Preferential transaction under the Insolvency and Bankruptcy Code, 2016 is a transfer of property or an interest in property by a corporate debtor to a creditor, surety, or guarantor that has the effect of placing that party in a more beneficial position than it would have occupied in a distribution under Section 53 of the Code. Under Indian law, preferential transactions are governed by Section 43 of the IBC, with a lookback period of one year from the insolvency commencement date, extended to two years where the beneficiary is a related party.
Legal definition
Section 43(2) of the Insolvency and Bankruptcy Code, 2016 provides:
A corporate debtor shall be deemed to have given a preference, if —
(a) 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 liability owed by the corporate debtor; and
(b) the transfer under clause (a) has the effect of putting such creditor or a surety or a guarantor in a beneficial position than it would have been in the event of a distribution of assets being made in accordance with section 53.
Section 43(4) provides the lookback period:
A preference shall be relevant if it is given during the period of one year preceding the insolvency commencement date, or during the period of two years preceding the insolvency commencement date in the case of a related party.
Section 44 sets out the orders the NCLT may pass upon finding a preferential transaction, including requiring any property transferred to be vested back in the corporate debtor and requiring any benefits received to be repaid.
How courts have interpreted this term
Anuj Jain (IRP for Jaypee Infratech Ltd.) v. Axis Bank Ltd. (2020) 8 SCC 401
The Supreme Court delivered the leading judgment on preferential transactions under the IBC. The case concerned mortgages created by Jaypee Infratech Ltd. (JIL) over its properties in favour of lenders of its parent company JAL. The Court held that these mortgages were preferential transactions because: (i) there was a transfer of interest in property by JIL; (ii) the transfer was for the benefit of JAL's creditors on account of JAL's antecedent debts; and (iii) the effect was to place JAL's creditors in a more beneficial position than they would have occupied under a Section 53 distribution. The Court emphasised that the test is objective — intent to prefer is not a requirement under Indian law, unlike under English insolvency law.
Jaypee Infratech Ltd. v. Axis Bank Ltd. (NCLAT, 2018)
The NCLAT initially reversed the NCLT's avoidance order, holding that mortgages by JIL did not constitute preferential transactions. The Supreme Court overturned the NCLAT, reinstating the NCLT's order and providing authoritative guidance on the interpretation of Section 43.
Srikanth Dwarakanath v. IDBI Bank (NCLAT, 2019)
The NCLAT held that the two-year lookback period for related parties is triggered by the definition of "related party" under Section 5(24) of the IBC. The determination of related-party status is based on the relationship existing at the time of the transaction, not at the time the avoidance application is filed.
Why this matters
Preferential transactions are the most commonly challenged category of avoidance transactions in Indian insolvency practice. They target the specific mischief of a corporate debtor paying one creditor in preference to others during the period immediately preceding insolvency, when the debtor is already in financial difficulty. The objective is to ensure the fundamental principle of pari passu distribution — that creditors of the same class are treated equally.
For practitioners, the key distinction between Indian and English insolvency law is that Section 43 does not require proof of subjective intent to prefer. The test is purely objective: did the transaction have the effect of placing one creditor in a more beneficial position? This makes it considerably easier for the resolution professional to challenge preferential transactions in India than in jurisdictions that require proof of a "desire to prefer."
A critical practical issue is the distinction between ordinary-course transactions and preferential transactions. Section 43(3) creates a safe harbour for transfers made in the "ordinary course of the business or financial affairs of the corporate debtor or the transferee." This exception protects routine business payments from being clawed back, but it has given rise to extensive litigation over what constitutes an "ordinary course" transaction.
Related terms
Broader concept:
Sibling categories:
Frequently asked questions
Does the resolution professional need to prove intent to prefer?
No. Unlike English insolvency law, Section 43 of the IBC does not require proof that the corporate debtor had a subjective desire to prefer the creditor. The test under Indian law is purely objective: whether the transaction had the effect of placing the creditor in a more beneficial position than it would have occupied under a Section 53 distribution.
What is the lookback period for preferential transactions?
One year from the insolvency commencement date for transactions with unrelated parties. Two years for transactions where the beneficiary is a related party as defined under Section 5(24) of the IBC.
Can routine business payments be challenged as preferential?
Section 43(3) provides a safe harbour for transfers made in the ordinary course of business or financial affairs of the corporate debtor or the transferee. Regular supplier payments, rent payments, and other routine commercial transactions are generally protected by this exception, unless the circumstances indicate they were made outside the normal pattern.
This entry is part of the Veritect Indian Legal Glossary, a comprehensive reference of Indian legal terminology grounded in statutory text and judicial interpretation.
Last updated: 2026-03-27. Veritect provides this content for informational purposes and does not constitute legal advice.