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This article will teach you what preferential transactions are under the Insolvency & Bankruptcy Code (IBC). You will also learn how to draft an application in such circumstances and related procedures. So, if you are starting your journey as an insolvency professional or a lawyer, this guide will be handy. 

Introduction

Imagine a situation wherein a captain of the sinking ship, instead of ensuring an orderly rescue, secretly hands over all the lifeboats to a select few, leaving the rest stranded. Sounds unfair, right? Now, think of this happening in the corporate world—where a financially struggling company favors certain creditors while others are left high and dry.

But that would be legally wrong, right? Yes, you are absolutely right! It is under the Insolvency and Bankruptcy Code, 2016 (“IBC”). 

IBC was enacted to ensure a fair and time-bound resolution of insolvency cases. One of its primary objectives being to maximize the value of assets and balance the interests of all stakeholders—creditors, employees, and even the economy at large.

The concept of avoiding preferential transactions is deeply rooted in this principle. 

When a company is on the verge of insolvency, preferentially paying off one creditor at the expense of others undermines the collective nature of insolvency proceedings. It reduces the overall value available for distribution, creating an uneven playing field.

What are preferential transactions?

Simply put, a preferential transaction occurs when a company, before going insolvent, transfers assets or repays debts in a way that puts certain creditors in a better position than they would have been under liquidation.

Let’s understand this better with an example:

Naya Kapada Ltd., a garment manufacturing company, is in deep financial trouble. It owes money to multiple creditors:

• Apna Bank Ltd. – ₹2 crore (financial creditor)
• Supplier X – ₹1.5 crore (operational creditor)
• Supplier Y – ₹2.3 crore (operational creditor)

Now, just six months before heading into insolvency, the company suddenly repays the entire ₹1.5 crore to Supplier X, while completely ignoring Supplier Y and other creditors. This isn’t just a naive repayment—it’s a classic case of a preferential transaction.

Why? Because Supplier X has now been placed in a better position than Supplier Y or the bank when the insolvency process begins. Had the company gone straight into liquidation, all creditors would have received their dues in an equitable manner.

This is exactly the kind of unfair advantage that the IBC seeks to undo—ensuring that insolvency remains a collective process where no single creditor gets an unfair head start.

So, the next time you see a company making quick repayments right before it hits rock bottom, you might just be looking at a preferential transaction in action!

What is the legal framework of preferential transactions?

Learning about preferential transactions may get daunting.  

So when I studied, I divided this topic into 4 questions, which helped me drill it in my memory till today as I write. 

What happens when a company gives preferential treatment? 

If a liquidator or resolution professional believes that a company (corporate debtor) has favoured certain creditors unfairly within a specific timeframe, they can seek relief from the NCLT inter alia to annul such a transaction under section 44.

When is a transaction considered preferential?

A transaction is treated as preferential when:

• The company transfers its property or an interest in it to a creditor, guarantor, or surety by way of repayment of a debt.
• This transfer puts the creditor in a more beneficial position than it would have been if the company’s assets were distributed fairly under the waterfall mechanism provided under the IBC. 

Coming to a crucial aspect, what transactions are not considered preferential?

So for instance, Naya Kapada Ltd. also owns a cotton production company, Kapus Ltd. within its umbrella of group companies. 

Naturally, Naya Kapada Ltd. regularly purchases its raw materials from Kapus Ltd. for which it has to pay a price. 

Say 6 months back, Naya Kapada Ltd. paid Rs. 5,00,000 to Kapus Ltd for its purchases. 

6 months thereafter, Naya Kapada Ltd. went into CIRP. The resolution professional, alleging a preferential transaction, moves an application before the NCLT seeking a refund of the said amount alleging preferential transaction. 

Do you think this petition is likely to succeed? Let’s find out the exceptions. 

The IBC under section 43(3) lays down a few exceptions, which are as follows-

• Transfers made as part of the normal course of business or financial activities (as seen in the above example); 
• Transfers where a security interest is created for a new loan or asset purchase, provided— the security was granted when the loan agreement was signed, and the transfer was registered within 30 days of the company getting the asset.

To explain the second bullet point, let’s take an example: 

Naya Kapada Ltd. takes a loan of ₹5.5 crore from HBFG Bank to purchase new machinery. As security for the loan, Naya Kapada Ltd. pledges the machinery itself. The loan agreement is signed on January 1, 2025, and the security interest is registered with the relevant authority on January 25, 2025 (within 30 days of Naya Kapada Ltd. acquiring the machinery).

