Section 166: Effect of Order under the Insolvency and Bankruptcy Code 2016
Section 166 of the Insolvency and Bankruptcy Code, 2016 governs the effect of orders concerning an undervalued transaction under Section 164 or a preference transaction under Section 165 in the bankruptcy process. It protects specified interests and benefits acquired in good faith and for value, subject to the conditions stated in the section.
Text of Section 166 - Effect of Order
(1) Subject to the provision of sub-section (2), an order passed by the Adjudicating Authority under section 164 or section 165 shall not,-
(a) give rise to a right against a person interested in the property which was acquired in an undervalued transaction or a transaction giving preference, whether or not he is the person with whom the bankrupt entered into such transaction; and
(b) require any person to pay a sum to the bankruptcy trustee in respect of the benefit received from the undervalued transaction or a transaction giving preference, whether or not he is the person with whom the bankrupt entered into such transaction.
(2) The provision of sub-section (1) shall apply only if the interest was acquired or the benefit was received-
(a) in good faith;
(b) for value;
(c) without notice that the bankrupt entered into the transaction at an undervalue or for giving preference;
(d) without notice that the bankrupt has filed an application for bankruptcy or a bankruptcy order has been passed; and
(e) by any person who at the time of acquiring the interest or receiving the benefit was not an associate of the bankrupt.
(3) Any sum required to be paid to the bankruptcy trustee under sub-section (1) shall be included in the estate of the bankrupt.
Meaning and Scope of Section 166
Section 166 limits the consequences of an order made by the Adjudicating Authority under Section 164 or Section 165. In substance, the provision prevents such an order from disturbing an interest in property, or requiring repayment of a benefit, where the recipient satisfies all the safeguards specified in sub-section (2).
The protection is conditional. The interest or benefit must have been acquired in good faith and for value. The recipient must also have lacked notice of the undervalued or preferential character of the transaction and lacked notice of the bankruptcy application or bankruptcy order. In addition, the recipient must not have been an associate of the bankrupt when the interest was acquired or the benefit was received.
Related Provisions
Section 164 - Undervalued Transactions
Section 164 deals with undervalued transactions in the bankruptcy context. Section 166 expressly refers to an order passed by the Adjudicating Authority under Section 164.
Section 165 - Preference Transactions
Section 165 deals with preference transactions. Section 166 also governs the effect of an order passed under Section 165 where the conditions in Section 166 are satisfied.
Conditions for Protection under Section 166(2)
- Good faith: the interest must have been acquired, or the benefit received, in good faith.
- For value: the acquisition or benefit must have been supported by value.
- No notice of the relevant transaction: the person must not have had notice that the bankrupt entered into a transaction at an undervalue or for giving preference.
- No notice of bankruptcy proceedings: the person must not have had notice that a bankruptcy application had been filed or that a bankruptcy order had been passed.
- Not an associate: the person must not have been an associate of the bankrupt at the relevant time.
Effect on the Bankruptcy Estate
Under Section 166(3), any sum required to be paid to the bankruptcy trustee under sub-section (1) is included in the estate of the bankrupt. This connects the recovery mechanism with the property available for administration in the bankruptcy process.
Practical Reading of Section 166
Section 166 should not be read in isolation. When considering whether the statutory protection applies, the relevant order under Section 164 or Section 165, the status and knowledge of the recipient, the consideration given, and the relationship between the recipient and the bankrupt are material to the application of the provision.
This page provides general legal information on the statutory provision. For an individual matter, the current text of the Code, applicable notifications, rules, regulations and judicial decisions should be examined.