PREFERENTIAL TRANSACTION IN IBC

PREFERENTIAL TRANSACTION IN IBC

Subject : Economics

Concept :

• Under the Insolvency and Bankruptcy code 2016, section 43 is dealt with Preferences if any given by the Corporate Debtor before and during the insolvency.
• Success of the insolvency depends upon timely completion of the process of insolvency and also ensures the corporate debtor should not alienate the property to others during twilight period.
• Twilight period means that time during which Directors have to come understand that they cannot avoid the commencement of insolvency and actual date of commencement of insolvency.
• Generally Directors will transfer certain properties to their nearby relatives. To avoid this, National Company Law Tribunal was given certain powers to undo these transactions and retransfer the properties to the control of insolvency Professional.
• A transaction is said to be a ‘preferential transaction’ if:

(a) the transaction relates to transfer of the property or interest of the corporate debtor for the benefit of a creditor, surety or guarantor in relation to an antecedent / past liability; and

(b) the transaction has the effect of giving such creditor, surety or guarantor a beneficial position in the distribution of assets in the event of liquidation under Section 53 of the IBC.

(c) This transfer should be done within the relevant period. The relevant period should be 2 years for related party and 1 year for other parties preceding the date of commencement  of insolvency of the corporate debtor.

• But the following transfers made by the corporate debtor will not be considered as preferential transfer.

(a) If the transfer of property or interest has been done in the ordinary course of the business or financial affairs of the corporate debtor or transferee

(b) Any transfer creating a security interest in property acquired by the corporate debtor.