Since this transfer secures a new value (the loan) and was duly registered within the prescribed period, it will not be considered a preferential transaction under the IBC. Instead, it is a legitimate business transaction made in the ordinary course.

What is the relevant time for determining preference?

A transaction is considered preferential:

• If the recipient is a related party, within two years before insolvency proceedings (except employees); 
• If the recipient is not a related party, within one year before the insolvency proceedings.

What is the time limit to file this application?  

Do you think you can apply before the NCLT at any time once the CIRP proceedings have commenced? 

The answer to this is NO. 

As per Regulation 35A of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations 2016:

• The resolution professional must, on or before the 75th day of the insolvency commencement date, assess whether the corporate debtor has engaged in a preferential transaction;
• If the RP concludes that the corporate debtor has been involved in any such transaction, they must make a formal determination within 115 days from the date of insolvency commencement; and 
• Following such a determination, the RP must make an application before the NCLT within 130 days from the date of insolvency commencement, seeking appropriate relief. 

To make this simpler, the resolution professional shall file the application before the NCLT within 130 days from the date of insolvency commencement. 

How do I draft the application seeking appropriate relief? 

I have always believed that learning law is the easiest part. Drafting is easier. But things get tricky when you have to present your case before the judge. 

But when you draft your application well, representing/arguing gets a lot easier. An articulate draft always goes a long way as it conveys intent and avoids ambiguity. 

Here are the facts of the case for your consideration

As we read above, Naya Kapada Ltd., a garment manufacturing company, was struggling financially to pay money to multiple creditors, including Apna Bank Ltd., Supplier X, and Supplier Y. 

Given this, Apna Bank Ltd. filed an application to initiate CIRP against Naya Kapada Ltd., i.e. Corporate Debtor, which was admitted to the NCLT.    

A Resolution Professional was appointed and accounts of the Corporate Debtor were audited. Certain transactions were flagged. Needless to say, such transactions were suspected to be preferential and hence the Resolution Professional (i.e. the Applicant) filed the interim application seeking necessary relief/s. 

Now, let’s move on to the next part, which is how to draft. The logic and explanation are in red.

The application shall begin with specifying the tribunal where it is being filed and must include the petition number of the CIRP or liquidation in which it is being filed. Further, all the parties are listed. Also, do not miss out on impleading the suspended directors of the corporate debtor as respondents. 

BEFORE THE NATIONAL COMPANY LAW TRIBUNAL,

MUMBAI BENCH

I.A.NO. 101 OF 2025

IN

C.P. (IB) 54/MB/2024

First, mention the parties of the original petition in which this interim application is being filed.   

IN THE MATTER OF

Now, here you can mention the parties to this application. 

AND IN THE MATTER OF

Next up, give the provisions under which this application is being filed. 

APPLICATION BY RESOLUTION PROFESSIONAL UNDER SECTION 25(2)(J) AND 43 OF THE INSOLVENCY AND BANKRUPTCY CODE, 2016, SEEKING APPROPRIATE ORDERS AGAINST THE RESPONDENTS.

MOST RESPECTFULLY SHOWETH: 

Who is filing this application? Under which provisions is it being filed? For what purpose? Answer these questions briefly in this para. 

1. This Instant Application is filed by Mr. S. Shankaran, Resolution Professional under section 25(2)(j) and 43 of the Insolvency and Bankruptcy Code, 2016 (“IBC” in short) inter alia seeking appropriate orders against the Respondents requiring them to make a contribution to the assets of the Corporate Debtor under the provisions of Insolvency and Bankruptcy Code for the interest of the Creditors of the Corporate Debtor.

In this para, state how you concluded that the Corporate Debtor has committed an act which is detrimental to the interest of the creditors. How did you determine that the transaction/s are preferential? With the help of an audit report, right? State this briefly.  

2. That a Transaction Audit was performed on the accounts of the Corporate Debtor at the instance of the Applicant. The Transaction Auditor in its Report dated 29^th December, 2024, has reported transactions which in the opinion of the Applicant have cast serious doubts that the said transaction may be Preferential.
   
   Therefore, the Applicant is making this Application in compliance with the statutory requirements as prescribed Under Section 25(2)(j) and 43 of the IBC read with relevant regulations framed there under to discharge the statutory duties and obligations as a Resolution Professional and to place on record, acts and conducts discovered to have been caused by erstwhile management of Corporate Debtor which have been detrimental to the interest of the Creditors.
   
