Transfer of Receivables: When Does It Become a Preferential Transaction?

 Transfer of Receivables: When Does It Become a Preferential Transaction?

The National Company Law Tribunal, Amaravati Bench, in IndusInd Bank Ltd. & Ors. v. Vamsee Teja Modern Rice Mill Pvt. Ltd., has drawn an important distinction between:

1. the assignment or transfer of a creditor’s debt; and

2. the transfer of the corporate debtor’s own assets or receivables to discharge antecedent liabilities.

The distinction is significant because the first category is expressly recognised under Regulation 28 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”), whereas the second may constitute a preferential transaction under Section 43 of the Insolvency and Bankruptcy Code, 2016 (“IBC”).

The decision was rendered on 31 August 2026 in IA(IBC)/199/2026 in IA(IBC)(LIQ)/2/2026 with IA(IBC)/200/2026 in IA(IBC)(LIQ)/2/2026 in CP(IB)/45/7/AMR/2023. It is reported as [(2026) ibclaw.in 3488 NCLT].

Background

The issue before the Tribunal concerned the adjustment of receivables of the corporate debtor from M/s Tammana Trading Company against liabilities allegedly due to the respondent-directors.

The Tribunal observed that the adjustment had the effect of:

• reducing or extinguishing antecedent liabilities of the respondent-directors; and

• correspondingly diminishing the receivables belonging to the corporate debtor.

On this basis, the Tribunal held that the transactions required examination under the provisions governing preferential transactions in Section 43 of the IBC.

The essential question was whether the arrangement represented a legitimate assignment of debt by a creditor or, instead, a transfer of the corporate debtor’s property for the benefit of creditors holding antecedent claims.

Regulation 28 recognises creditor-initiated debt assignments

Regulation 28 of the CIRP Regulations deals with the transfer of debt due to a creditor during the insolvency resolution process. It provides:

# 28. Transfer of debt due to creditors
(1) In the event a creditor assigns or transfers the debt due to such creditor to any other person during the insolvency resolution process period, both parties shall, within seven days of such assignment or transfer, provide the interim resolution professional or the resolution professional, as the case may be, the terms of such assignment or transfer and the identity of the assignee or transferee.

(2) The resolution professional shall notify each participant and the Adjudicating Authority of any resultant change in the committee within two days of such change.

The provision contemplates a transaction in which the creditor transfers its claim against the corporate debtor to another person. In such a case, the subject matter of the transaction is the creditor’s right to receive payment.

The transaction does not, by itself, involve a transfer of the corporate debtor’s property.

Accordingly, a properly documented creditor-initiated assignment of debt, complying with Regulation 28, would not ordinarily amount to a preferential transaction merely because the assignment takes place during the look back period period.

Transfer of the corporate debtor’s receivables is materially different

A different legal position arises where the corporate debtor transfers, adjusts or appropriates its own receivables or other assets for the benefit of a creditor or another person.

Such a transaction may satisfy the essential elements of a preferential transaction under Section 43 of the IBC, namely:

• there is a transfer of property or an interest in property of the corporate debtor;

• the transfer is for the benefit of a creditor, surety or guarantor;

• the transfer is made for or on account of an antecedent financial debt, operational debt or other liability; and

• the transfer places the relevant person in a more beneficial position than it would have occupied in accordance with the distribution mechanism under Section 53 of the IBC.

The character of the transaction therefore depends not merely on the terminology used by the parties, but on the nature of the property transferred and the substance of the arrangement.

If the corporate debtor’s receivables are used to discharge or adjust liabilities owed to directors or other creditors, the transaction may be viewed as a transfer of the corporate debtor’s property for the benefit of those persons. It may consequently be examined as a preferential transaction, subject to the applicable “relevant time” and other statutory requirements under Section 43.

