Section 165: Preference Transactions under the Insolvency and Bankruptcy Code 2016
Section 165 of the Insolvency and Bankruptcy Code, 2016 (IBC) deals with preference transactions entered into by a bankrupt before bankruptcy. It enables the bankruptcy trustee to approach the Adjudicating Authority where a transaction has placed a creditor, surety or guarantor in a better position than that person would otherwise have occupied in the bankruptcy.
Meaning and purpose of Section 165
A preference transaction is, in substance, a transaction by which the bankrupt does something, or permits something to be done, that improves the bankruptcy position of a creditor, surety or guarantor. Section 165 permits qualifying transactions within specified look-back periods to be examined and, where the statutory requirements are met, reversed or otherwise remedied by the Adjudicating Authority.
Section 165 - statutory provisions
(1) The bankruptcy trustee may apply to the Adjudicating Authority for an order under this section if a bankrupt has given a preference to any person.
(2) The transaction giving preference to an associate of the bankrupt under sub-section (1) should have been entered into by the bankrupt with the associate during the period of two years ending on the date of the application for bankruptcy.
(3) Any transaction giving preference not covered under sub-section (2) should have been entered into by the bankrupt during the period of six months ending on the date of the application for bankruptcy.
(4) The transaction giving preference under sub-section (2) or under sub-section (3) should have caused the bankruptcy process to be triggered.
(5) On the application of the bankruptcy trustee under sub-section (1), the Adjudicating Authority may:
(a) pass an order declaring a transaction giving preference void;
(b) pass an order requiring any property transferred in respect of a transaction giving preference to be vested with the bankruptcy trustee as a part of the estate of the bankrupt; and
(c) pass any other order it thinks fit for restoring the position to what it would have been if the bankrupt had not entered into the transaction giving preference.
(6) The Adjudicating Authority shall not pass an order under sub-section (5) unless the bankrupt was influenced in his decision of giving preference to a person by a desire to produce in relation to that person an effect under clause (b) of sub-section (8).
(7) For the purpose of sub-section (6), if the person is an associate of the bankrupt, otherwise than by reason only of being his employee, at the time when the preference was given, it shall be presumed that the bankrupt was influenced in his decision under that sub-section.
(8) For the purposes of this section, a bankrupt shall be deemed to have entered into a transaction giving preference to any person if:
(a) the person is the creditor or surety or guarantor for any debt of the bankrupt; and
(b) the bankrupt does anything or suffers anything to be done which has the effect of putting that person into a position which, in the event of the debtor becoming a bankrupt, will be better than the position he would have been in if that thing had not been done.
Key requirements at a glance
| Requirement | Section 165 position |
|---|---|
| Who may apply? | The bankruptcy trustee may apply to the Adjudicating Authority. |
| Preference to an associate | The transaction must fall within the two-year period ending on the date of the bankruptcy application. |
| Other preference | The transaction must fall within the six-month period ending on the date of the bankruptcy application. |
| Required connection | The qualifying preference should have caused the bankruptcy process to be triggered. |
| Preferential effect | The creditor, surety or guarantor is put in a better position in the event of bankruptcy than if the act had not occurred. |
| Associate presumption | Where the preferred person is an associate, subject to the employee exception in sub-section (7), the statutory presumption regarding influence by the relevant desire applies. |
Orders the Adjudicating Authority may pass
If the statutory conditions are satisfied, the Adjudicating Authority may declare the preference transaction void, require transferred property to vest in the bankruptcy trustee as part of the bankrupt's estate, and make another appropriate restorative order. The object is to restore the position to what it would have been if the preference had not been given.
Important definitions and connected provisions
Bankruptcy trustee
The bankruptcy trustee is the insolvency professional appointed or confirmed to administer the bankruptcy process and the estate of the bankrupt in accordance with Part III of the IBC. Section 165 specifically gives the bankruptcy trustee standing to seek an order concerning a preference transaction.
Adjudicating Authority
For individuals and partnership firms under Part III, Section 179 identifies the Debt Recovery Tribunal as the Adjudicating Authority, subject to the special jurisdictional rule in Section 60 for personal guarantors to corporate debtors.
Associate
The expression "associate" is relevant because Section 165 provides a longer two-year look-back period for a preference given to an associate and creates the presumption stated in sub-section (7). The meaning is governed by the definitions applicable to Part III of the Code.
Related provisions
Section 164 addresses undervalued transactions by a bankrupt. Section 166 sets out the effect of an order under Sections 164 or 165, while Section 167 deals with extortionate credit transactions. These provisions form part of the Code's framework for reviewing transactions affecting the bankruptcy estate.
Section 165 and corporate preferential transactions
Section 165 applies in the personal-bankruptcy framework. Corporate insolvency uses a separate avoidance provision under Section 43, with remedies principally addressed in Section 44. The tests and relevant periods under the corporate provisions should therefore not be substituted for the requirements of Section 165.
Current legal framework
The Insolvency and Bankruptcy Code, 2016 is Act No. 31 of 2016. The IBBI maintains the official legal framework, including the Code, amendment legislation, regulations, notifications, circulars and other updates. The IBC was amended in 2026; readers dealing with a live proceeding should verify the commencement and applicability of amendments and the regulations relevant to the particular insolvency or bankruptcy process.
Content reviewed and updated: 30 September 2026.