   The facts and the circumstances leading to the instant application are more fully and particularly below.

PARTICULARS OF THE PETITIONER:

Now give details of the petitioner, that is, its full name and registered address. Also, state that the petitioner had filed the petition and the date of the order by which the petition was admitted.  

3. Apna Bank Ltd., having its registered office at 302, Status Towers, Nariman Point, Mumbai-400 020, was the Petitioner of the Application for initiation of Corporate Insolvency Resolution Process (“CIRP”) of the Corporate Debtor, as filed before the Hon’ble Tribunal and was allowed on 5^th May, 2021.

PARTICULARS OF THE CORPORATE DEBTOR: –

In this section, give details of the corporate debtor i.e. its full name, registered address and business carried out. 

4. Naya Kapada Pvt. Limited, having its registered office at Plot No.B-2/B-3, Phase I Verma Industrial Estate, Alibag, Maharashtra, is involved in the business of garment manufacturing.  

PARTICULARS OF THE APPLICANT

Upon a careful perusal of section 43, at the outset itself, it is mentioned that only a resolution professional or liquidator must approach the NCLT seeking relief under this section. So, provide the name and office address of the applicant herein. 

5. Mr. S. Shankaran, Resolution Professional appointed in the instant matter, having his registered office at Brilliant Insolvency Professionals LLP, 46-B, 5th Floor, 22/28A, Ghatkopar (East), Mumbai.  

JURISDICTION OF THE BENCH

This clause is to ensure that the application is filed before the appropriate forum. 

6. The Applicant declares that the subject matter of the application is within the jurisdiction of the Bench.

LIMITATION

This clause is to ensure that the application is filed well within the prescribed period of limitation. A declaration to this effect at the outset throws much-needed light on preliminary objections which if not complied with, lead to rejection of the application.  

7. The Applicant declares that there is no period of limitation prescribed for the instant application as known to the Applicant. However, the application is within the period of limitation, if any.

BRIEF FACTS

We have now arrived at the crux of the application. So soon, isn’t it? 

This portion spells out every vital information based on which this application is filed.

You need to mention a brief overview of the company and the background of the case, explaining the events that led to the filing of this application.

8. Naya Kapada Pvt. Ltd., the Corporate Debtor herein, was incorporated on 25^th September 2000 and has its registered office in Maharashtra. It is engaged in the business of garment manufacturing.
   
9. Apna Bank Ltd. had filed an Application for initiating Corporate Insolvency Resolution Process of the Corporate Debtor under section 7 of the Insolvency and Bankruptcy Code, 2016, which was allowed by the Hon’ble Tribunal by virtue of the order dated 5^th May, 2024. Hereto annexed and marked as “Annexure 1” is the copy of the order dated 5^th May, 2024.

You need to inter alia state that an audit was conducted on the Corporate Debtor’s books and that certain anomalies were found in the payments made, which were flagged by the auditors. You must also mention the entries that are suspected to be preferential.  

Next few paragraphs shall state the fact that an auditor was appointed to conduct the audit of the corporate debtor and that the auditor, after completion of the review, submitted a final report to the Applicant. The final report shall also identify the preferential transaction. 

10. The Applicant engaged M/s. Chorpakadkar & Associates as the Transaction Auditor to conduct a Transaction Audit of the Corporate Debtor for a review period from 1^st April 2022 to 5^th May 2023 and to determine the transactions of the nature mentioned under section 25 (2)(j) and 43 of IBC vide letter dated 7^th July 2022.

11. That on 7^th July 2022, the Transaction Auditor was appointed to conduct the Transaction Audit and submitted its Final report to the Applicant on 29^th April 2022, having considered the Transaction report as determined and specified transactions that were Preferential, Undervalued, Fraudulent, or Extortionist in nature.
    
    Hereto annexed and marked as “Annexure 2” is the copy of the Transaction Report dated 29^th April 2022, along with its Annexures. Hereto annexed and marked as “Annexure 3” is the copy of the Financial Statement for the Financial year 2022-2023, and “Annexure 4” is the copy of the Financial Statement for the Financial year 2023-2024.

It is said that you need to convey things to a judge with the belief that he is completely unfamiliar with the facts and the law. So you need to go to the root of it and explain things fundamentally. 

