Section 165 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.
Section 165 lets the bankruptcy trustee ask the Adjudicating Authority to undo a preference: a transaction that puts a creditor, surety or guarantor of the bankrupt in a better position than he would otherwise have been in. The look-back is six months before the application for bankruptcy, and two years if the person preferred is an associate.
The article follows the IBBI consolidated text of the Code amended up to 12 August 2021 (the "consolidated text").
A preference is something the bankrupt does, or suffers to be done, that puts a creditor, surety or guarantor in a better position than he would have had if it had not been done. The trustee may challenge it if it was made within six months of the application for bankruptcy, or within two years for an associate, and it caused the bankruptcy process to be triggered. The Adjudicating Authority must find that the bankrupt was influenced by a desire to produce that effect; for an associate this is presumed.
Sub-section (1): the trustee's application
"The bankruptcy trustee may apply to the Adjudicating Authority for an order under this section if a bankrupt has given a preference to any person." As in section 164, only the trustee applies; the recipient is "any person". The sections work as a pair: section 164 is on undervalued transactions (see Section 164), and section 165 on preferences. If you need to review a payment or security given shortly before a bankruptcy application, a short look by our financial and legal due diligence team can set out the dates and the parties.
Sub-sections (2) to (4): the time limits
| Sub-section | Who received the preference | Period |
|---|---|---|
| (2) | An associate of the bankrupt | Entered into during the period of two years ending on the date of the application for bankruptcy |
| (3) | Any other person, "not covered under sub-section (2)" | Entered into during the period of six months ending on the date of the application for bankruptcy |
| (4) | Either | The transaction "should have caused the bankruptcy process to be triggered" |
Section 79(2) defines "associate" for Part III. The look-back periods in the Code are fixed as printed, two years and six months; the text does not give a power to change them.
Sub-section (5): the orders
On the trustee's application, the Adjudicating Authority "may":
- (a) pass an order declaring a transaction giving preference void;
- (b) pass an order requiring any property transferred in respect of a transaction giving preference to be vested with the bankruptcy trustee as part of the estate of the bankrupt; and
- (c) pass any other order it thinks fit for restoring the position to what it would have been if the bankrupt had not entered into the transaction giving preference.
These mirror section 164(4).
Sub-sections (6) and (7): the state of mind
Sub-section (6): "The Adjudicating Authority shall not pass an order under sub-section (5) unless the bankrupt was influenced in his decision of giving preference to a person by a desire to produce in relation to that person an effect under clause (b) of sub-section (8)."
The bankrupt's desire is therefore a condition to relief. The effect referred to is in sub-section (8)(b): putting the person in a better position.
Sub-section (7): "if the person is an associate of the bankrupt, (otherwise than by reason only of being his employee), at the time when the preference was given, it shall be presumed that the bankrupt was influenced in his decision under that sub-section."
Note the carve-out: a person who is an associate only because he is the bankrupt's employee does not attract the presumption. For other persons, nothing in the text creates a presumption; the point must be established, and the text does not say how.
Sub-section (8): what counts as a preference
A bankrupt is deemed to have entered into a transaction giving preference to a person if:
| Clause | Requirement |
|---|---|
| (a) | The person is the creditor or surety or guarantor for any debt of the bankrupt; and |
| (b) | The bankrupt does anything or suffers anything to be done which has the effect of putting that person into a position which, in the event of the debtor becoming a bankrupt, will be better than the position he would have been in, if that thing had not been done |
"Guarantor" and "surety" are the statutory words. A payment to a creditor out of turn, a security given for an old debt, or a payment which relieves a guarantor are examples of acts that could have such an effect; whether any particular act does so depends on the facts and the comparison in clause (b). For the underlying law of guarantees, the site has posts on the contract of guarantee under the Indian Contract Act, 1872; please check the current law for the corresponding provisions of that Act.
A worked example
Four months before a bankruptcy application is filed against him, Dhruv Mehta repays in full an unsecured loan he owes to his spouse Pallavi, while other creditors remain unpaid. A person who belongs to the immediate family of the debtor is an associate under section 79(2), and the immediate family includes the spouse (section 79(17)); the period that applies is therefore two years (sub-section (2)). The payment puts her in a better position than she would have been in if Dhruv had become bankrupt without making it (sub-section (8)(b)), and under sub-section (7) it is presumed that he was influenced in his decision by the desire described in sub-section (6).
Had Dhruv paid an unrelated supplier four months before the application, the period would be six months under sub-section (3), and no presumption of desire would arise: the trustee would have to bring the case within sub-section (6). The names and facts are invented, and this is not a prediction of any outcome.
Interaction with other sections
- Section 166 limits the effect of an order against good-faith, for-value, no-notice holders: Section 166.
- Extortionate credit is a separate head in section 167: Section 167.
- The Code also has a live post on avoidance transactions generally: avoidance transactions: preferential, undervalued, fraudulent and extortionate.
Law around this section
The Amendment Act, 2026 (No. 6 of 2026) has no clause that amends section 165. It comes into force on the date or dates the Central Government notifies; the notification is not in the texts consulted, so check whether any change to a neighbouring provision, for example the new section 164A, has been notified.
For personal guarantors to corporate debtors, the Insolvency and Bankruptcy Board of India (Bankruptcy Process for Personal Guarantors to Corporate Debtors) Regulations, 2019 (the copy consulted is amended up to 02-06-2026) apply alongside Part III; no rules or regulations for other individuals or for partnership firms are in the texts consulted.
Amendments and notifications made after 12 August 2021, other than the Amendment Act, 2026, are not in the texts consulted and should be checked.
Need help reviewing a payment or security before a bankruptcy?
Creditors who were paid, guarantors who were released and trustees looking at the last months of a bankrupt's affairs all need the dates and the relationship right. Our team can help you review them through a financial and legal due diligence engagement.
Key takeaways
- The trustee applies; the recipient may be a creditor, surety or guarantor.
- The period is six months before the application, or two years for an associate.
- The transaction should have caused the bankruptcy process to be triggered.
- The Adjudicating Authority must find that the bankrupt was influenced by a desire to produce the better-position effect; this is presumed for an associate who is not one only as an employee.
- Orders: void, vest property with the trustee, or restore the position.
Read next
- Section 166 of the Insolvency and Bankruptcy Code, 2016: effect of orders on undervalued and preference transactions
- Section 164 of the Insolvency and Bankruptcy Code, 2016: undervalued transactions of a bankrupt
- Section 167 of the Insolvency and Bankruptcy Code, 2016: extortionate credit transactions of a bankrupt
- Avoidance transactions under IBC: sections 43 to 51
Disclaimer: Based on the IBBI consolidated text of the Insolvency and Bankruptcy Code, 2016 amended up to 12 August 2021 and on the Insolvency and Bankruptcy Code (Amendment) Act, 2026 (No. 6 of 2026), which comes into force on the date or dates notified by the Central Government, as consulted on 2 October 2026. It explains the words of the statute only; commencement notifications, other amendments made after 12 August 2021, notified thresholds, the rules and IBBI regulations, and the way tribunals and courts apply these sections should be checked. This article is general information, not legal advice; check the official text before acting.