THE INSOLVENCY AND BANKRUPTCY CODE (AMENDMENT) ACT, 2026 PART – V

Relevant time for preferential transactions

Section 43 of the Code deals with the preferential transactions and relevant time.  The Act made some amendments to Section 43(4) of the Code.  After incorporating the amendments Section 43(4) of the Act provides that a preference shall be deemed to be given at a relevant time, if-

• It is given to a related party (other than by reason only of being an employee), during the period starting from 2 years preceding the initiation date and ending on the insolvency commencement date; or
• a preference is given to a person other than a related party during the period starting from] one year preceding the initiation date and ending on the insolvency commencement date.

Amendment to Section 46

The Act made amendments to Section 46 including its heading.   After incorporating the amendments of the Act this section will read as below-

Relevant period for undervalued transactions

46. (1) In an application for voidance of an undervalued transaction, the liquidator or the resolution professional, as the case may be, shall demonstrate that-

(i) such transaction was made with any person within the period starting from 1 year preceding the initiation date and ending on the insolvency commencement date; or

(ii) such transaction was made with a related party within the period starting from two years preceding the initiation date and ending on the insolvency commencement date.

(2) The Adjudicating Authority may require an independent expert to assess evidence relating to the value of the transactions mentioned in this section.

Application by creditors, member or partner in case of certain transactions or trading

The Act substituted a new section for the existing section 47.  The newly substituted section provides where a preferential transaction, an undervalued transaction, an extortionate credit transaction or fraudulent or wrongful trading has occurred and the liquidator or the resolution professional,  has not reported it to the Adjudicating Authority, a creditor, either by itself or jointly with other creditors, a member, or a partner of the corporate debtor,  may make an application to the Adjudicating Authority to pass orders in accordance with the respective provisions of the Code.

The Adjudicating Authority, after examination of the application made, is satisfied that the relevant transaction or trading under Section 47(1) has occurred, it shall pass an order, for the avoidance of such transaction or trading,  as if such an application had been filed by a liquidator or a resolution professional in accordance with the relevant provisions of the Code.

After passing an order if the Adjudicating Authority is satisfied that the liquidator or the resolution professional, after having sufficient information or opportunity to avail information of such transaction or trading, did not report such transaction or trading to the Adjudicating Authority, it shall pass an order requiring the Board to initiate disciplinary proceedings against the liquidator or the resolution professional.

Amendment to Section 52

The Act substituted a new section 52(2) and section 52(8) to the existing section 52(2) and 52(8) respectively and also inserted a new explanation to the Section 52.

The newly substituted Section 52(2) provides that where the secured creditor intends to realise the security interest under section (1)(b), he shall inform the liquidator of such security interest and identify the asset subject to such security interest to be realised within a period of 14 days from the liquidation commencement date, and if he fails to do so, such security interest shall be deemed to be relinquished to the liquidation estate.  

If more than one secured creditor has any security interest over an asset of the corporate debtor, no secured creditor shall be entitled to realise its security interest, unless the realisation is agreed upon by the secured creditors representing not less than sixty-six per cent. of the value of all claims that are secured by such security interests.

The newly substituted Section 52(8) provides that the amount of insolvency resolution process, costs and the liquidation costs, and workmen’s dues as referred to in clause (a) and sub-clause (i) of clause (b) of sub-section (1) of section 53 respectively, shall be deducted from the proceeds of any realisation by the secured creditors who realise their security interests in the manner provided in this section, and they shall transfer such amounts to the liquidator to be included in the liquidation estate in such manner, within such period and subject to such conditions to secure the payment as may be specified.

The newly inserted explanation declares that the provisions of sub-section (2) as amended by the Act shall not apply to the liquidation process initiated on and before the date of commencement of the Act.

Distribution of assets

Section 53 of the Code provides the procedure of distribution of assets to the eligible stakeholders in liquidation process.  The Amendment inserted explanations to Section 53(1)(b)(ii),Section 53(1)(e)(i) and illustrations to Section 53(2) of the Code.

The newly inserted explanation to Section 53(1)(b)(ii) clarified that the provisions of sub-section (2) as amended by the Act shall not apply to the liquidation process initiated on and before the date of commencement of the Act.

The newly inserted explanation Section 53(1)(e)(i) clarified that  any amount, whether or not a security interest is created to secure such amount by an act of two or more parties or merely by operation of law, due to the Central Government and the State Government, in respect of the whole or any part of the period of 2 years preceding the liquidation commencement date, shall be distributed under this sub-clause and any remaining amount, whether or not such security interest is created to secure the amount, due to the Central Government and the State Government, shall be distributed under clause (f).

The newly inserted illustrations to Section 53(2) provide as detailed below-

Illustration I - The workmen and the secured creditors of the corporate debtor have a contractual arrangement which provides that in the event of insolvency or liquidation of the corporate debtor, all debt owed to the secured creditors shall be cleared before clearing any debt owed to the workmen. Such a contractual arrangement shall be disregarded.

Illustration II - “X”, a secured creditor of the corporate debtor, has a contractual arrangement with “Y”, another secured creditor of the corporate debtor. As per the contractual arrangement, in the event of insolvency or liquidation of the corporate debtor, the debt owed to “X” shall be cleared before clearing any debt owed to “Y”. Such a contractual arrangement shall not be disregarded.

Dissolution of corporate debtor

Section 54 of the Code provides the procedure for dissolution of the corporate debtor.  The Act substituted a new section 54(1) for the existing section 54(1); inserted a new section 54(2A) and 54(2B) and inserted a new section 54(4).

The newly substituted section 54(1) provides that the liquidator shall completely liquidate the assets of the corporate debtor and make an application for its dissolution to the Adjudicating Authority within a period of 180 days from the liquidation commencement date in such manner as may be specified.  The Adjudicating Authority may, on an application by the liquidator along with sufficient reasons, extend the stipulated time by such period as it deems fit, but not exceeding a period of 90 days.

Section 54(1A) provides that where a proceeding in respect of an avoidance transaction or fraudulent or wrongful trading is pending before an application is made or a decision is made to dissolve the corporate debtor, the CoC shall determine the manner of pursuing such proceedings and the distribution of the proceeds arising out of such proceedings, in such manner and subject to such conditions as may be specified.

Section 54(1B) of the Act provides that where any suit or other legal proceeding against the corporate debtor in respect of any proceeds to be distributed under section 53 is pending before application is made under sub-section (1) or a decision is made to dissolve the corporate debtor the CoC shall make appropriate arrangements for pursuing such suit or proceeding, and distribution of proceeds to the parties in such suit or proceedings, in such manner and subject to such conditions as may be specified.

The newly inserted Section 54(2A) provides that the Adjudicating Authority may, on receipt of the decision of the committee of creditors to dissolve the corporate debtor, order that the corporate debtor shall be dissolved from the date of that order and the corporate debtor shall be dissolved accordingly.  If, on the passing of an order under this sub-section, any asset of the corporate debtor remains with it, such asset may be disposed of in such manner as may be specified, and the proceeds thereof shall be distributed for payment of the insolvency resolution process costs and any surplus remaining after payment of such costs shall be credited to the Insolvency and Bankruptcy Fund. 

The newly inserted section 54(2B) provides that the passing of the dissolution order shall not affect the continuation of proceedings referred to in sub-sections (1A) and (1B).

The newly substituted Section 54(4) provides that the Adjudicating Authority shall pass a dissolution order under this section within a period of 30 days from the date of receipt of the application or the intimation of the decision of the CoC to dissolve the corporate debtor.   If the Adjudicating Authority has not passed an order within such period, it shall record the reasons for such delay in writing.