The key distinction

The distinction may be summarised as follows:

Nature of transaction	What is transferred?	Legal character
Creditor-initiated assignment	The creditor’s debt or claim against the corporate debtor	Recognised under Regulation 28, subject to prescribed disclosures
Corporate-debtor-side transfer	The corporate debtor’s receivables or other assets	May constitute a preferential transaction under Section 43

In the first category, the creditor transfers its own claim. The corporate debtor’s assets are not transferred merely because the identity of the claimant changes.

In the second category, the corporate debtor parts with its own property, usually to satisfy an existing liability. The transaction therefore directly engages the avoidance provisions of the IBC.

Importance of documentation

The Tribunal also treated the absence of formal assignment or transfer documentation from the creditors as a relevant circumstance.

Where a transaction is claimed to be an assignment under Regulation 28, the parties should be able to demonstrate:

• the identity of the original creditor;

• the identity of the assignee or transferee;

• the terms of the assignment;

• the date on which the assignment took place;

• the debt or claim assigned; and

• compliance with the disclosure requirements under Regulation 28.

In the absence of such material, an arrangement described as a “transfer” or “assignment” may instead be examined as a transfer by the corporate debtor of its own assets or receivables.

Documentation alone may not determine the legal character of a transaction. However, the absence of documentation can make it difficult to establish that the transaction was genuinely a creditor-side assignment rather than a corporate-debtor-side transfer.

Substance prevails over form

The decision reinforces the need to examine the substance and economic effect of a transaction.

A transaction is unlikely to avoid scrutiny under Section 43 merely because it is described as:

• an adjustment;

• a set-off;

• a transfer;

• a settlement; or

• an assignment.

The relevant inquiry is whether the corporate debtor’s property or interest in property was transferred for the benefit of a creditor or another person in satisfaction of an antecedent liability, and whether the transaction improved that person’s position compared with the position contemplated under Section 53 of the IBC.

Thus, where the corporate debtor’s receivables are reduced or extinguished in order to discharge liabilities of directors or other persons, the transaction may be treated as preferential notwithstanding the form in which it was recorded.

Practical implications

The decision has practical implications for resolution professionals, liquidators, creditors, directors and transaction advisers.

For resolution professionals and liquidators

The following issues should be examined when reviewing a transfer or adjustment of receivables:

• whether the receivables belonged to the corporate debtor;

• whether the transaction reduced the corporate debtor’s asset base;

• whether an antecedent liability was discharged;

• who obtained the benefit of the transaction;

• whether any creditor actually assigned its debt;

• whether the parties complied with Regulation 28; and

• whether the transaction falls within the relevant period under Section 43.

For creditors

A creditor proposing to assign its debt should ensure that the transaction is supported by a clear assignment instrument and that the terms and identity of the assignee or transferee are properly disclosed.

For corporate debtors and directors

Use of corporate-debtor receivables to discharge personal liabilities or liabilities owed to directors may attract scrutiny under the avoidance provisions of the IBC. The commercial purpose, authority, timing and beneficiaries of the transaction should therefore be carefully documented.

Conclusion

The decision in IndusInd Bank Ltd. & Ors. v. Vamsee Teja Modern Rice Mill Pvt. Ltd. draws a clear conceptual line between a creditor assigning its claim and the corporate debtor transferring its own property.

A creditor-initiated assignment of debt, properly documented and disclosed in accordance with Regulation 28 of the CIRP Regulations, does not per se constitute a preferential transaction.

However, where the corporate debtor transfers or adjusts its own receivables against antecedent liabilities, particularly without evidence of a genuine creditor-side assignment, the transaction may fall within the scope of Section 43 of the IBC and may be liable to examination as a preferential transaction.

The decision therefore highlights a basic but important principle: the legal character of a transaction depends on what was transferred, by whom, for whose benefit and with what effect - not merely on the label attached to the arrangement.

This blog is intended for general informational purposes only. It is not legal advice and should not be relied upon as a substitute for professional advice. The relevant statutory provisions, facts, procedural history and subsequent judicial developments should be independently examined before taking any action or making any decision.

