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Role of Resolution Professional on “Preferential and other transactions” of Corporate Debtor during Corporate Insolvency Resolution Process

Role of Resolution Professional (RP) on “Preferential and other transactions”

As per Regulation 35A of Insolvency and Bankruptcy Board of India (Insolvency Process for Corporate Persons) Regulations, 2016 (CIRP Regulations), the following action shall be taken by the RP within the time lines mentioned below :

1. Action Item: form an opinion whether the corporate debtor has been subjected to any transaction covered under sections 43, 45, 50 or 66

Timeline: On or before the seventy-fifth day of the insolvency commencement date

2. Action Item: Determine such transaction and intimate to IBBI

Timeline: on or before the one hundred and fifteenth day of the insolvency commencement date

3. Action Item: Make an application to Adjudicating Authority for appropriate relief

Timeline: on or before the one hundred and thirty-fifth day of the insolvency commencement date.

Preferential and other transactions or PUFE transactions:

The following are the PUFE transactions as per Insolvency and Bankruptcy Code, 2016:

A. preferential transactions under section 43;

B. undervalued transactions under section 45;

C. business with intent to defraud creditors or for any fraudulent purpose under section 66

D. extortionate transactions under section 50; and 

Brief on each of above PUFE transactions:

 A.   Section 43: Preferential Transactions

Preference:

Preference is said to be given if –

(a) Transfer of property happens for the benefit of creditor / surety / guarantor; and

(b) Such transfer puts the creditor in beneficial position than what he would have been obtained, in the event of distribution of assets.

Exclusions of Preference:

The following are not considered to be in Preference:

1.  transfer made in the ordinary course of the business or financial affairs of the corporate debtor or the transferee;

2.  any transfer creating a security interest in property acquired by the corporate debtor to the extent that – 

(i) such security interest secures new value and was given at the time of or after the signing of a security agreement that contains a description of such property as security interest, and was used by corporate debtor to acquire such property; and

(ii) such transfer was registered with an information utility on or before thirty days after the corporate debtor receives possession of such property:  Provided that any transfer made in pursuance of the order of a court shall not, preclude such transfer to be deemed as giving of preference by the corporate debtor.

Relevant Time:

1. with related party – 2 years preceding the insolvency commencement date.

2. with others – 1 year preceding the insolvency commencement date.

B.   Section 45: Undervalued Transactions

Transaction is considered to be undervalued when:

1. Gift is given; or

2. Transfer the asset for consideration which is significantly less than the consideration provided by the CD

3. Above transaction is not in ordinary course of business.

Relevant Time:

1. with related party – 2 years preceding the insolvency commencement date.

2. with others – 1 year preceding the insolvency commencement date.

C.     Section 50: Extortionate Transactions

It’s a credit transaction involving the receipt of financial or operational debt.

Reg.5 of CIRP Regulations - A transaction shall be considered extortionate under section 50(2) where the terms:

(1) require the corporate debtor to make exorbitant payments in respect of the credit provided; or

(2) are unconscionable under the principles of law relating to contracts. 

Exemption:

it is clarified that any debt extended by any person providing financial services which is in compliance with any law for the time being in force in relation to such debt shall in no event be considered as an extortionate credit transaction. 

Relevant Period:

During the period within two years preceding the date of commencement of insolvency.

D.   Section 66: Fraudulent transaction

Transaction to defraud the creditors during CIRP.

Relevant period – During CIRP.