IBC Section 166: Effect of order

Section 166 of Insolvency and Bankruptcy Code, 2016: Effect of order

Official Bare Act Text

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

(1) Subject to the provision of sub-section (2), an order passed by the Adjudicating Authority under section 164 or section 165 shall not,-

(a) give rise to a right against a person interested in the property which was acquired in an undervalued transaction or a transaction giving preference, whether or not he is the person with whom the bankrupt entered into such transaction; and

(b) require any person to pay a sum to the bankruptcy trustee in respect of the benefit received from the undervalued transaction or a transaction giving preference, whether or not he is the person with whom the bankrupt entered into such transaction.

(2) The provision of sub-section (1) shall apply only if the interest was acquired or the benefit was received-

(a) in good faith;

(b) for value;

(c) without notice that the bankrupt entered into the transaction at an undervalue or for giving preference;

(d) without notice that the bankrupt has filed an application for bankruptcy or a bankruptcy order has been passed; and

(e) by any person who at the time of acquiring the interest or receiving the benefit was not an associate of the bankrupt.

(3) Any sum required to be paid to the bankruptcy trustee under sub-section (1) shall be included in the estate of the bankrupt.

Legal Commentary & Landmark Judgments: Section 166

Section 166 specifies the extensive restorative orders that the Adjudicating Authority may pass upon finding a transaction to be undervalued or preferential.

Restoration of Estate Property: The Authority may direct that any property transferred be re-vested in the bankruptcy trustee or that the transferee pay monetary compensation.
Release of Security and Guarantees: May order the release or discharge of any mortgage, pledge, or personal guarantee created under the avoided transaction.
Protection of Subsequent Bona Fide Holders: Protects subsequent purchasers who acquired the property from the initial transferee in good faith and for valuable consideration without notice.

Key Landmark Precedents:

Anuj Jain v. Axis Bank Ltd. (2020) 8 SCC 401: The Supreme Court held that the restorative jurisdiction under avoidance provisions is broad and aimed at undoing the exact financial advantage unlawfully gained.
Phoenix ARC Pvt. Ltd. v. Spade Financial Services Ltd. (2021) 3 SCC 475: Held that tribunal orders under avoidance sections must place the estate and creditors in the precise position they would have enjoyed but for the vitiated transaction.

Courtroom Practice & Strategic Litigation Guidance:

Trustees should seek an interim injunction under Section 166 restraining the respondent transferee from further alienating, encumbering, or creating third-party rights in the contested property pending final disposal of the avoidance application.