Preferential transfer under insolvency law can arise from accounting adjustments, even without cash movement, when related parties are favoured.

An accounting adjustment that extinguishes a corporate debtor's receivable in favour of a related party can constitute a preferential transfer under Section 43 of the Insolvency and Bankruptcy Code, even without physical movement of funds. The tribunal treated the square-off and offsetting entries as a transfer because they reduced the debtor's asset pool and satisfied dues of entities under common control. It also found the transaction fell within the relevant look-back period for related parties. The plea that the adjustment was in the ordinary course of business failed, as the entry bypassed banking channels, lacked corporate authorisation, and was not a routine commercial transaction.

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Issues: (i) Whether the impugned square-off and offsetting entries constituted a preferential transaction under Section 43 of the Insolvency and Bankruptcy Code, 2016. (ii) Whether the transaction was undertaken within the relevant look-back period and involved related parties. (iii) Whether the absence of physical movement of funds and the plea of ordinary course of business defeated the avoidance action.

Issue (i): Whether the impugned square-off and offsetting entries constituted a preferential transaction under Section 43 of the Insolvency and Bankruptcy Code, 2016.

Analysis: A transfer for the purposes of Section 43 is not confined to cash movement. Extinguishment or reduction of an enforceable receivable through accounting entries can amount to a transfer of property or an interest therein. The receivable of the corporate debtor was adjusted in a manner that satisfied the dues of the appellant or its controlled entity and diminished the asset pool available for distribution among creditors.

Conclusion: The transaction amounted to a preferential transaction.

Issue (ii): Whether the transaction was undertaken within the relevant look-back period and involved related parties.

Analysis: The appellant was found to be the director and key managerial personnel of the corporate debtor, while also controlling the recipient entity and his proprietorship, bringing the entities within the related-party framework. The square-off entry was recorded on 30.06.2019, while insolvency commenced on 01.02.2021. The transaction thus fell within two years preceding the insolvency commencement date and within the relevant time for related-party transactions.

Conclusion: The transaction was within the relevant period and involved related parties.

Issue (iii): Whether the absence of physical movement of funds and the plea of ordinary course of business defeated the avoidance action.

Analysis: The transaction bypassed banking channels, lacked corporate authorisation, and was made in favour of related parties under common control. Such selective adjustment, in the backdrop of other unpaid creditors, did not constitute a routine transaction in the ordinary course of business. The absence of physical transfer of funds did not alter the legal character of the transaction.

Conclusion: The plea of ordinary course of business failed, and the absence of cash movement did not save the transaction.

Final Conclusion: The avoidance order was sustained, and the appeal was rejected on merits with no interference in the finding that the impugned adjustment was a preferential transaction liable to be restored to the corporate debtor's estate.

Ratio Decidendi: For the purpose of Section 43 of the Insolvency and Bankruptcy Code, 2016, an accounting adjustment that extinguishes a corporate debtor's receivable in favour of a related party within the relevant period can constitute a preferential transfer even without physical movement of funds, unless it is shown to be in the ordinary course of business.

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