants argued the absence of antecedent debt, lack of creditor relationship, and that the transactions were carried out in the ordinary course of business. They also raised objections regarding the non-joinder of necessary parties and the lack of CoC approval.
The Appellate Tribunal held that the Resolution Professional is statutorily empowered under Section 25 and CIRP Regulations to appoint professionals and file avoidance applications without requiring approval of the Committee of Creditors. It further held that proceedings under the Code are summary in nature and non-joinder of transferee entities is not fatal where adjudication can proceed on the basis of the Corporate Debtor’s records.
On merits, applying the principles laid down in Anuj Jain Interim Resolution Professional for Jaypee Infratech Limited v. Axis Bank Limited Etc., REEDLAW 2020 SC 02502, the Tribunal examined whether the transactions satisfied the essential ingredients under Section 43. It found that the transfer to one related party, which was also a creditor, satisfied the conditions of antecedent debt and beneficial positioning and thus constituted a preferential transaction. However, the transfer to another related party, which was not a creditor and lacked antecedent debt, failed to meet the statutory criteria and could not be treated as preferential.
Accordingly, the Tribunal partly allowed the appeal by restricting the avoidance to only such transactions that fulfilled all statutory requirements and directed repayment limited to that extent.
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