Preferential Transactions: Potential Interpretations Based On The Us Bankruptcy Code

The key challenge going forward will be for the NCLT to adopt a purposive interpretation to the IBC provisions on preferential transactions which strikes a balance between preventing unfair payments and ensuring that lenders are willing to continue supporting a distressed business during the time when their support is most required

A fundamental objective of insolvency law is ensuring parri passu (on equal footing) treatment of creditors of the same class. When borrowers become financially distressed, individual creditors are incentivized to press for payment in priority to other creditors to maximize their individual recovery. Borrowers themselves are incentivized to prioritize payments to certain lenders (for example, those who hold a personal guarantee from the promoters of the borrower). Insolvency legislation in various jurisdictions, for example, the United States of America (“US”) and England, describes such payments as “preferences” and allows for insolvency professionals appointed over insolvent debtors to apply to a Court to set them aside and recover the monies paid out into the common pool available to all creditors with unsecured claims in accordance with the legislative order of priority.

The Insolvency and Bankruptcy Code, 2016 (“IBC”) has introduced provisions prohibiting “preferential transactions” in Indian insolvency legislation.2 Resolution professionals have a duty to report such transactions to the committee of creditors and to file applications to set them aside.3 The US Bankruptcy Code (“US Bankruptcy Code”) has contained similar provisions for a number of years. This article considers the preferential transaction provisions in the IBC and how these might be interpreted based on the US Bankruptcy Code and decisions of the US Courts. It also briefly considers additional defenses available to creditors in the US, which might be argued in India.

“Preferential Transactions” Provisions in the IBC