Moratorium and Preference Powers: NCLAT Limits IBC to Debtor-Origin Transactions in ICICI Bank v. Chanchal Dua

[Akshit is a student at Hidayatullah National Law University.]

Recently, the National Company Law Appellate Tribunal (NCLAT), Delhi, in ICICI Bank Limited v. Chanchal Dua and Others, held that a co-applicant’s reimbursement into the corporate debtor’s loan account from a non-debtor bank account during the corporate insolvency resolution process (CIRP) neither breaches the moratorium under Section 14 nor qualifies as a preferential transaction under Section 43 of the Insolvency and Bankruptcy Code 2016 (IBC). The tribunal stressed that both the moratorium and avoidance provisions apply exclusively to the corporate debtor’s assets and transactions; third-party remittances cannot be unwound.

By delineating these statutory boundaries, NCLAT reinforced the IBC’s twin objectives, preserving asset value in distress and ensuring creditor certainty. The appeal arose from IA 2162/2020, filed under Section 19(2) read with Sections 14, 43, and 74(2), and from the NCLT’s order directing reversal of INR 8,92,980 and re-examination of ICICI Bank’s claim under Section 53.

This article unpacks the judgment in 3 parts. Part I examines the factual matrix and procedural history. Part II distils NCLAT’s statutory interpretation under Sections 14 and 43 (within the IA’s framework of Sections 19(2), 74(2), and 53) and maps its alignment with Supreme Court and tribunal precedents. Part III offers targeted recommendations, ranging from payment-source annexures to safe-harbor carve-outs, to translate this clarity into India’s insolvency framework.

Factual Matrix of the Case

The core issue was whether a third-party remittance into the corporate debtor’s loan account during the moratorium could be clawed back under Sections 14 or 43 of the IBC. Trend Flooring Private Limited and its co-applicant, Mr Arvind Narayan Singh, had availed an Innova/Zx AT vehicle loan from ICICI Bank before the initiation of CIRP.

On 9 October 2019, the NCLT, New Delhi, admitted a Section 7 petition filed by the State Bank of India against Trend Flooring. The tribunal appointed an interim resolution professional, confirmed him as resolution professional (RP), and declared a moratorium under Section 14 with effect from the insolvency commencement date.

During the moratorium, on 27 January 2020, INR 8,92,980 was credited to the loan account via NEFT/RTGS from HDFC Bank in the name of “Born to Right” held by Mr Amit Narayan Singh, co-applicant’s brother and additional director of Trend Flooring. Upon realization, ICICI Bank released the hypothecation charge on the vehicle. The RP emailed ICICI Bank on 5 February 2020 and 25 February 2020 seeking details of the corporate debtor’s assets.

By IA 2162/2020 filed under Section 19(2) read with Sections 14, 43, and 74(2), the RP prayed that this third-party payment be treated as a preferential transaction, reversed into the corporate debtor’s account, and that ICICI Bank’s claim be admitted under Section 53. On 22 December 2023, the National Company Law Tribunal (NCLT) directed ICICI Bank to refund INR 8,92,980 to Trend Flooring’s account and re-evaluate its insolvency claim. Aggrieved, ICICI Bank appealed to the NCLAT.

Freezing Only the Debtor’s Assets, Safeguarding Third-Party Payments: NCLAT’s Harmonious Verdict

In this case, the NCLAT clarified that the moratorium under Section 14 of the IBC applies exclusively to the corporate debtor’s assets and accounts. While the tribunal noted the Supreme Court’s ruling in Anand Rao Korada, Resolution Professional v. M/S Varsha Fabrics (Private) Limited, it expressly distinguished that decision as fact‐specific and inapplicable here no parallel auction or enforcement against the debtor’s property occurred. Accepting a bona fide remittance of INR 8,92,980 from a third‐party account did not amount to “enforcement” under Section 14. Since ICICI Bank merely acknowledged payment made by the co‐applicant’s brother and did not withdraw funds from Trend Flooring’s account, there was no breach of the moratorium.

Turning to avoidance under Section 43, the bench held that only transactions “given by the corporate debtor” can be rendered void. Relying on Indian Overseas Bank v. Dinkar T. Venkatasubramanian and Suresh Chand Garg v. Aditya Birla Finance Limited, it concluded that a co‐applicant’s separate‐account payment falls outside the statutory definition of “preference.” By confining Section 43’s scope to debtor‐origin transfers, NCLAT shielded bona fide lenders from claw‐back claims.

Finally, the two-member bench’s analysis focused solely on Sections 14 and 43 as invoked in IA 2162/2020 under Section 19(2), read with Sections 74(2) and 53. The bench allowed the appeal, set aside the NCLT’s direction to reverse the INR 8,92,980 payment and directed each party to bear its own costs. By adhering strictly to these provisions, it reinforced that only transactions squarely within Sections 14 and 43 may be unwound, thereby fortifying procedural clarity in the CIRP.

