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The case deals with the subject of Insolvency Code, 2016. The idea of ‘Related Party Transactions’, for example exchanges went into by a corporate element with its connected gatherings, and the treatment of such exchanges is a definitely managed part of corporate administration.

Their pertinence acquires significance with regards to aversion exchanges of a corporate substance that is confronting an approaching danger or probability of bankruptcy procedures. It is known to be one of the landmark judgements dealing with preferential, undervalued and fraudulent transactions (Section 43, 45, 66 – respectively).

The Insolvency and Bankruptcy Code, 2016 (“IBC”) is by a wide margin India’s generally thorough indebtedness goal structure and is furnished with important arrangements to manage evasion exchanges and ensuring the interests of the partners of a Corporate Account holder who are wronged by such exchanges.


The Jaiprakash Associates Ltd (herein after referred as JAL) was the parent company to the Jaypee Infratech Ltd company (herein after referred as JIL). JAL is stated to be a public listed Company. In the year 2003, JAL was awarded the rights for construction of an expressway from Noida to Agra. A concession agreement was entered into with the Yamuna Expressway Industrial Development Authority. In this project, JIL was set up as a special purpose vehicle. Finance was obtained from a consortium of banks against the partial mortgage of land acquired and a pledge of 51% of the shareholding held by JAL.

 Later, the IDBI Bank Limited instituted a petition under Section 7 of the Code before the NCLT, seeking initiation of Corporate Insolvency Resolution Process against JIL, while alleging that JIL had committed a default in repayment of its dues to the tune of Rs. 526.11 crores. When the JIL’s insolvency application was admitted in before the NCLT, the Interim resolution professional (herein referred as IRP) denied to accept the certain claims of the Axis bank which were related to the collateral submitted by the parent company JAL. Therefore, present case was filed before the NCLT disputing the Nature of claims by the IRP.


The legal issue came before the Supreme Court of India for consideration is;

  1. whether the transactions in question deserve to be avoided as being preferential, undervalued and fraudulent, in terms of Sections 43, 45 and 66 respectively of the Code, 2016.


For the reasoning stated above, the Hon’ble Supreme court of India reversing the decision of NCLT, held that the transaction in question between the JIL & JAL are preferential according to Section 43 of the Insolvency Code, 2016.

And further held that with regard to the allegations of the transaction in question being Undervalued and fraudulent the court decided that since the Intent is not necessary under Section 43 of the code, the question of fraudulent nature and undervalue doesn’t have to be answered. Nevertheless, the Hon’ble SC ordered the Adjudicating authority to look into the matters of fraudulent and undervalued transaction ass it requires different enquires to be made under the Code.


The procedural history began when the Axis bank (Respondent) approached the NCLT where the court held that the transaction in question between the parent company Jayaprakash Associates Ltd (JAL) & Jaypee Infratech company (JIL) was related party transaction. And the transactions were preferential, undervalued and fraudulent as per section 43, 45, 66 respectively provisions of the code. When the appeal was filed before NCLAT, the court rejected the reasoning of NCLT and held that the transaction was not preferential, Undervalued & fraudulent as per the provisions of the Code as it was done in the ordinary course of business.

(I) Reasoning of the court on preferential transaction:

The Hon’ble Supreme court, defined preferential transfer as a pre-bankruptcy transfer made by an insolvent debtor for the benefit of a creditor who is owed on an earlier debt, the transfer should occur not than 90 days before the date when the bankruptcy petition is filed so that the creditor receives more than it would otherwise receive through the distribution of the bankruptcy estate. As the relevant period of transfer is consider as the look back period. The court reasoned that if the both the twin conditions of section 43(2) is satisfied then the transactions is said to be preferential.


The court further reasoned that if the above two conditions are fulfilled and if the transaction is not falling within the ambit of Section 43 (3) i.e. transfer in ordinary course of business then it shall be considered to be preferential transfer. Hon’ble Supreme Court referring to of St. Leon Village Consolidated School District v. Ronceray[1], interpreted the word ‘deemed’ used in Section 43 employed for different purposes in different contexts but one of its principal purpose, in essence, is to deem what may or may not be in reality, thereby requiring the subject-matter to be treated as if real.

 Relating the above legal interpretations and provisions to the present facts, the court opined that JIL has made deemed to have made a preferential transaction as it satisfies both the conditions of Section 43(2) and the transaction has not been done in ordinary course of business. Having made this transaction the JAL has been put in much better position and has received much more than what it would have received from the liquidation proceeding which makes it a preferential transaction.

(II) Reasoning of Court on relevant time of preferential transaction:

The Hon’ble court opined that the provisions contained in Section 43, indicative that when a preference is given at a relevant time, it gives beneficiary of preference an unwarranted better position in the event of distribution of assets. Applying this to the present facts and circumstances the transactions commencing from 10.08.2015 until the date of insolvency commencement shall fall under the scanner of look back period. 