In the following paragraphs, explain the commercial significance of this application and its importance as per the objects of the Code.

12. That in view of the determination of transactions by the Resolution Professional, this Instant Application is being filed to bring to the notice of the Hon’ble Tribunal, those transactions which are Preferential in nature, so that appropriate orders may be passed for the avoidance of such transactions, to declare such transaction void and reverse its effect and to direct such contributors to contribute to the assets of the Corporate Debtor.

13. The Applicant submits that the object of the IBC and this present application inter alia is to ensure that the value of assets of the Corporate Debtor is maximized and all the creditors get their dues in an equitable manner which otherwise has been wrongfully dissipated on account of fraudulent and wrongful transactions.

After giving a brief background, state the amount that is siphoned off by the suspended directors

14. The Applicant submits that monies siphoned off under avoidable preferential transaction is Rs. 3,25,22,494/- which is being prayed to be returned/ contributed to the Corporate Debtor together with interest.

In the next few paragraphs, you need to explain the provisions of the Code. This acts as a reference and gives a flow to the application. 

15. Under section 43(2) of IBC, “A Corporate Debtor shall be deemed to have given a preference, if-

1. 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 owned by the Corporate Debtor; and
2. The transfer under clause (a) has the effect of putting such a Creditor or surety or guarantor in a more beneficial position than it would have been in the event of a distribution of assets being made in accordance with section 53. 

16. The Applicant humbly submits that the relevant period as mentioned in section 43(4) (b) of IBC is two years in case of Preferential Transactions with related parties.

In the upcoming paragraphs, we need to reproduce certain relevant extracts from the audit report that are names of the related party transactions, the value of the transactions entered into with the related parties, the period during which such transactions were entered into, etc. 

17. The related party transactions of the Corporate Debtor are on internal pages No. 38 to 43 of the Audit Report and are summarized as follows:     

Sr. No.	Name of Related Party	Relationship
1.	Mr. XYZ	Director
2.	M/s. Shirt & Co.	Enterprise under significant influence
3.	Kapus Pvt. Ltd.	Enterprise under significant influence
4.	Cotton Trading Company Private Limited	Enterprise under significant influence
5.	Blue T-shirts Private Limited	Enterprise under common directorship

18. Following are the details of the related party payments for FY 2022 – 2023 and 2023 – 2024 as per annual report and for the period upto 5^th May, 2024 (as per books): 

Sr. No.	Name of Party	2022-2023	2023-2024	Total
1.	Mr. XYZ	Rs. 89,207/-	Rs. 1,30,000/-	Rs. 2,19,207/-
2.	M/s. Shirt and Co.	Rs. 4,76,261/-	–	Rs. 4,76,261/-
3.	Kapus Pvt. Ltd.	Rs. 1,65,76,700/-	Rs. 15,56,406/-	Rs.1,81,33,106/-
4.	Cotton Trading Co. Pvt. Ltd.	Rs. 48,46,694/-	–	Rs. 48,46,694/-
5.	M/s. Blue T-shirts Pvt. Ltd.	Rs. 80,05,938/-	Rs. 8,41,288/-	Rs. 88,47,226/-
Total				Rs. 3,25,22,494/-

To make a strong case for preferential payments, it is crucial here to clarify that the payments made to the related parties were in lieu of pending loan repayment and not in the ordinary course of business. If you are unable to establish this to the court, there is a high probability that your petition will be rejected.  

19. The details of the transaction carried out by the Corporate Debtor with the aforesaid related parties were in lieu of pending loan repayment during the period starting from 1^st April 2022 to 5^th May 2023. The Respondents have failed to provide any balance confirmation from the lenders and loans and advances by and to the Corporate Debtor, to the Applicant herein.

20. It is observed that the loans and advances have been given to various related parties, the purpose of which is unknown due to the absence of relevant supporting documents, adequate information, and explanation from the Respondents.
    
    That there has been no handover of any Board resolution approval or shareholders’ approval, wherever necessar,y for providing such advances to the related parties. Moreover, there is no movement in the Advances given to related parties other than Mr. XYZ during the period under review.

Further, to fuel up your arguments, you also need to emphasize the fact that the bank statements of the disbursement are unavailable to the Applicant and the auditor. 

21. Further, the bank statements for the relevant periods for the said amounts disbursed were not made available to the Applicant or the Financial Auditor by the Respondents, and none of the preferential transactions have been reflected in the related party disclosure as required under the Companies Act, 2013. 

