NCLAT Clarifies that Accounting Set-Offs May Constitute Preferential Transactions under s. 43 of the IBC

Introduction

Preferential transactions under the Insolvency and Bankruptcy Code, 2016 (‘IBC’), often raise complex questions where commercial arrangements between related parties intersect with the principle of equitable distribution among creditors. The issue becomes particularly nuanced when such transactions are structured through accounting adjustments rather than actual fund transfers, raising doubts as to whether they fall within the ambit of 'transfer of property' under s. 43. The National Company Law Appellate Tribunal (‘NCLAT’), in Atul Babulal Prajapati & Anr. v. Suhas Dinkar Bhattbhatt & Ors.[i], engages with this question by examining whether accounting adjustments that extinguish the corporate debtor's (‘CD’) receivables in favour of related parties constitute preferential transactions, and clarifies that actual fund transfer is not necessary for invoking s. 43 where such transactions result in the extinguishment of receivables.

Brief Facts

• The CD, WSH Pvt. Ltd., promoted by the Appellants (suspended directors/promoters), was admitted into the corporate insolvency resolution process (‘CIRP’) on 01.02.2021, pursuant to which a forensic audit was conducted for FY 2018-2019 and 2019-2020.

• The forensic audit revealed that the  CD had offset receivables from Wholesale Hub LLP against payables due to the Appellant’s proprietorship concern, without routing through the CD’s bank account, resulting in diversion and extinguishment of receivables, amounting to Rs. 2,00,50,141/-. The adjustment was effected through accounting entries dated 30.06.2019, extinguishing the CD’s receivable.

• The resolution professional filed I.A. No. 556 of 2021 under ss. 43, 45, and 66 of the IBC seeking avoidance of various transactions, including preferential transactions.

• The National Company Law Tribunal (‘NCLT’), by order dated 01.10.2024, partially allowed the application, holding the aforesaid transaction to be preferential and directing repayment of Rs. 2,00,50,000/-, while rejecting other reliefs.

• The said order was challenged before the NCLAT, wherein it was contended that the impugned transaction was merely an accounting adjustment without any actual transfer of funds, did not confer any preferential benefit, and could not be brought within the ambit of s. 43 of the IBC, including on the grounds that it fell within the ordinary course of business and outside the relevant look-back period.

Held

• The NCLAT upheld the findings of the NCLT and held that the Appellant, being a director and person in control of multiple entities, including Wholesale Hub LLP and his proprietorship concern, squarely falls within the ambit of a ‘related party’ under s. 5(24) of the IBC.

• The NCLAT observed that the impugned transaction dated 30.06.2019, as reflected in the ledger accounts and confirmed by the forensic audit, falls within the two-year look-back period preceding the insolvency commencement date, thereby satisfying the requirement under s. 43(4) of the IBC.

• The NCLAT rejected the contention that no 'transfer' had taken place and held that a transfer under s. 43 is not confined to the actual movement of funds. It was observed that the extinguishment of receivables through accounting set-off entries constitutes a transfer of property or an interest thereof within the meaning of s. 43(2)(a).

• The Tribunal further clarified that extinguishment or reduction of an enforceable receivable constitutes transfer of an ‘interest in property’ under s. 43(2)(a).

• The NCLAT further held that the transaction satisfied both limbs of s. 43(2), since the adjustment was in respect of an antecedent liability, and had the effect of placing the Appellant in a more beneficial position than other creditors, particularly when several creditors remained unpaid.

• The NCLAT noted that such an adjustment resulted in the extinguishment of a valuable receivable of the CD, thereby reducing the asset pool available for distribution under s. 53 of the IBC and prejudicing the interests of other creditors.

• The NCLAT also observed that such conduct, involving diversion of receivables for the benefit of a related party, operated to the detriment of creditors and attracted scrutiny not only under s. 43, but also in the context of ss. 66(1) and 66(2) of the IBC.

• In view of the above, the NCLAT held that the impugned transaction was rightly classified as a preferential transaction, found no infirmity in the order of the NCLT, and accordingly dismissed the appeal.

Our Analysis

The judgment reinforces and extends the existing interpretation of avoidance powers under the IBC, particularly the ‘substance over form’ doctrine. The NCLAT’s primary contribution in this ruling lies in its rejection of the so-called 'physicality defence,' wherein the Appellants contended that the absence of a cash movement through banking channels precluded a 'transfer of property' under s. 43. By holding that the extinguishment of a receivable through a book adjustment constitutes a transfer of an interest in property, the Tribunal clarifies the scope of transactions that may fall within avoidance jurisdiction, including 'paper-only' transactions.

This interpretation aligns with the definition of ‘property’ under s. 3(27) of the IBC, which includes actionable claims. Accordingly, the extinguishment of a CD’s receivable through such accounting adjustments results in a reduction of the asset pool available for distribution among creditors. Where such an adjustment operates in favour of a related party, it may confer a preferential advantage by placing that party in a more beneficial position than other creditors, subject to the requirements of s. 43 of the IBC.

The ruling further reflects that the determination of a preferential transaction turns on its effect on the creditor pool, rather than the form or structure of the transaction, thereby aligning the interpretation of s. 43 with its core objective of equitable distribution.

Further, the judgment provides a necessary refinement of the ‘ordinary course of business’ exception under s. 43(3). The NCLAT indicates that the defence requires more than demonstrating that the underlying trade was routine; the method of settlement must also conform to established commercial and financial practices. In the present case, the multilateral set-off between entities under common control, lacking formal corporate authorisation and bypassing banking channels, was rightly treated as an extraordinary arrangement rather than a routine commercial transaction.

This approach signals that internal accounting adjustments between related entities during the look-back period are likely to invite heightened scrutiny, particularly where they impact the asset pool of the corporate debtor. The Tribunal’s observations in the context of s. 66 further underscores that such transactions, if structured to the detriment of creditors, may attract additional consequences under the IBC’s anti-avoidance framework.

End Notes

[i] Company Appeal (AT) (Insolvency) No. 2273 of 2024 dated 25.03.2026

Authored by the Editorial Board at Metalegal Advocates. Views expressed are strictly personal and do not constitute legal opinion.