A company in winding up may have entered into transactions shortly before the winding-up order that prefer one creditor over another or transfer assets at an undervalue. The Companies Act, 2013 ("the Act") contains provisions that allow the liquidator to challenge such transactions, and the IBC contains a parallel regime for avoidance transactions. The two regimes are not identical, and the applicable regime depends on whether the winding up is under the Companies Act or the IBC.
The Preferential Payments
Section 326 of the Act provides for overriding preferential payments. In the winding up of a company, the workmen's dues and the debts due to secured creditors (to the extent of the value of the secured assets) are paid in priority to all other debts. The provision is designed to protect the weaker creditors, and it overrides the ordinary contractual priorities.
The Avoidance Powers
The Act contains provisions that allow the liquidator to challenge transactions entered into within a specified look-back period. The provisions are modelled on the avoidable transaction regime, and they allow the Tribunal to order the restoration of the property or the payment of compensation. The IBC's Sections 43, 45, and 66 contain a more detailed avoidance regime, and the Supreme Court has held that the IBC's regime applies to a company in IBC liquidation.
The Practical Implications
A creditor who has received a preference shortly before the winding up may be required to return the preference. A transferee who has acquired assets at an undervalue may be required to restore the assets or pay the difference. The liquidator must identify the transactions, establish the look-back period, and apply to the Tribunal for the appropriate order.
The avoidance regime is a critical tool for maximising the value of the estate. A liquidator who neglects it may be liable for the loss to the creditors.
Call to Action
Anuj Desai & Associates advises liquidators, creditors, and transferees on the preferential and undervalued transaction regime—from the identification of avoidable transactions to the NCLT application and the defence of a challenge. If you are involved in a winding-up avoidance dispute, we can help you assess the position.
📧 office@anujdesaiassociates.com
📞 9619456656
🌐 https://anujdesaiassociates.com
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