22. Apart from the direct amount received in the various accounts of the Corporate Debtor from various related parties, most of the advances received from the related party pertains to the amount of Salary, Employer Contribution to PF, ESIS Contribution, and Other Miscellaneous Expenses paid on behalf of the Corporate Debtor as reflected in the narration to the journal voucher in the tally. No supporting documents have been annexed or provided to verify the same.

Give out specifications of the transactions of a related party to whom the director has transferred certain sum of money regularly, if any. 

23. Details of the Sales transaction effected during the FY 2022-23 with its related party – M/s. Shirt & Co. are as per “Para 7(O) i.e., Findings & Observation – Sales” at Page No. 48 of the Audit report. Various amounts have been received from Director- Mr. ABC from time to time, the purpose of the same could not be verified in the absence of any remarks in the journal voucher or any Board Resolution or any other supporting documents.

It is necessary to convey to the tribunal how the parties are related. 

24. It is to be noted that on cross-verification with audited accounts for Kapus Pvt. Ltd. for the year ended 31.03.2023, Naya Kapada Pvt. Ltd. has been shown as the Corporate Debtors holding Company. An explanation for the same has not been provided.

You need to demonstrate how this transaction shall fulfil the criteria of a preferential transaction, which is by examining the nature and relevant time frame of the transaction. Also, emphasise how this is an undue advantage for such a creditor- an advantage that it would not have received had the proceeds been distributed proportionately. 

25. The aforesaid transaction meets with the requirement of section 43(4) of the IBC as it is given to a related party and is considered as deemed preference and is within two years preceding the insolvency commencement date. The transaction has given preference to a payment which is not a liability in the books of the Corporate Debtor thus injuring the interest of other creditors of the Corporate Debtor.

26. These net payments amounting to Rs. 3,25,22,494/- made by the Corporate Debtor in lieu of credit balance are preferred transactions as defined under section 43(2) of the IBC as the Party would have received the amounts only after satisfaction of the claims of the Secured creditors in accordance with section 53 of the IBC whereas by these transactions they have received the payment of their dues even prior to the Secured creditors.

Towards the end, make some general averments to show your bona fides. 

27. The Applicant craves the leave of the Hon’ble Tribunal to consider the facts of the said transactions as discussed for the purpose of passing appropriate orders as the amounts disbursed form a part of ‘Preference transactions’ which, as per section 43 of IBC, can and should have been avoided.

28. It is a fit and proper case where necessary direction is issued and action be taken in accordance with law.

29. This Application is made bona fide and for the ends of justice.

30. The balance of convenience and the prima facie case is in favor of the order as prayed for herein.

Prayer clause

In this application, we seek a declaration to the effect that this transaction be held preferential and direct the suspended directors to make good the loss incurred due to them. Accordingly, our prayer clause shall reflect these two requests. 

The Applicant, therefore, humbly prays before this Hon’ble Tribunal as follows:

1. That this Hon’ble Tribunal may be pleased to adjudicate the facts and circumstances of this case and be pleased to declare the various transactions carried out by the Corporate Debtor within the look-back period of two years preceding from the date of Insolvency commencement with related parties of the Corporate Debtor as has been stated at Para No. 18 above be termed as a preferential transaction.
   
2. That this Hon’ble Tribunal may be pleased to adjudicate the facts and circumstances of this case and necessary directions be passed in terms of section 44 of the IBC particularly.
   
3. That this Hon’ble Court may be pleased to direct the Respondents to contribute the amount of Rs. Rs. 3,25,22,494/- towards the Preferential Transactions carried out as per section 43 of the IBC.
   
4. Such further or other order or orders as this Hon’ble Tribunal may deem fit and proper in accordance with the Civil Procedure Code and the Code of Criminal Procedure.
   
5. Any other such directions which this Hon’ble Tribunal may deem fit.

At the end, don’t miss out on giving details of the fees paid on this application.  

Particulars of the Bank draft evidencing payment of the fee for the petition or application made: 

Branch of the Bank on which drawn: 

Name of the issuing branch: 

Demand Draft No [insert DD No.] Date [insert the date on which DD was drawn] 

Amount Rs. 1000/- ……….. 

Mr. S. Shankaran 

Resolution Professional

Naya Kapada Pvt. Ltd. 

