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  • Pratyush Singh

The Need to Revisit the Exception of ‘Ordinary Course of Business’ under IBC

[Pratyush is a student at National Law School of India University, Bangalore.]

Section 43(3) of the Insolvency and Bankruptcy Code 2016 (IBC) lays down the exceptions from terming certain transactions as preferential. This article looks at the exception mentioned under Section 43(3)(a) which exempts a “transfer made in the ordinary course of the business or financial affairs of the corporate debtor or the transferee.” The Supreme Court in Anuj Jain v. Axis Bank (Anuj Jain) interpreted this provision to rule that the contested transactions between Jaiprakash Associates Limited (JAL) and Jaypee Infratech Limited (JIL) did not satisfy the requirements of Section 43(3)(a). It is in this context that this article attempts to argue that there is a need to revisit the interpretation of this provision owing to the unsoundness of Supreme Court’s analysis. To that end, the article, at first, briefly summarise the Supreme Court’s reasoning in Anuj Jain, and it will therea, argue that the exception should be read disjunctively, and third, present why the exception should be read subjectively.

Shortcomings of JIL and JAL

The Supreme Court in Anuj Jain made two observations on Section 43(3)(a). First, citing Mazagaon Dock Limited v. The Commissioner of Income-Tax, the court stated that the 'or' between 'corporate debtor' and 'the transferee' should be interpreted as 'and'. According to the court, such a purposive interpretation was required to prevent the intent of the legislature from being destroyed. If the provision were to be interpreted literally, in almost all instances of a transfer being made to a financial institution, it would fall within the ordinary course of business, which defeats the purpose of the provision. And second, with regards to the phrase 'ordinary course of business', the court stated that a transaction should form a “part of the undistinguished common flow of business done…calling for no remark and arising out of no special or particular situation.” In the instant case, the Supreme Court observed that JIL was a subsidiary created by JAL for the execution of housing/building projects. Hence, according to the court, there was no reason for a construction company to regularly mortgage its assets to get debts for its parent company. Moreover, JIL had no history (indicating the ordinary course of business) of creating encumbrances over its property. Thus, the Supreme Court relied upon the lack of continuous practice with regard to the instant transaction, and the lack of discernible reason for a construction company to carry out such a transaction to rule that this particular transaction would not fall within the ordinary course of business of JIL.

Purposive Interpretation or Judicial Overreach?

In Anuj Jain, the Court seems to rely upon a supposed purposive interpretation to read ‘corporate debtor’ and ‘transferee’ conjunctively despite the use of the word ‘or’. In Babu Manmohan Das Shah v. Bishun Das, the Supreme Court had opined that a statute should be interpreted literally. The only two instances where a purposive interpretation could be taken by courts is when a literal construction of the law would either lead to absurd results or would be fundamentally against the legislature’s view. The author argues that neither of such situations exists in the present case.

First, as observed in Sumit Binani Resolution Professional v. Excello Fin Lea Ltd, Section 43(3)(a) of the IBC has been bodily lifted from 547(c)(2)(A) of the US Bankruptcy Code. The US version of the provision uses the expression 'made in the ordinary course of business or financial affairs of the debtor and the transferee'. Hence, the change of words for IBC can be inferred to be deliberate. Additionally, the Report of the Insolvency Law Committee by the Ministry of Corporate Affairs refers to the UNCITRAL Legislative Guide on Insolvency Law as one of the reasons for adding provisions pertaining to avoidable transactions. The UNCITRAL Legislative Guide itself stipulates that the ‘ordinary course of business’ component requires looking at the “intention of one or both of the parties.” Thus, the legislature was fully aware of the options that existed concerning this exception. By deliberately choosing to replace the word ‘and’ with ‘or’ when lifting it from the US Bankruptcy, the intention of the legislature is discernible and hence a literal interpretation should be undertaken.

