Insolvency proceedings are important to resolve the financial issues of companies and require all parties involved in such proceedings to be genuine and provide accurate information. In India, the Insolvency and Bankruptcy Code, 2016 (IBC) is the comprehensive framework to address insolvency and ensure timely resolution. Doctrine of Antecedent Debt is the primary goal to maximise the recovery of assets of the company, distribute them fairly among stakeholders, and ensure that creditors are paid according to their priority and shareholders receive their share of any remaining assets.
What is the Doctrine of Antecedent Debt?
Definition and Origin:
The doctrine of antecedent debts states that a debt must be independent of a transfer and used in insolvency law to determine if a transfer of property is preferential. Its main purpose is to distinguish genuine transactions from preferential transfers made to benefit creditors.Â
Application in the IBC Framework:
This doctrine is used to evaluate transactions under section 43 of the IBC, which defines preferential transactions. These transactions are in relation to a transfer of the property or interest of the corporate debtor for the benefit of a creditor, surety, or guarantor or in relation to an Doctrine of Antecedent Debt, and if the transaction has the effect of putting such creditor, surety, or guarantor in a beneficial position in the distribution of assets under section 53 of the IBC.Â
Suggested Reading : Limiting the Jurisdiction of NCLT under Section 60(5)
The Role of Antecedent Debt in Identifying Preferential Transactions
“Antecedent debt” refers to a pre-existing debt that existed before a transfer of property was made. It is crucial to identify a “preferential transaction” in section 43:Â
Understanding Preferential Transactions Under Section 43:
Preferential transactions are those transactions that give a creditor an undue advantage over others during the look-back period, which is 2 years before the insolvency commencement date for related parties to the corporate debtor.Â
Key Elements of Preference Under Section 43:
A corporate debtor gives preference to a creditor if corporate debtor transfers property or interest for the benefit of a creditor, surety, or guarantor, or on account of an antecedent debt, operational debt, or other liabilities owed by the corporate debtor.Â
The transfer has put such creditor, surety, or guarantor in a more beneficial position than it would have been in the event of the distribution of assets under section 53.
The preference is given at a relevant time, if:
it is given to a related party, other than by reason only of being an employee, during two years preceding the insolvency commencement date, or
a preference is given to a person other than a related party during one year preceding the insolvency commencement date.
Exclusion of Ordinary Course of Business Transactions:
The corporate debtor will not be giving any creditor “preference” in the following transactions:
transfer made in the ordinary course of the business or financial affairs of the corporate debtor or the transferee.
any transfer creating a security interest in property acquired by the corporate debtor to the extent that such security interest secures new value and was given at the time of or after the signing of a security agreement that contains a description of such property as a security interest, and was used by corporate debtor to acquire such property, and such transfer was registered with an information utility on or before 30 days after the corporate debtor receives possession of such property.
Suggested Reading : Constitution of Committee of Creditors under Section 21 of IBC
Judicial Interpretations of the Doctrine of Antecedent Debt
In Anuj Jain v. Axis Bank Ltd., the Hon’ble Supreme Court observed that section 43(2) shall have to be examined on another touchstone as to whether the transfer in question has the effect of putting such creditor or surety or guarantor in a beneficial position than it would have been in the event of distribution of assets per Section 53 of the Code. If the answer to this question is in the affirmative, the transaction under examination shall be deemed to be of preference within a relevant time, provided it does not fall within the exclusion provided by section 43(3). The court thereby clarified the concept of preference and the role of antecedent debt in identifying preferential transactions. According to the National Company Law Appellate Tribunal in Sidharth Bharatbhushan Jain and Ors vs. State Bank of India and Ors., the look-back period under section 43 cannot exceed 2 years. The NCLT in GVR Consulting vs. Pooja Bahry held that any transaction entered into by the corporate debtor would be regarded as a preferential transaction if it fulfills the conditions as prescribed under the IBC irrespective of whether the transaction was intended or anticipated to be so.
