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The “Ordinary Course of Business” exception in preferential transactions – Deciphering the interpretation methodology

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The concept of avoidance of preferential transactions under Section 43 of the Insolvency & Bankruptcy Code, 2016 (“Code”), is based on the principle that insolvency is a collective scheme process and that the assets of a corporate debtor (“CD”) are distributed equitably in a liquidation scenario. During the twilight period of insolvency, paying off one creditor selectively can be disadvantageous to the interests of other stakeholders/creditors as transferring certain assets/monies diminishes the CD’s value. To reverse/avoid such preferential transactions, Section 43(1) of the Code empowers the resolution professional (“RP”) or the liquidator to approach the jurisdictional National Company Law Tribunal (“NCLT”). As per Section 43(2), a CD shall be deemed to have been given “preference” if the CD’s transfer of property benefits any creditor on account of any pre-existing debt owed by the CD and such a transfer puts the creditor into a beneficial position than it would have had the assets been distributed in a liquidation scenario. One of the two exclusions Section 43(3) lays down two exceptions from the trappings of the deeming fiction of preferential transactions one of them being “transfers made in the ordinary course of business or financial affairs of the corporate debtor or the transferee” (the “OCOB Exception”)[1].

The phrase “ordinary course of business” (“OCOB”) is not defined under the Code or the Companies Act, 2013. Its interpretation has evolved through various judicial pronouncements from the pre-Code era, which has also guided the Indian insolvency courts in determining if a transaction (alleged to be a preferential transaction under Section 43 of the Code) falls under the OCOB Exception. However, the authors believe that the interpretation of the OCOB Exception warrants a more nuanced and cautious approach considering the uniqueness of an insolvency situation when decisions taken by corporates may fall on a blurred line between violating the collective scheme tenet and achieving a genuine commercial end to maintain the going concern status of the CD. To decode the most appropriate manner of interpretation of the OCOB Exception, the authors first trace the legislative intent of Section 43 and then examine some judgments passed by the Indian courts/tribunals interpreting the OCOB Exception. 

Ordinary course of business – The legislative background and judicial evolution   

Legislative background – The following three sources are relevant for this purpose:

  • UNCITRAL Guide: Section 43 of the Code is inspired by the avoidance provisions as conceptualised under the UNCITRAL Legislative Guide on Insolvency Laws[2] (“UNCITRAL Guide”), which recognises that while different states have defined the term “ordinary course” with varying emphasis on different elements, one commonality in the interpretation is to determine if the particular transaction constitutes the routine conduct of business, allowing for routine payments and the entering into of routine contracts.[3]
  • US Bankruptcy Code: While the Code largely takes inspiration from the UK’s Insolvency Act 1986 (“UK Law”), it follows the Section 547(c)(2)(A) of the US Bankruptcy Code (“US Code”), which uses the same OCOB exception (unlike its UK counterpart).[4] US Courts have held that the interpretation of the exception requires subjective standard of proof that can be based on various factors such as antecedent trend of the transactions between parties, change in payment behaviour (in terms of quantum, manner, and timing) during the lookback period, etc.[5]
  • BLRC Report[6]: The BLRC Report (based on which the Code was enacted) states, in the context of avoidance transactions, that the RP is responsible for verifying that the reported transactions are central to running of the business of the CD.[7] This signifies that the nature of payment should be such that it is justified in light of the requirement of keeping the going concern status of the CD during the twilight period.

Judicial Interpretation: In the pre-Code era, Indian courts held that ascertaining the contents of OCOB is a subjective and fact-specific determination, which needs to be undertaken on a case-to-case basis. The courts have recognised the following parameters as being indicative of “ordinary course of business”:

  • the frequency and past conduct of the company, whether the transaction is stray or casual or whether it is a habit and is a matter of regular business;[8]
  • whether there is a routine and uniformity in dealings;[9]
  • whether such activity serves a business purpose and/or is undertaken with a profit motive[10];
  • reliance on the business practices in the commercial world in general;[11] and
  • whether the constitutional documents specifically permit undertaking of such activity.[12]

In the context of insolvency, while determining this may be comparatively easier in the case of payment to operational/trade creditors (given that availing of goods and services would normally be done to keep the going concern status of the CD[13]), the exercise becomes slightly difficult when it comes to examining financial debt transactions. Hence, the authors have analysed the following judgments, where the Indian courts interpreted the OCOB exception under Section 43 of the Code while examining certain financial debt transactions: 