Second, reading the provision literally does not lead to absurd results. The very fact that the UNCITRAL Legislative Guide gives countries the option to look at the intent of one or both parties gives us the idea that either of the options can be adopted based on the context of each country. For example, Section 122(2)(a) of the Australian Bankruptcy Act states '[n]othing in this section affects the rights of a purchaser, payee or encumbrancer in the ordinary course of business…'. This shows that countries with both versions exist and there is no uniform approach required for this exception. Thus, solely because this version of the phrase might exempt financial institutions cannot be the only ground for the Court to read the phrase conjunctively. In fact, one of the principal reasons for this exception to exist is so that a company that is struggling financially can seek a credit line. In Re Modern Terrazzo Limited, it was observed that the reason that ordinary business transactions are exempted from the purview of preferential transactions is to ensure that financial institutions are not dis-incentivized from giving credit. Perhaps, the court was worried that if JIL was allowed to take advantage of this exception, they would be adversely impacting one of the most fundamental objectives of insolvency law: equality among creditors. If such were the case, the court could have looked at other provisions in the IBC such as undervalued transactions under Section 45 or fraudulent transactions under Section 66, which were also argued by the IRP in Anuj Jain.

Need for a Subjective Construction

Circling back to the ‘ordinary course of business’ part of the Supreme Court’s analysis in Anuj Jain, we see that they focused on two components. First, the subjective component, where the company’s past practice was looked at and second, the objective component, where the general business practice of that sector was analyzed. To Supreme Court’s credit, interpreting this phrase is extremely difficult. In fact, Australia has taken this phrase out of their Corporation Act as an exception to the voidable preference transactions owing to judicial uncertainty and confusion regarding its interpretation. However, where the Supreme Court goes beyond the text of the statute is by conducting an objective analysis. The text clearly refers to 'ordinary course of the business…of the corporate debtor or the transferee,' thus signifying a subjective analysis. While Section 547 of the US Bankruptcy Code also prescribes for an objective analysis in a subsequent sub-section, the same has not been incorporated into the IBC. An objective assessment entails an analysis of the industry standard. This has been criticized for having a very difficult evidentiary standard as it does not account for variance in industry practice, and forces businesses to adopt a uniform standard of payment terms. The Supreme Court’s ratio is already being used to completely change the purpose of the provision. The National Company Law Tribunal, Mumbai Bench in a recent case stated that since no ‘prudent person’ would have acted in the way as the corporate debtor, their transaction would not fall within the exception. Besides Anuj Jain, there was no mention of any other source as to where such a standard of a prudent person was being imported from. Even if the Indian legislature were to add such an objective requirement to the exception, perhaps the approach in Tolona Pizza Prods. Corp. v. Rose Packing Co. can be adopted. In this case, it was observed that the general industry practice should only be looked at when there is no other way to access the transaction objectively.

Lastly, while the author agrees that the past practice of a company can be looked at for a subjective analysis, there may be instances where it is the company’s first transaction with a party or they have a very small history between them. In such a case, refusing to grant the protection under Section 43(3)(a) only because there is a lack of history of transactions between the parties is unjust in nature. The United States Court of Appeals for the Tenth Circuit has an answer for such a situation. The court in Jubber v. SMC Electrical Products, Inc. remarked that first-time transactions can also be protected under the ordinary course of business exception. Such a protection may be granted provided that it aligns with the debtor’s or creditor’s “past practices when dealing with other, similarly situated parties.”


This article attempted to highlight the shortcomings of the court’s interpretation of the phrase ‘ordinary course of business’ in Anuj Jain. It observed that there is sufficient reason to demonstrate that the legislature wanted the phrase to be disjunctive in nature. Additionally, it was seen that IBC only envisages a subjective analysis of this exception which should be construed more liberally than what was done by the court. All of these points showcase why there is a clear need to revisit the provision either at a judicial or at a legislative level so that its actual purpose is not defeated, and companies are not unjustly punished.

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