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Do Statutory First Charges Survive an IBC Liquidation Sale?

Do Statutory First Charges Survive an IBC Liquidation Sale? 

Introduction

Whether a statutory charge attached to immovable property survives its sale during liquidation under the Insolvency and Bankruptcy Code, 2016 (“IBC”) has significant consequences for municipal authorities, government departments, liquidators and auction purchasers.

A recent decision of the Mumbai Bench of the National Company Law Tribunal (“NCLT”) in Indojewel Jewellery Private Limited v. Brihanmumbai Municipal Corporation has taken the view that a statutory first charge created under municipal law continues to attach to the property even after its sale in liquidation. On this reasoning, the municipal authority may recover outstanding property tax from the auction purchaser.

This view, however, must be examined alongside the statutory scheme of the IBC, particularly the mandatory claims process, the waterfall mechanism under Section 53, the clean-slate principle recognised in several decisions, and the Supreme Court’s interpretation of Section 55(1)(g) of the Transfer of Property Act, 1882 (“TPA”).

The issue is therefore not merely whether a statutory charge exists. The more important question is whether such charge can continue to be enforced against the property or its purchaser after the liquidation process has concluded and the sale proceeds have been distributed under Section 53 of the IBC.

The Mumbai NCLT Decision

In Indojewel Jewellery Private Limited v. Brihanmumbai Municipal Corporation, the Mumbai NCLT considered the effect of unpaid property tax under the relevant provisions of the Mumbai Municipal Corporation Act.

The Tribunal observed that property tax due in respect of a building or land constitutes a statutory first charge upon that property, subject to the prior payment of land revenue due to the State Government. It reasoned that a transfer of the property would not, by itself, extinguish or override the charge created in favour of the municipal authority.

The Tribunal further relied on the statutory power of the municipal corporation to recover unpaid property tax by attachment and sale of the concerned immovable property. According to the Tribunal, this demonstrated that the statutory scheme contemplated enforcement of the tax dues against the property itself.

The central reasoning was that a statutory charge:

• attaches to the property rather than merely to the corporate debtor personally;

• operates as an encumbrance running with the property;

• is distinct from an ordinary personal claim against the corporate debtor; and

• is not necessarily inconsistent with the IBC.

On this basis, the Tribunal held that the overriding provision contained in Section 238 of the IBC would not automatically extinguish the statutory charge.

This approach gives primacy to the character of the charge under the municipal statute. However, it raises important questions concerning the collective insolvency framework and the finality of a liquidation sale.

Claims in Liquidation Are Required to Be Filed

The liquidation process under the IBC is based on the submission, verification and adjudication of claims.

Regulation 16 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 requires a person claiming to be a stakeholder to submit its claim if it was not submitted during the corporate insolvency resolution process. The claim must be submitted within the prescribed period from the liquidation commencement date, and the claimant must establish the debt or dues as on the insolvency commencement date.

The regulation also requires a stakeholder to update its claim when it is satisfied, either wholly or partly, from any source after the insolvency commencement date.

This framework indicates that government departments and local authorities are not outside the liquidation process merely because their dues are supported by a statutory charge. They are required to lodge and pursue their claims before the liquidator.

A statutory charge may determine the character or security of the claim. It does not necessarily dispense with the obligation to participate in the statutory insolvency process.

Section 53 and the Liquidation Waterfall

Section 53 of the IBC begins with a non-obstante clause and provides the order in which the proceeds from the sale of liquidation assets must be distributed.

Government dues rank under Section 53(1)(e), alongside the specified claims of other stakeholders. The explanation to Section 53(1)(e) clarifies that the provision applies whether or not the government dues are secured by a security interest created by agreement or merely by operation of law.

This clarification is particularly important in the context of statutory charges. It indicates that a government claim does not escape the Section 53 waterfall merely because the security interest arises by operation of law.

The statutory scheme therefore supports the following propositions:

1. Government and municipal dues must be submitted as claims in the liquidation process.

2. Statutory security interests are recognised for the purposes of classification under Section 53.

3. The existence of a statutory charge does not, by itself, confer an independent right to recover outside the liquidation process.