Rewriting the Rules of Insolvency: Balancing Moratorium Precision with Practical Fairness

Before exploring targeted solutions, it is crucial to ask whether NCLAT’s narrow reading of “given by the corporate debtor” in Section 43 might inadvertently hollow out the avoidance regime. What if a director’s spouse, a group subsidiary, or a friendly third-party entity routes a payment into the debtor’s loan account during CIRP to benefit one creditor over others? These “third-party payments”, defined broadly as remittances made by persons or entities other than the corporate debtor itself, could be used to sidestep claw-back provisions while achieving the same preferential effect. By focusing solely on the formal source of funds and ignoring the underlying relationship or intent, the tribunal’s approach risks shielding disguised preferences.

This concern underscores the urgent need for legislative amendments that explicitly address third-party payments and introduce transparency measures to prevent misuse. Without such safeguards, enforcement becomes difficult; resolution professionals may struggle to trace beneficial ownership or prove collusion, especially when payments are routed through opaque structures or layered accounts.

Substance Over Form: Comparative Lessons

While NCLAT’s ruling offers textual clarity, it risks privileging form over substance. International insolvency regimes have long recognized that the economic reality of a transaction must prevail over its formal structure.

United States: “Dominion and control” test

Under Section 547(b) of the US Bankruptcy Code, courts assess whether the debtor had control over the funds or orchestrated the transaction. In Bonded Financial Services v. European American Bank, the Seventh Circuit held that even if a third party makes the payment, it may be deemed preferential if the debtor exercised dominion over the funds. This prevents debtors from routing payments through affiliates to shield preferences.

United Kingdom: Intent and effect-based scrutiny

Section 239 of the Insolvency Act 1986 voids preferences that improve a creditor’s position, regardless of the transaction’s formal structure. In Re M C Bacon Ltd, the court emphasized that the debtor’s intent and the transaction’s effect on creditor equality are paramount. This allows tribunals to look beyond the surface and assess the real impact.

Australia: Benefit to debtor principle

Section 588FA of the Corporations Act 2001 treats payments made “on behalf of” the debtor as preferential if they reduce the debtor’s liability. In Airservices Australia v. Ferrier, the High Court clarified that indirect payments can be clawed back if they serve the debtor’s interests. This ensures that substance guides the avoidance analysis.

These jurisdictions demonstrate that substance-over-form is not merely a doctrinal preference; it is a safeguard against strategic circumvention and a tool for preserving the integrity of insolvency proceedings.

Recommendations: Closing the Substance Loophole

To align India’s insolvency framework with global standards and prevent disguised preferences, the following reforms are proposed. Each recommendation addresses a specific doctrinal vulnerability and operational gap exposed by the NCLAT ruling.

Adopt substance-over-form in defining preferential transactions

Amend Section 43 to clarify that any payment, whether made directly by the debtor or indirectly through a related party, that reduces the debtor’s liability or benefits a specific creditor may constitute a preference. This mirrors the dominion-and-control test in the US and the intent-based scrutiny in the UK and Australia. It addresses the risk of strategic routing of payments to evade claw-back.

Codify bona fide third-party safe harbor

Introduce a proviso under Section 14 exempting documented third-party remittances made without debtor direction or benefit. This protects genuine co-applicants or family assistance while preventing abuse. It balances creditor protection with financial realism.

Mandate payment-source disclosure in CIRP filings

Amend Regulation 36 to require resolution professionals to submit a “third-party payment schedule” detailing remitter identity, relationship to the debtor, transaction mode, and purpose. This enables tribunals to apply substance-based scrutiny and prevents opacity in financial flows.

Introduce a time bar for avoidance applications

Amend Section 19(2) to require all avoidance petitions to be filed within the CIRP period, before plan approval. This prevents tactical litigation post-resolution and reinforces finality in insolvency outcomes.

Create a co-applicant declaration regime 

Require any related-party remitter to file a declaration within 7 days of payment, specifying their relationship, source of funds, and intent. This helps distinguish genuine assistance from veiled preferences and supports substance-based adjudication.

Each reform is designed not as a procedural fix, but as a normative recalibration, ensuring that the IBC’s avoidance regime reflects economic reality and resists strategic manipulation.

Conclusion

While precision is vital, ignoring substance risks creating a loophole that undermines the IBC’s foundational goal of creditor equality. The NCLAT’s ruling, though doctrinally clear, exposes a structural vulnerability: the potential for disguised preferences routed through third parties. India’s insolvency regime must evolve beyond formalism.

By adopting a substance-over-form approach, anchored in comparative precedent and embedding safeguards like payment-source disclosures and co-applicant declarations, the IBC can uphold its normative promise. These reforms do not penalize genuine financial support; they ensure that economic reality, not legal camouflage, guides insolvency adjudication.