And since there were number of mortgage deeds created in the said period were held to be preferential. The court giving significance to the operative effect of the Insolvency code, held that the impugned preference was given to a related party during a relevant time and falls with in the look back period under the code.

(III) Reasoning on the court on if the transaction has taken place in ordinary course of Business:

The Hon’ble court observed that in order to understand if a transaction is done in ordinary course of business what is to be examined is the conduct and affairs of the corporate debtor. That is if the beneficiary of the transaction in question is a related party of the corporate debtor, the period of enquiry is enlarged to two years whereas it is counted as 1 year if the party is unrelated.

The court observed that the transaction in question made by the parent company JAL is not done in ordinary course of transaction as the transaction doesn’t give rise to a ‘the undistinguished common flow of business done[2]”. The court rejected the contention that the word “or” means the ordinary course of business of corporate debtor or the lender.

The court referring to the landmark judgement of R.M.D. Chamarbaugwala[3] held that well known cannons of construction of statutes permit the Court to read the word “or” as “and” after looking at the clear intention of the legislature.

In the present case the expression “or”, appearing as disjunctive between the expressions “corporate debtor” and “transferee”, ought to be read as “and”; so as to be conjunctive of the two expressions i.e., “corporate debtor” and “transferee”.  Thus section 43(3)(a) mean that a preference shall not include the transfer made in the ordinary course of the business or financial affairs of the corporate debtor and the transferee.

The Hon’ble Supreme Court’s decision to arrive that the transactions between the JAL & JIL are not fraudulent, came with a varied interpretation of the words used in the Section 43 of the code.

The transaction in question can be said to be referential because of the very fact that the transaction falls within the look back period i.e. two years in the related party transaction. Though the Intention under Section 43 is not important, other essentials such as “ordinary course of business” & “relevant period” are given due consideration in determining if a transaction falls within the ambit of Section 43 of the code.


(I) Interpretation of words “and & “or”:

The Court rightly interpreted the meaning of the word “and” & “or” to ensure that the true intention of the legislature is given effect while deciding the cases which being the maximisation of value of assets of corporate persons and balancing the interests of all the stakeholders. If an interpretation defeats the intention and object of the code, the such an interpretation should be avoided.

The Hon’ble Supreme Court interpreted the disjunctive words to be conjunctive of the expression and applied purposive interpretation so as to ensure that the provision operates in sync with the intention of legislature and achieves the avowed objective rather than the literal interpretation.

If the provision were to be read literally using the word “or” then it can only mean the ordinary course of business of either corporate debtor or the transferee which leave a room to escape from the ambit of section 43. Therefore, the word “or” was read as “and” which gives a much wider scope to being the parties within the ambit of section 43.

(II) Principle of Noscitur a Sociis:

Further, UNCITRAL model codes which forms the basis for Insolvency law in India, have been given due significance to interpret the means of the word “preferential transaction”. In determining the meaning of Financial Debt, the court used the very unique style of interpretation that is the word “means” used in the definitions gives a restrictive application and the word “include” gives an extensive application.

Further the court applied the principle of noscitur a sociis, where the questionable meaning of a doubtful word is arrived at by looking into the words associated to in the context, in interpreting the section 5(8)(f) of the code. In an overall view the court stood with the objects and intention of the makers of the legislation and avoided a holistic interpretation which is completely against the objects of the code.


In the present case, the Hon’ble Supreme Court took a chance to explain and untangle the various confusions regarding the interpretation of the words in Section 43 of the Code. The judgement is delivered in an orderly manner starting from the objects and intent of the code to the reasoning and interpretation of section 43 which gives even the readers a clear picture of what is being dealt in the case. This judgement would stand as a very important development in the jurisprudence of I&B Code, 2016 in the future. The Count interpreted various provision in harmony with the objects and intention of the code.

From the above judgement it can be noted that the preferential transaction per se cannot be challenged unless they fall within the lookback period prescribed and doesn’t come under the ordinary course of business. And even though the provisions of preferential transaction are falling under liquidation process it should be given due consideration in the corporate insolvency process as well.

The danger of related party weakening the worth of the Corporate Debtor, regardless of whether during the lookback time of 2 years before the bankruptcy initiation date, during the CIRP or even through instalments and advantages under a goal plan is adequately made preparations for by a large group of shields under the IBC.

Further the case clearly exhibited that JIL was already in financial crush and transactions carried over at that financial situation would clearly bring suspicion to the court. Therefore, the court rightly concluded that the transactions were preferential under Section 43 of the code.

[1] (1960) 23 DLR (2d) 32 (Can))

[2] Burns v. McFarlane, [1940] HCA 25.

[3] R.M.D. Chamarbaugwala v UOI (1957 AIR 628)