4. Once the liquidation proceeds have been distributed in accordance with Section 53, claims ordinarily cannot be pursued in a manner inconsistent with the statutory waterfall.

If a municipal authority could recover its dues directly from the auction purchaser after the liquidation sale, the statutory charge holder could effectively obtain payment outside the Section 53 mechanism. This may result in preferential treatment over other creditors and stakeholders.

The principal counterargument, however, is that recovery against the property is not the same as recovery against the corporate debtor. Where the charge is said to run with the property, the municipal authority may contend that the claim is enforceable against the asset even though the corporate debtor’s personal liability has been dealt with under the IBC.

The conflict is therefore between two competing principles:

• the statutory charge as an encumbrance attached to the property; and

• the IBC’s objective of finality, collective distribution and transfer of assets free from past liabilities.

Section 55(1)(g) of the Transfer of Property Act

Section 55(1)(g) of the TPA provides that, in the absence of a contract to the contrary, the seller of immovable property is bound:

• to pay public charges and rent accrued due in respect of the property up to the date of sale;

• to pay interest on encumbrances due on that date; and

• unless the property is sold subject to encumbrances, to discharge the encumbrances then existing on the property.

The Supreme Court considered this provision in AI Champdany Industries Ltd. v. The Official Liquidator. The Court held that, when property is sold by auction, the seller is ordinarily bound to pay public charges due in respect of the property up to the date of sale.

The Court also clarified that a departure from the statutory obligations under Section 55 must arise from an express contract. A contrary intention cannot simply be inferred. The terms of the auction advertisement and sale conditions are therefore critical.

The principle emerging from AI Champdany Industries is that the seller has an obligation to address public charges and encumbrances before transferring the property, unless the property is expressly sold subject to those encumbrances.

Applied to an IBC liquidation sale, this raises a further issue: whether the liquidator, as seller, is required to settle statutory property-related dues before completing the sale, or whether those dues are to be dealt with exclusively through the Section 53 waterfall.

A harmonious approach would be that:

• the liquidator must identify and disclose material statutory charges;

• the relevant authority must submit its claim in the liquidation;

• the charge must be dealt with in accordance with the IBC;

• the sale notice must clearly state whether the property is being sold free from or subject to specified encumbrances; and

• the auction purchaser should not ordinarily be exposed to undisclosed pre-sale liabilities after completion of the sale.

IBC Liquidation and SARFAESI Auctions Are Different

An auction conducted under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”) is generally an enforcement action undertaken by a secured creditor for recovery of its own debt.

An IBC liquidation sale is fundamentally different. It is part of a collective insolvency process intended to realise the value of the corporate debtor’s assets and distribute the proceeds among stakeholders in accordance with Section 53.

The two types of sale therefore serve different purposes:

SARFAESI enforcement sale	IBC liquidation sale
Conducted primarily for enforcement of a secured creditor’s security interest.	Conducted for collective realisation of the corporate debtor’s assets.
Proceeds are principally connected with the secured creditor’s enforcement rights.	Proceeds are distributed through the statutory waterfall under Section 53.
May be governed by the priority framework under Section 26E of the SARFAESI Act.	Governed principally by the IBC once liquidation proceedings commence.
The rights of other stakeholders may arise under the applicable enforcement framework.	All stakeholder claims must ordinarily be submitted and dealt with within the liquidation process.

Section 26E of the SARFAESI Act gives registered secured creditors priority over government dues. However, its explanation expressly provides that, where insolvency or bankruptcy proceedings are pending, the priority of secured creditors is subject to the provisions of the IBC.

Accordingly, a decision concerning a SARFAESI sale cannot automatically be applied to an IBC liquidation sale.

The NCLAT Position on Pre-Sale Government Dues

Several decisions of the National Company Law Appellate Tribunal (“NCLAT”) have protected auction purchasers from claims relating to dues arising before the liquidation sale.