Challenges in Applying the Doctrine of Antecedent Debt
Determining the Intent of the Transaction:
A debt is considered antecedent if it exists independently of a specific transaction and places one stakeholder in a more beneficial position than other stakeholders in the insolvency process. The foremost issue in determining if the debt is “antecedent” or not is the difficulty of determining whether a transaction was intended to benefit a particular creditor unfairly.
Ambiguities in Identifying Debt as “Antecedent”:
Insolvency professionals or the Adjudicating Authority may find challenges in identifying whether a debt existed before the transaction, especially in complex commercial arrangements.
Balancing Creditor Rights:
A corporate debtor may have multiple creditors, including financial creditors, operational creditors, etc. Hence, insolvency professionals may face issues in balancing the doctrine’s application with the legitimate rights of creditors.Â
Practical Implications of the Doctrine for Stakeholders
For Insolvency Professionals:
Insolvency professionals have the main role in identifying if certain transactions put certain creditors in a beneficial position and if such a transaction falls within the look-back period under section 43(4). However, they may face challenges in analysing large amounts of financial transactions within the time limit in the insolvency framework.Â
For Creditors:
Creditors need to be genuine and provide accurate data to the insolvency professionals and the Adjudicating Authority. To avoid further legal disputes and complicating the resolution process, creditors need to be cautious about their transactions with corporate debtors during the look-back period to avoid clawbacks.
For Corporate Debtors:
It is the responsibility of the corporate debtor to maintain accurate financial records to justify the legitimacy of transactions during insolvency proceedings. This ensures the transparency and accountability of the process and avoids potential legal disputes.Â
Recommendations for Improving the Application of the Doctrine
The Insolvency and Bankruptcy Board of India (IBBI) needs to improve this doctrine, with the following recommendations:
The scope of antecedent debt has not been well-defined under section 43 of the IBC. Hence, there is a necessity for amendments to the IBC to clarify the importance of antecedent debts to identify preferential transactions.
It is suggested for the IBBI to introduce training programs for insolvency professionals to ensure proper identification of preferential transactions.
Insolvency professionals may utilise blockchain technology, advanced accounting tools, or artificial intelligence tools to tamper-proof financial records, aiding in the identification of antecedent debts.
Comparative Analysis:
Antecedent Debt in Global Insolvency Frameworks
The Bankruptcy Code in the United States does not define antecedent debt, but section 547 of the code gives bankruptcy courts the power to address it, allowing debtors or trustees to recover payments made to creditors during the insolvency period before bankruptcy. Hence, similar to the IBC, the role of antecedent debt in the US bankruptcy code is to avoid fraudulent transfers. Under the United Kingdom Insolvency Act, 1986, an antecedent debt has a similar definition as defined by judicial decisions. Section 239 of this Act, outlines the legal framework for challenging preferential transactions, requiring the insolvency practitioner to prove that the transactions were made to prefer a particular creditor and that the creditor was aware of the company’s insolvency or had reasonable grounds to suspect it.
The Way Forward for the Doctrine of Antecedent Debt in India
Courts might scrutinise transactions involving antecedent debts between related parties even more closely to ensure fair treatment of all creditors. To make it easier for insolvency professionals to identify preferential transactions, there needs to be clear documentation of debts. Currently, insolvency cases rely on judicial precedents as IBC provisions do not elaborate upon the definition of antecedent debt. Therefore, legal reforms may be introduced to define antecedent debts and their role in identifying preferential transactions.
Conclusion
The doctrine of antecedent debt ensures fairness and prevents preferential treatment in insolvency cases. It is used to prevent a debtor from unfairly favoring one creditor over others by transferring property to them before filing for insolvency to pay off debt while leaving other creditors with less. Insolvency professionals play a crucial role in reviewing transactions that occurred before the filing and potentially undoing transfers made to creditors that are considered preferential. However, it may be difficult to determine if a transaction was made with ill intent, the look-back period, and if the creditor was put in a beneficial position. To overcome these challenges, there is a need for legislative and judicial clarity.