Mumbai, dated this 5th day of April, 2024

     VERIFICATION

I, Mr. S. Shankaran, age 45, Indian Inhabitant, the Resolution Professional of Naya Kapada Pvt. Ltd. having his registered office at Brilliant Insolvency Professionals LLP, 46-B, 5th Floor, Ghatkopar (east), Mumbai do hereby state and declare that whatever has been stated in the foregoing paragraphs are true to the best of my knowledge and belief and I believe the same to be true.

Solemnly declared at Mumbai                             )

On this _____ day of August, 2024                     )

                Sd/-

                                                                                       Deponent

              Sd/- 

Advocate for Deponent

How to contest an application for preferential transaction? 

Something that interests me in such cases is how it is contested. 

What are the points on which advocates argue? What documents do they present before the Tribunal in support of their case?  

Shall we see what happens in the courtroom? 

• When such an application is filed, it is first served on the respondents, calling upon them to remain present on the given date. 
• On the first date, the Tribunal grants time to file a reply either denying the claim or justifying the transaction.  

Such a reply is on the lines of how the transaction does not meet the legal criteria of a preferential transaction under the relevant insolvency or bankruptcy laws.

• The Petitioner may file a rejoinder if it deems it necessary. 
• Before the Tribunal, the applicant opens his argument on the basis of the application and produces exhibits in his favour.  
• Following the completion of the applicant’s arguments, the respondent may argue- 

1. The transaction was made as part of regular business dealings and not to unfairly favor any creditor.  
2. There was no intent to prefer one creditor over others; the payment was routine or legally required.  
3. The transaction took place outside the statutory relevant time frame in which preferences can be challenged.  
4. Even if the payment was made, it did not harm the rights of other creditors or disrupt equitable distribution.  

• The counsel for both parties must effectively counter the claim made by highlighting legal precedents and loopholes in their argument
• Needless to say, it is important to present supporting evidence such as bank records, contracts, invoices and expert opinions to establish that the payment was made lawfully.  
• After hearing both parties and examining the evidence placed before it, the court may:  

1. Dismiss the petition – If the court finds the transaction was legitimate and does not qualify as a preferential transaction.  
2. Set aside the transaction– If proven preferential, the court may reverse the transaction, requiring the creditor to return the payment to the debtor’s estate.  

• The NCLT is empowered to order compensation or adjustments to ensure fair distribution among creditors.  

Orders that may be passed by the NCLT in preferential transaction cases

What are the possible orders that could be passed by the NCLT to undo or rectify? To what extent will the NCLT go to make good the damage? What reliefs can be sought? What are the powers of the NCLT in such a case?

Answers to all of these questions are provided in section 44 of the IBC. 

Let’s have a look.  

1. The NCLT may order the return of any property transferred under the preferential transaction to the corporate debtor.
2. If the transferred property has been sold or converted into money, the equivalent amount must be returned to the corporate debtor.
3. Any mortgage, lien or security interest created through the preferential transaction may be released or discharged.
4. The authority may order the beneficiary of the preferential transaction to repay the benefits received to the liquidator or resolution professional.
5. If a guarantor’s debt was discharged or released due to the preferential transaction, the authority can reinstate or adjust its liability.
6. If a secured debt is released as a result of the preference, the authority can restore the security interest on another property.
7. The NCLT may decide how claims arising from preferential transactions should be treated in the insolvency or liquidation process.

It is pertinent to note that- 

1. An order under this section will not:

• Impact third parties who acquired the property in good faith and for fair value.
• Require a person who received a benefit in good faith and for fair value to return the money or property.

For example, if Mr. X, in good faith (that is not being aware that the company is under CIRP) purchases a residential property from the corporate debtor as per the ready reckoner value just 3 months prior to filing such an application for relief under Section 44, such a transaction cannot be considered set aside. This is because Mr. X is a third party who acquired the property in good faith and for adequate value. Even if it is challenged, the tribunal will not pass an order returning the property or its money equivalent. 

2. A person who received a benefit or acquired property through a preferential transaction will be presumed to have acted in bad faith (unless proven otherwise) if:

• They knew about the insolvency proceedings of the corporate debtor.
• They are a related party to the corporate debtor. 

Now if the above example is completely reversed i.e. Mr. X, a director’s father, cognizant of the fact that the company is under CIRP purchased a property for Rs. 1 cr as against the ready reckoner value of Rs. 5 crores, then Mr. X can be held liable to return the property to the resolution professional. 