  • Keeping the legislative background and the object and purpose of Section 43 into consideration, the Supreme Court in the landmark judgment in Anuj Jain (IRP, Jaypee Infratech Limited) v. Axis Bank Limited and Ors[14] (“Anuj Jain case”) held as follows: “28.3. ……It has rightly been contended on behalf of the appellants that for the purpose of exception under clause (a) of sub-section (3) of Section 43, the intent of legislature is required to be kept in view…. 28.4. It remains trite that an interpretation that defeats the scheme, intent and object of the statutory provision is to be eschewed and for that matter, if necessary, by applying the principles of purposive interpretation rather than literal.” In the Anuj Jain case, the CD had mortgaged properties (which is otherwise considered usual transaction by companies) in favour of its holding company’s lenders, which the Supreme Court held as not being in the CD’s OCOB as it was only an SPV of the holding company had incorporated for a specific purpose and that security creation for its holding company could not have been its business object.[15]
  • The NCLT Mumbai reviewed the repayments made to certain financial creditors during the lookback period in Sumit Binani, Resolution Professional of Monnet Ispat & Energy Ltd, v. Excello Fin Lea Ltd.[16] (“Monnet Ispat case”). It held equality of distribution of the CD’s assets as the most fundamental doctrine underlying an insolvency process and that it cannot be achieved (and will become meaningless) if the debtor is free to make preferential payments shortly before the onset of insolvency. Here the CD had made repayments as per agreed terms to certain financial creditors during the lookback period even though it was facing losses for a long period and its account was already in default with respect to other financial creditors. The NCLT reversed the said transaction by rejecting the transferee’s submission that the repayments fell under the OCOB Exception.        
  • The NCLAT[17] in GVR Consulting Services Limited v. Pooja Bahry & ors.,[18] (“GVR case”) held that the expression “ordinary course of business” or “financial affairs of the CD” had to be read “ejusdem generis” and could not be given an extended meaning else all the CD’s financial transactions would be covered within the said expression. In this case, involving the CD’s repayment of loan to related parties during the lookback period, the NCLAT observed that taking financial assistance from related parties could not be categorised as OCOB. The NCLT, Chandigarh bench, followed the same rationale in Sanjay Kumar Dewani v. Mr. Totakura Rajshekar & ors.[19] when it held that the repayment the CD made towards unsecured loan provided by the director of the CD (as a preference over other creditors) was clearly not a part of “undistinguished common flow of business done” and hence such repayment could not be treated to be in the OCOB.
  • The NCLT Mumbai, in Ms. Charu Desai, RP of Mandhana Industries Limited v. HDFC Bank Limited & Ors,[20] (“Mandhana case”), held that repayment of loan by a CD to one of its creditors on the relevant due date (or even with little delay), as per the prescribed repayment schedule, during the lookback period should be treated as a transaction done in the OCOB. In this case, the NCLT was dealing with an application filed by the RP for the reversal of repayments the CD had made within the lookback period to one of its unsecured lenders (“Unsecured Lender”) when loans to a consortium of secured lenders (“Consortium Loans”) was already in default. While the NCLT observed that the transaction satisfied the basic ingredients of Section 43(2) of the Code, it also held, among other things, that the transaction fell under the OCOB Exception  as the CD had been making payments regularly to the Unsecured Lender even before the lookback period, and it had shown no change in its repayment behaviour within the lookback period.

Authors’ comments on the interpretation methodology

The authors believe that while the Anuj Jain case and the Monnet Ispat case have ensured that the intent and purpose of Section 43(2) were duly considered while examining the transaction in question as an OCOB, the GVR Case and Mandhana case have fallen short of such mandate as these transactions were analysed on a standalone basis. The authors would like to make the following submissions to support their observation:

