Section 43 of IBC : Section 43: Preferential Transactions And Relevant Time

Explanation using Example

Imagine a company, XYZ Pvt Ltd, is facing financial difficulties and is unable to pay its debts. Six months before filing for insolvency, the company decides to repay a loan to one of its directors, who is also a creditor. This director is considered a related party. The repayment is made in full, while other creditors are still unpaid.

Upon reviewing the transactions of XYZ Pvt Ltd, the resolution professional finds this repayment unusual because it favored the director over other creditors. Since the repayment happened within two years before the insolvency commencement date, the resolution professional suspects that this was a preferential transaction as defined in Section 43 of the Insolvency and Bankruptcy Code, 2016.

The resolution professional decides to apply to the Adjudicating Authority to challenge this transaction. If the Authority agrees that it was a preferential transaction, it may order the director to return the money so that it can be distributed equitably among all creditors as per the code's provisions.