In Haryana State Industrial and Infrastructure Development Corporation Ltd. v. AAR AAR Technoplast Pvt. Ltd., the NCLAT held that, once the liquidation sale was completed, the sale certificate was executed and possession was handed over, pre-auction dues could not be recovered from the auction purchaser. This conclusion was particularly relevant where the authority had already approached the liquidator as an operational creditor and had been informed that no amount remained available for payment.

Similarly, in Sri Gomathi Energy Private Limited v. The State of Tamil Nadu, the NCLT Chennai held that, after completion of the liquidation sale, execution of the sale certificate and delivery of possession, pre-auction dues could not be imposed upon the auction purchaser. The decision also took into account the fact that the claimant had approached the liquidator and its claim had not been admitted because it was filed belatedly.

In Paschimanchal Vidyut Vitran Nigam Ltd. v. HSA Traders, the NCLAT distinguished cases arising under the SARFAESI Act from cases involving an IBC liquidation. It observed that, in an IBC liquidation, the electricity distribution company was required to file its claim in respect of outstanding electricity dues against the corporate debtor.

These decisions emphasise that the government authority must participate in the insolvency process and cannot ordinarily bypass the liquidation mechanism by proceeding directly against the auction purchaser.

The Clean-Slate Principle

The clean-slate principle is especially significant where the corporate debtor or its business is sold as a going concern.

In M/s Shiv Shakti Inter Globe Exports Pvt. Ltd. v. M/s KTC Foods Private Limited, the NCLAT held that, after distribution of the sale proceeds in accordance with Section 53, no creditor, including a government entity, could claim past unpaid dues against the purchaser of the corporate debtor as a going concern.

The NCLAT observed that the purpose of the IBC is to extinguish claims, particularly claims that were not submitted during the CIRP or liquidation process, so that the purchaser may commence operations without being burdened by past liabilities.

In Gaurav Jain v. Sanjay Gupta, the Mumbai NCLT similarly held that, after receipt and distribution of the sale consideration under Section 53, the liabilities of the corporate debtor towards creditors are treated as settled. The purchaser takes the assets without encumbrances and free from the action of creditors.

These authorities support the proposition that a completed liquidation sale should ordinarily convey the asset, or the corporate debtor as a going concern, free from past claims unless the sale documents expressly provide otherwise.

Reconciling the Apparently Conflicting Views

The authorities referred to above reveal two lines of reasoning.

The first line, reflected in Indojewel Jewellery, treats a statutory first charge as an encumbrance attached to the property. On this approach, a transfer of the property does not necessarily extinguish the charge, particularly where the statute authorises recovery against the property itself.

The second line, reflected in the decisions concerning Sri Gomathi Energy, AAR AAR Technoplast, Shiv Shakti Inter Globe Exports and Gaurav Jain, gives priority to the finality of the liquidation process. On this approach, once the claim is required to be submitted and the liquidation proceeds are distributed under Section 53, past dues cannot ordinarily be enforced against the auction purchaser.

The better reconciliation may depend on the following factors:

1. The wording of the special statute.
   The relevant municipal, revenue or taxation statute must be examined to determine whether it creates a charge, a personal liability, or both.

2. The terms of the sale notice.
   An express stipulation that the property is sold subject to specified encumbrances may materially alter the rights of the purchaser.

3. Disclosure of the statutory charge.
   A purchaser may have a stronger remedy where the charge was disclosed before the auction and factored into the bid price.

4. Submission of the claim.
   The authority’s participation in the CIRP or liquidation is a significant factor. Failure to lodge a claim may support extinguishment of the dues.

5. Completion of the sale.
   Execution of the sale certificate and delivery of possession strengthen the purchaser’s claim to finality.

6. Distribution under Section 53.
   Once the liquidation proceeds have been distributed, a direct recovery against the purchaser may conflict with the statutory waterfall.