  • Availing loan from related parties is a routine matter for companies considering the factors of additional costs and time involved in sourcing debt from non-related parties. Therefore, blanket categorisation of these transactions as not being OCOB solely on the factor of the involvement of a related party (such as in the GVR Case) and especially when the Code does not prescribe any such presumption (unlike its UK counterpart[21]), will impact credit flow for companies. Instead, courts/tribunals should examine such transactions on the touchstone of preference being caused to the related party and not only by their very nature of being a related party transaction.
  • In the Mandhana case (the facts of which are similar to the Monnet Ispat Case and both judgments came out of the same Mumbai bench), the NCLT applied the OCOB test on a standalone basis even after determining that the transaction fulfilled all ingredients of a preferential transaction. It failed to appreciate that the amounts the CD repaid to the Bank during the lookback period are the CD’s assets, which would not be available for distribution to the secured creditors in a liquidation scenario, who otherwise would have had priority over any unsecured creditor with respect to such assets. It would be interesting to see if the NCLT would have come to the same conclusion if:
    • the case involved two unsecured loans being paid regularly as per their respective terms while, during the lookback period, the CD was making selective repayment towards only one of them; or
    • the question involved selective repayment of the secured Consortium Loan while the Unsecured Loan was already in default (even though this may not amount to a preference considering secured lenders would anyway have priority over the unsecured lenders under the payment waterfall in Section 53).
  • Furthermore, in the Mandhana case, the facts do not appear to suggest that the repayments were to induce the Unsecured Lender to provide further value (in the form of money – similar to a cash credit limit transaction[22]– or goods – such as in case of LC issuances[23]), similar to the “running account principle” under Australian[24] and UK laws,[25] which would have helped keep the going concern status of the CD. 

Therefore, while examining the applicability of the OCOB Exception, the courts/tribunals must keep in mind the legislative intent behind Section 43 and give a purposive interpretation to evaluate the transaction at hand instead of limiting the examination to just one or few factors (such as historical repayment behaviour or relationship of the CD with transferee, etc.). While it is not necessary to interpret the OCOB Exception only in the context of inviolability of the collective scheme of an insolvency process, it is necessary to see if the transaction has a genuine commercial end and benefits the CD to keep it as a going concern even though there may be a factual preference.[26]


In light of the constant evolution of complexities in financial transactions (especially during the twilight period of insolvency to deal with the financial stress), a careful examination of these transactions is required before giving them the benefit of the OCOB Exception so as to not lose sight of the legislative purpose of the rigour under Section 43 of the Code. This is to ensure that fundamental doctrines of insolvency as a collective scheme process and equality of distribution of the CD’s assets among its creditors are not undermined.

* The Authors were assisted by Bhavit Baxi.

[1] The other exception as per Section 43(3) of the Code, being transfers creating a security interest in property acquired by the corporate debtor to the extent that such security secures new value and was given at the time of or after the signing of a security agreement.

[2] Refer to UNCITRAL Guide on Insolvency Laws, Part two, Chapter F, Avoidance proceedings, p. 135 onwards.

[3] Ibid, section 2(d) of Chapter F, paragraph nos. 164-168 at p. 140. It further goes on to identify payments such as payment of rent, utilities (electricity, telephone) and payment for trade supplies as routine payments.

[4] The language of the OCOB exception as it appears in the Section is as follows: “(2) to the extent that such transfer was in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee, and such transfer was— (A) made in the ordinary course of business or financial affairs of the debtor and the transferee; or (B) made according to ordinary business terms.”

[5] In FBI Wind Down Inc. v. Innovative Delivery Sys. Inc., 581 B.R. 662, 387 (Bankr. D. Del. 2018), the court observed that a multitude of factors might be taken into consideration while examining a transaction to be in the ordinary course such as:

  1. the length of time the parties were engaged in the type of dealing at issue;
  2. whether the amounts of the alleged preferential transfers were larger than prior payments;
  3. whether the payments were tendered in a manner different from previous payments;
  4. whether there was any unusual action by either the debtor or the creditor to collect or pay the debt; and
  5. whether the creditor did anything to gain an advantage in light of the debtor’s deteriorating financial condition.

[6] Bankruptcy Law Committee Report of November, 2015

[7] Ibid, paragraph 5.5.7, p. 101

[8]  Somanath Baraman v. S. V. Jagannatha,AIR 1973 AP 144; Herbertsons Ltd. v. Deputy Commissioner of Income Tax,(2004) 87 TTJ (Mumbai) 840. Also see Gajnan v. Seth Bringaban,AIR 1970 SC 2007and Sitaram Sharwan v. Bajya Parnav, A.I.R. 1941 Nag. 177

[9]  Kalapnath Singh v. Surajpal Singh,AIR 1949 ALL 425

[10] The Madhya Pradesh High Court in State of M.P. v Bengal Nagpur Cotton Mills Ltd., 1960 SCC OnLine MP 199, distinguished between activities, including such activities that have been carried out continuously, vis-à-vis activities that have been consistently carried on coupled with an intention to earn profit, holding the latter to be indicative as carrying on a ‘business.’

