Preferential Transactions explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
A preference is not a payment the debtor should not have made. It is a payment that moved one creditor ahead of where the statutory waterfall would have placed it — which is why the test is measured against Section 53 rather than against fairness.
The four criteria — Section 43(2)
Preferential transactions are defined as transfers of property or interests by a corporate debtor that favour certain creditors over others. Four elements must be present:
- Transfer of property. There must be a transfer of property or an interest in property from the corporate debtor.
- Beneficiary. The recipient must be a creditor, surety or guarantor.
- Antecedent debt. The transfer must be for the benefit of that person in respect of an antecedent financial debt or operational debt.
- Beneficial position. The transfer must place them in a more advantageous position than they would have been in under the distribution of assets as per section 53.
The first three are usually easy to establish and rarely decide anything. The fourth is where preferential transactions are won and lost.
The question is not whether the payment was justified in commercial terms; it is counterfactual. Take the payment away, put the creditor into the section 53 waterfall at its proper rank, and ask what it would have received. If the payment gave it more than that, it is a preference — however ordinary the payment looked at the time.
This is why an unsecured lender repaid on schedule can be preferred while a secured lender receiving the same amount may not be. Their positions in the waterfall differ, so the same payment has different counterfactuals.
The look-back periods
The window for assessing preferential transactions depends on the relationship between the parties:
| Counterparty | Period before commencement of insolvency |
|---|---|
| Related parties | Two years |
| Unrelated parties | One year |
The exclusions — Section 43(3)
- Transfers made in the ordinary course of business.
- Transfers creating security interests securing new value, provided these are documented and registered with an information utility within 30 days.
The second exclusion is precise and easily lost. New money advanced against fresh security is not a preference, because the estate received something for the security it gave. But the protection is conditional on registration with an information utility within 30 days — a lender that takes security for new lending and does not register it in time loses the exclusion, not merely the evidentiary convenience.
What is and is not preferential in practice
| Payment | Preferential? |
|---|---|
| Repayment of an unsecured family loan during the look-back while secured debt is outstanding | Yes |
| Payment of old operational creditors (not regular business payments for goods or services supplied) while secured or unsecured financial creditors remain unpaid | Yes |
| Payment to an unsecured financial creditor, even as per pre-fixed loan instalments, while secured debt is outstanding | Yes |
| Payment to workmen and employees in the regular course of business | No |
| Payment of any tax against the order of an authority | No |
| Payment of regular taxes, direct or indirect | No |
The instalment example repays study
Paying an unsecured financial creditor exactly as the loan agreement required can still be a preference. Nothing improper happened at the level of the contract — but under section 53 that creditor ranks below secured creditors and workmen, and the payment took it out of the queue ahead of them.
The practical consequence for a distressed company's management is uncomfortable and worth stating: continuing to service unsecured borrowings on their contractual terms while secured debt goes unpaid is one of the most commonly found preferential transactions in a transaction audit. Preferential transactions of that kind are rarely concealed — they are simply not recognised as preferences by the people making them.
Who applies
The resolution professional or liquidator applies to the NCLT to avoid a transaction found to be preferential. The relief follows section 44 — the property is ordinarily vested back in the corporate debtor, though an order may vest it with another party, the resolution professional or the liquidator.
Common mistakes
- Assessing a payment against commercial fairness rather than against the section 53 counterfactual.
- Applying the two-year look-back to an unrelated counterparty.
- Claiming the new value exclusion without registration with an information utility within 30 days.
- Treating contractual instalments to an unsecured lender as automatically safe.