IBC Section 165: Preference transactions

Section 165 of Insolvency and Bankruptcy Code, 2016: Preference transactions

Official Bare Act Text

Override / Mandate Mens Rea (Intent) Actus Reus (Conduct) Punishment Limitation Monetary

(1) The bankruptcy trustee may apply to the Adjudicating Authority for an order under this section if a bankrupt has given a preference to any person.

(2) The transaction giving preference to an associate of the bankrupt under sub-section (1) should have been entered into by the bankrupt with the associate during the period of two years ending on the date of the application for bankruptcy.

(3) Any transaction giving preference not covered under sub-section (2) should have been entered into by the bankrupt during the period of six months ending on the date of the application for bankruptcy.

(4) The transaction giving preference under sub-section (2) or under sub-section (3) should have caused the bankruptcy process to be triggered.

(5) On the application of the bankruptcy trustee under sub-section (1), the Adjudicating Authority may-

(a) pass an order declaring a transaction giving preference void;

(b) pass an order requiring any property transferred in respect of a transaction giving preference to be vested with the bankruptcy trustee as a part of the estate of the bankrupt; and

(c) pass any other order it thinks fit for restoring the position to what it would have been if the bankrupt had not entered into the transaction giving preference.

(6) The Adjudicating Authority shall not pass an order under sub-section (5) unless the bankrupt was influenced in his decision of giving preference to a person by a desire to produce in relation to that person an effect under clause (b) of sub-section (8).

(7) For the purpose of sub-section (6), if the person is an associate of the bankrupt, (otherwise than by reason only of being his employee), at the time when the preference was given, it shall be presumed that the bankrupt was influenced in his decision under that sub-section.

(8) For the purposes of this section, a bankrupt shall be deemed to have entered into a transaction giving preference to any person if-

(a) the person is the creditor or surety or guarantor for any debt of the bankrupt; and

(b) the bankrupt does anything or suffers anything to be done which has the effect of putting that person into a position which, in the event of the debtor becoming a bankrupt, will be better than the position he would have been in, if that thing had not been done.

Legal Commentary & Landmark Judgments: Section 165

Section 165 regulates the clawback of Preference Transactions where the bankrupt transferred assets or gave collateral to certain creditors to the detriment of the collective body.

Constituents of Preference: Occurs where a transfer of property or interest puts a creditor, surety, or guarantor in a position better than they would have occupied in the statutory distribution.
Desire to Produce Preference: The bankrupt must have been influenced by a desire to produce the preferential effect (presumed where the transaction is with an associate/related party).
Look-Back Window: Covers transactions entered into within two years for associate/related parties and six months for third-party creditors prior to the bankruptcy filing date.

Key Landmark Precedents:

Anuj Jain v. Axis Bank Ltd. (2020) 8 SCC 401: The Supreme Court clarified the ingredients of preferential transactions, holding that putting a creditor in a superior position during the look-back window triggers statutory clawback.
Swiss Ribbons Pvt. Ltd. v. Union of India (2019) 4 SCC 17: Affirmed that preference clawbacks prevent favoured creditors from raiding insolvent assets shortly before formal bankruptcy.

Courtroom Practice & Strategic Litigation Guidance:

When pursuing associate preferences under Section 165, trustees enjoy a statutory presumption under Section 165(3); the burden shifts entirely to the respondent associate to prove the transaction was in the ordinary course of business.