[11]  Countrywide Bank Corporation Limited v. Brian Norman Dean, (1998) A.C. 338 at 349; ITW Signode India Ltd. v. Dy. CIT (2007) 110 TTJ (Hyd) 170. Further, In A. Ebrahim and Company v. State of Bombay, 1962 SCC OnLine Bom 195 the High Court of Bombay laid down the test of ‘reasonable connection with the nature of the business’ (i.e. reasonably establish that any such other business has a connection with the main business of the company) to determine whether an act would be considered in the ‘course of business’ of a company.

[12]  Commissioner of Income Tax v. Birla Brothers P Ltd,(1970) 2 SCC 88; Goetze (India) Limited v. Deputy Commissioner of Income Tax [2008] 25 SOT 171 (Delhi)

The NCLT Mumbai in Liquidator for Birla Cotsyn (India) Limited v. Sona Cotsyn Private Limited & ors, MANU/NC/5743/2023 dated November 20, 2023 has held that transactions executed by CD with operational creditors for supply of cotton and other allied raw materials was essential for running its business operations as going concern and therefore the same would be considered as being in the ordinary course of business.

[14]  (2020) 8 SCC 401

[15] Read more at The `Jaypee Judgement’ – Assessing it’s impact on the Indian financing landscape | India Corporate Law (

[16] 2018 SCC OnLine NCLT 23785, vide order dated 25.07.2018, which was also upheld by the Hon’ble NCLAT

[17] The National Company Law Appellate Tribunal

[18] (2023 SCC OnLine NCLAT 220) 

[19] (2023) 614 NCLT

[20] Order dated April 16, 2024, passed in MA 1254 of 2018 in CP(IB)1399 of 2017 [Microsoft Word – MA 1254 of 2018 CHARU DESAI V. HDFC BANK LTD & ORS. (]

[21] The UK law in S. 239 (6) of the Insolvency Act 1986 provides that a company which has given factual reference to a defined category of connected persons is presumed to have been influenced by a desire to prefer.

[22] In a Cash Credit (CC) loan transaction, a limit is made available to the debtor with a repayment period of upto 12 months. If any portion of the limit is utilised by the borrower and repaid as per the terms, the limits are renewed by the bank to the extent of the utilised portion.

[23] Letter of Credit (LC) transactions involve issuance of the LC instrument by a bank on behalf of the buyer/borrower in favor of the Seller/its bank for purchase of goods. Upon devolvement of any LC, the buyer is supposed to make repayment to the issuing bank or authorise the Bank to debit its account as per the agreed terms, following which the bank will issue further LCs towards the LC limits made available to the borrower which enables the borrower to procure goods from the seller. In the case of Ruchi Soya ICICI Bank Ltd. v. Shailendra Ajmera, 2019 SCC OnLine NCLAT 1052 the Hon’ble NCLAT held that debits made by the issuing bank from the current account of the CD towards issuance of LCs were in the ordinary course of business.

[24] The running account principle as per Australian law is that a transaction will be considered to be in the ordinary course if the purpose of the payment is to induce the creditor to provide further goods or services as well as to discharge an existing indebtedness unless the payment exceeds the value of such goods or services. See: Airservices Australia v Ferrier, (1996) 137 ALR 609 (at 622-623). While the Australian running account principle was developed by the courts, it is now codified under Section 588FA(3) Corporations Act 2001 which states that multiple running account transactions between debtor and creditor are to be treated as constituting a single transaction giving unfair preference to such creditor. Also see Infra at 25.

[25] While the running account principle is not codified under English law, the concept has been adopted in several judgments. See: Re Ledingham-Smith, [1993] BCLC 635, as referred to in, “Preferences” by Adrian Walters, Vulnerable Transactions in Corporate Insolvency, J Armour and H Bennett (eds), (Chapter 4, at pp. 123-181), (Oxford: Hart Publishing, 2003), paras 4.63-4.64.

[26] English preference law doesn’t favor the blanket rule but mediates between insolvency law norms and wider issues of policy within commercial law and the credit economy. See Ibid at para 4.2 on p. 125.