1. INSOLVENCY AND BANKRUPTY CODE, 2016
ASSIGNMENT – 02
1. Preference means a “favour” or “bias” both. So, where a creditor is unduly favoured by the
debtor which affects the collective interest of all creditor in a liquidation scenario, it leads the
creditor to obtain an advantage or irregular payment. Such a transaction is called “preference
transactions”.
Examples of Preference Transactions can be:
a) A grant of a security interest shortly before commencement of proceedings, which may
be found to have favoured unfairly a creditor at the expense of the rest;
b) The payments to a secured creditor, if the secured creditor is undersecured and is paid
in full within the stipulated time period.
c) An impugned transaction to secure a prior debt or on the basis of past consideration.
2. If the liquidator or the RP determines that some certain transactions were made during the
relevant period which were undervalued, he/she shall make an application to the Adjudicating
Authority to declare such transactions as void and reverse the effect of such transaction.
Examples of Undervalued transactions can be:
a) A transaction where the corporate debtor makes a gift to a person.
b) A transaction of transferring of one or more assets, for example machinery, by the
corporate debtor to a person, where the value of consideration is comparatively less
than the value of consideration provided by the corporate debtor, and it has not taken
place in the ordinary course of business.
3. Whenever an entity become an insolvent, certain transactions are to be avoided otherwise it
will affect the financial position of the entity. These transactions are called avoidable
transactions.
The idea behind the concept of avoidable transactions is that the basic objective of the code is
to maximization of the value of assets, availability of credit, improve entrepreneurship and
equitable distribution of assets to all stakeholders and achieve the resolution in a time bound
manner. To achieve this objective, the corporate debtor that is the company which has availed
credit facility from the creditors, should avoid certain financial transactions which will affect the
very basic objective of the code. These transactions are called avoidable transactions. The
entity should avoid these transactions either during the insolvency resolution period or before
certain period.