7. Nature of the sale.
   A sale of an individual asset and a sale of the corporate debtor as a going concern may raise different issues, although both remain subject to the terms of the sale and the insolvency framework.

Practical Implications

For municipal and government authorities

Government authorities should:

• monitor CIRP and liquidation proceedings from the commencement date;

• file claims within the prescribed period;

• clearly identify the statutory basis and period of the dues;

• place the liquidator on notice of any statutory charge;

• seek appropriate directions from the Adjudicating Authority before the sale; and

• avoid relying solely on the existence of a statutory charge to recover dues after completion of the liquidation sale.

For liquidators

Liquidators should:

• conduct searches for municipal, revenue, electricity and other public dues;

• obtain written statements of outstanding charges from the relevant authorities;

• record statutory charges in the asset memorandum and sale documents;

• determine how admitted claims are to be treated under Section 53;

• ensure that the sale notice clearly states whether the asset is sold free from or subject to encumbrances; and

• seek directions from the Adjudicating Authority where a statutory charge is disputed or likely to affect marketability.

For auction purchasers

Auction purchasers should undertake detailed due diligence, including:

• municipal property tax searches;

• revenue and land records;

• electricity and utility dues;

• encumbrance certificates;

• pending litigation and recovery proceedings;

• claims filed before the liquidator; and

• the precise language of the sale notice and certificate.

The purchaser should not assume that a general statement that the asset is sold “as is where is” or “whatever there is” necessarily transfers every statutory liability. The effect will depend on the wording of the sale documents, the governing statute and the applicable insolvency jurisprudence.

Conclusion

The proposition that every statutory first charge automatically survives an IBC liquidation sale and can be enforced against the auction purchaser is too broad.

A statutory charge may attach to the property under the relevant special statute. However, its enforcement during liquidation must be tested against the mandatory claims process, Section 53 of the IBC, the finality of the liquidation sale, Section 55(1)(g) of the TPA and the express terms of the sale notice.

The stronger line of authority from the NCLAT and other benches of the NCLT indicates that, where:

• the statutory dues arose before the auction;

• the authority was required to submit a claim in the insolvency process;

• the sale certificate was executed;

• possession was delivered; and

• the liquidation proceeds were distributed under Section 53,

the auction purchaser should ordinarily not be made personally liable for those past dues.

The decision in Indojewel Jewellery nevertheless highlights an important unresolved issue: whether a statutory charge created by operation of law can be treated as extinguished merely because the property was sold in liquidation. Until the Supreme Court or a larger judicial forum settles the interaction between such statutory charges and the IBC liquidation framework, the safest course is full disclosure, timely submission of claims and a clear judicial or contractual determination of whether the property is being sold free from or subject to the charge.

Disclaimer: The sole purpose of this blog is to create awareness on the subject and must not be used as a guide for taking or recommending any action or decision, commercial or otherwise. One must do his own research and seek professional advice if he intends to take any action or decision in the matters covered in this blog.

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References;

1. Indojewel Jewellery Private Limited vs. Brihanmumbai Municipal Corporation [Link Synopsis]

2. M/s Sri Gomathi Energy Private Limited, Vs. The State of Tamil Nadu & Ors [Link Synopsis]

3. Paschimanchal Vidyut Vitran Nigam Ltd. Vs. HSA Traders [Link Synopsis]

4. Haryana State Industrial and Infrastructure Development Corporation Ltd. Vs. M/s. AAR AAR Technoplast Pvt. Ltd. [Link Synopsis]

5. M/s Shiv Shakti Inter Globe Exports Pvt. Ltd. Vs. M/s KTC Foods Private Limited [Link - Synopsis]

6. Gaurav Jain  Vs. Sanjay Gupta [Link Synopsis]

7. Bhatpara Municipality Through its Chairperson Vs. Nicco Eastern Pvt. Ltd. [Link Synopsis]

7. AI Champdany Industries Ltd. vs. The Official Liquidator and Anr. [Link Synopsis]

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