The Insolvency and Bankruptcy Code (IBC), 2016, is a law in India that organizes and improves the process of handling financial troubles for individuals, companies, and partnership firms when they can’t pay their debts. It aims to make the process smoother, fairer, and more effective in recovering money or assets for those owed money (creditors). Section 43 is a key part of this law, found in Part II, Chapter III, which focuses on how a company’s assets are handled when it’s being shut down or restructured (liquidation process). This section’s main job is to stop a struggling company from unfairly favoring some creditors, guarantors, or sureties over others, ensuring that the company’s assets are shared fairly according to the rules in Section 53 (which explains the order in which creditors get paid).
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What is Section 43 of IBC, 2016?
Section 43 of the IBC, 2016, deals with “preferential transactions” situations where a company, before it officially goes insolvent, makes payments or transfers assets to certain people or entities in a way that gives them an unfair advantage over other creditors. This section became active on December 15, 2016, as part of a larger set of rules (Sections 33 to 54) in the IBC. Its purpose is to make sure all creditors are treated fairly when a company’s assets are divided up during insolvency proceedings.
What Happens Under Section 43(1)?
This part explains that if the person managing the insolvency process (called a liquidator or resolution professional) notices that the company made unfair payments or transfers before it went insolvent, they can ask a special court (called the Adjudicating Authority) to cancel those transactions. These unfair actions are called preferential transactions because they give some people an advantage over others who are also owed money.
For example, imagine a company that’s struggling financially suddenly pays off a big loan to a friend of the owner, even though other creditors are still waiting to be paid. This could be seen as unfair, and the resolution professional can step in to challenge it.
What Makes a Transaction “Preferential”? (Section 43(2))
A transaction is considered preferential (or unfair) if it meets these conditions:
The company gives money, property, or some kind of benefit to a creditor (someone it owes money to), a surety (someone who guarantees the company’s debt), or a guarantor (someone who promises to pay if the company can’t).
This payment or transfer is for a debt that existed before the transaction (an old debt, like a loan from months or years ago).
The result of this transaction is that the person who received the payment or benefit ends up in a better position than other creditors when the company’s assets are divided up under Section 53 (the rule that decides who gets paid first).
For example, if a company pays off one creditor in full while others get nothing, that creditor is in a better spot, which might be unfair to the others.
What Transactions Are Not Considered Preferential? (Section 43(3))
Not every transaction is seen as unfair. Some are considered normal or legitimate and are excluded from being treated as preferential. These include:
Regular business activities: Payments or transfers that happen as part of the company’s normal day-to-day operations, like paying for supplies, utilities or employee salaries, are not counted as preferential. This ensures that routine business isn’t disrupted by the insolvency process.
Transfers for new loans or value: If the company creates a security interest (like a lien on property) to secure a new loan, or if it receives new money, goods, or services in exchange for the transfer, this is okay. However:
The new loan or value must be fresh (not just rearranging or paying off old debts).
The transaction must be properly registered with the authorities within 30 days.
For example, if a company takes out a new loan and uses its property as security (collateral), and this is properly documented, it’s not considered preferential because it’s a fair exchange.
When Did the Transaction Happen? (Section 43(4))
Section 43 sets specific time periods for checking if a transaction is preferential. These timeframes depend on who received the payment or benefit:
For close associates (related parties): The insolvency team can look at transactions that happened up to two years before the company officially became insolvent. Related parties include people or entities closely connected to the company, like its owners, subsidiaries, or associates, but not regular employees.
For everyone else: The team checks transactions from the past one year before insolvency.
This difference exists because transactions with close associates (like family or business partners of the company’s owners) are more likely to involve favoritism, so they’re scrutinized over a longer period. For example, if a company gave a big payment to a related company two years before insolvency, that could be reviewed. But for an unrelated supplier, only payments from the last year would be checked.
Key Terms to Understand
To make Section 43 clearer, here are some important terms:
Related Party: As defined in Section 5(24) of the IBC, this includes people or entities with significant control or connection to the company, like its promoters, subsidiaries, or associates. Regular employees (who don’t have a controlling role) are not counted as related parties.
Antecedent Debt: This means a debt (like a loan or unpaid bill) that the company owed before the transaction happened. Section 43 focuses on payments for these older debts.
New Value: When a company gets something new, like fresh cash, goods, or services in exchange for a transfer, it’s called “new value.” This must be genuinely new and not just a way to cover up an old debt.
Learn more about Corporate Insolvency Resolution
Challenges in Applying Section 43
Applying Section 43 of the IBC, 2016, can be challenging due to complex transaction histories in large companies, requiring meticulous record-keeping. Disputes over identifying related parties and determining whether transactions are preferential often necessitate judicial intervention. Using Section 43 can be tricky in practice:
Record-Keeping: Companies need to keep detailed records of their transactions, especially for the two-year period involving related parties. If records are messy, it’s hard for the resolution professional to figure out what happened.
Complex Transactions: Large companies often have complicated financial dealings, making it tough to decide if a transaction was preferential or part of normal business.
Related Parties: Figuring out who counts as a “related party” can lead to disputes, especially in big organizations with many connections.
Judicial Interpretations on Section 43 of IBC
Courts in India have helped clarify how Section 43 works. One important case is Anuj Jain IRP for Jaypee Infratech Ltd. v. Axis Bank Ltd. (2020), where the Supreme Court gave a clear process for resolution professionals:
Look at transactions from up to two years back for related parties or one year back for others.
Identify whether the people involved are related (using Section 5(24)) or unrelated.
Check if the transaction unfairly benefited someone for an old debt.
This case emphasized that following this process carefully ensures fairness and saves time during insolvency proceedings.
Summary
Section 43 of the IBC, 2016, is a powerful tool to prevent companies from unfairly favoring certain creditors before insolvency. It allows the resolution professional to cancel transactions that give some people an unfair advantage, ensuring that assets are shared fairly under Section 53. The section balances fairness with practical needs by excluding normal business transactions and new loans (if properly registered). It also sets clear timeframes: two years for close associates and one year for others. While the rules are straightforward in theory, applying them can be complex, especially with large companies or unclear records. Courts, like in the Jaypee Infratech case, have provided guidance to make the process clearer.
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Section 43 of IBC, 2016: FAQs
Q1. What is Section 43 of the IBC Act?
Section 43 of the IBC, 2016, addresses preferential transactions, allowing the resolution professional to cancel unfair payments or transfers that favor certain creditors before insolvency, ensuring fair asset distribution.
Q2. What is the minimum amount for insolvency?
For corporate insolvency under the IBC, the minimum default amount is ₹1 crore. For individuals and partnerships, it’s ₹1,000, as per Section 4.
Q3. What is the meaning of avoidance of transactions?
Avoidance of transactions refers to canceling or reversing unfair transactions (like preferential, undervalued, or fraudulent ones) made by a company before insolvency to protect creditors’ interests.
Q4. What is Section 42 of the IBC?
Section 42 allows creditors or the resolution professional to appeal orders related to preferential or undervalued transactions before the Adjudicating Authority within 14 days.
Q5. What are avoidable transactions in IBC?
Avoidable transactions in IBC include preferential transactions (Section 43), undervalued transactions (Section 45), fraudulent transactions (Section 66), and extortionate credit transactions (Section 50) made before insolvency.