Conclusion

Avoidance of preferential transactions under the IBC is crucial to ensuring fairness and equitable distribution of proceeds among creditors. The Code prevents undue advantages given to specific creditors before insolvency and empowers the Resolution Professional (RP) to challenge such transactions before the National Company Law Tribunal (NCLT).

From drafting a well-structured application to contesting it with strong legal arguments and evidence, every stage of the process requires careful examination of financial records. The role of the NCLT is pivotal in striking a balance between protecting rights of all the creditors and maintaining commercial equity.

As insolvency laws continue to evolve, the principles of transparency, accountability, and fairness will remain pivotal to corporate resolution and liquidation proceedings. 

But how does a company avoid such transactions? Here are some of the ways- establish effective corporate governance mechanisms which lay out clear financial policies, maintain transaction records, ensure proper documentation of all payments and financial dealings, monitor related-party transactions, follow a fair payment mechanism, seek legal & compliance advice 

By integrating these best practices and reinforcing corporate governance structures, businesses can safeguard stakeholder interests, minimize litigation risks and uphold financial integrity—ensuring long-term sustainability and resilience in the face of insolvency challenges.

FAQs

Are any ancillary documents required to be filed along with the application? 

The NCLT Rules, 2016 prescribed that only an affidavit in support of such an application is needed to be filed. This being a part of ongoing proceeding, one need not file any other documents. 

Is this application listed any differently from the main petition?

No. Rules for listing this application are the same as that of the main petition. You may refer to my article “The Ultimate Guide on initiating CIRP” for more information. 

What is the court fee payable on such an application?

Rs. 1000/-  

What is the “relevant time” for determining a preferential transaction?

A transaction is deemed preferential if it was made:

• Within 2 years before the insolvency commencement date if the recipient is a related party (excluding employees).
• Within 1 year before the insolvency commencement date for unrelated parties.

Can this interim application be withdrawn? 

Yes with the leave of the court. However, it can so happen only before the hearing has commenced. 

You may also note that the tribunal is empowered to impose costs if it deems fit. 

Are all transactions made before insolvency considered preferential?

No, section 43(3) of the IBC provides exceptions. Transactions made in the ordinary course of business or as part of standard financial affairs are not considered preferential.

Who can challenge a preferential transaction?

The resolution professional (RP) or liquidator can apply to the National Company Law Tribunal (NCLT) to have a preferential transaction set aside and the assets restored to the corporate debtor.

Can a third party be affected by a preferential transaction order?

If a third party acquires assets in good faith and for fair value, their rights remain protected under section 44. However, if the buyer has knowledge of the insolvency process or is a related party, the transaction may be reversed.

How does the resolution professional identify preferential transactions?

The RP reviews financial records, transaction history, and payment patterns to detect unusual payments made before insolvency. If a transaction disproportionately benefits a creditor, it can be challenged as preferential.

What is the difference between preferential transactions and fraudulent transactions?

A preferential transaction is when a corporate debtor favours one creditor over others when it comes to making payments. 

A transaction can be called fraudulent when it involves intentional misconduct to defraud creditors or siphon off assets.

How does the avoidance of preferential transactions benefit creditors?

By reversing unfair payments, the IBC ensures that assets are fairly distributed among all creditors. This strengthens creditor confidence in insolvency proceedings and protects the integrity of the process.

Can payments to banks be considered preferential transactions?

Yes, if the payments were made within the relevant look-back period and disproportionately benefited certain banks over others. 

Have promoters ever been held accountable for preferential transactions?

Yes. In several cases, the RP identified that funds were diverted to related parties, which could be treated as preferential. The NCLT has upheld that preferential transactions favouring promoters or related parties must be reversed.

Can employee salary payments be considered preferential transactions?

Not necessarily. Payments made in the ordinary course of business, such as salaries and statutory dues, are generally excluded from the scope of preferential transactions under section 43(3). However, if disproportionate payments were made to specific employees or related parties, they may come under scrutiny.

Can directors be held liable for facilitating preferential transactions?

Yes. In cases where company directors approve payments or transfers that violate the provisions of section 43, they may be held accountable. In several insolvency proceedings, directors have been questioned on why certain creditors were favoured over others.

What happens if a preferential transaction is discovered after the resolution plan is approved?

Even after a resolution plan is approved, the NCLT can still claw back preferential transactions if they are discovered later. The RP or liquidator can apply for reversal, ensuring that creditors who were unfairly paid do not retain an undue advantage.