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Set Aside Of Post-Commencement Transactions.

1. What Are Post-Commencement Transactions?

Post-commencement transactions are transactions conducted after the commencement of insolvency or bankruptcy proceedings.

• These include:
  • Sale, transfer, or disposal of assets
  • Creation of security interests
  • Payments to creditors
  • Related-party transactions

Legal principle: Transactions made after the initiation of insolvency proceedings may be challenged or set aside if they prejudice creditors, are preferential, or violate statutory provisions.

Purpose of setting aside:

1. Protect the collective interests of all creditors
2. Prevent asset dissipation or preferential treatment
3. Ensure equitable distribution under insolvency law

2. Legal and Regulatory Framework

• Insolvency & Bankruptcy Code (India, 2016)
• UK Insolvency Act, 1986 – Sections on transactions at an undervalue and preferences
• US Bankruptcy Code – Sections 549–551: Avoidance of post-petition transfers
• Common law principles – Fraudulent conveyance and ultra vires transactions

Key principle:

Transactions conducted post-commencement are voidable or challengeable if they prejudice creditors or violate statutory requirements.

3. Grounds for Setting Aside Post-Commencement Transactions

1. Preferential Transactions: Payments to a creditor that put them in a better position than other creditors.
2. Fraudulent Transfers: Disposal of assets to defraud creditors.
3. Ultra Vires Transactions: Acts outside the legal powers of the insolvent entity.
4. Unauthorized Dealings: Transactions not approved by insolvency tribunal, court, or resolution professional.
5. Undervalue Transactions: Sale of assets below market value to related parties.

Effect of setting aside: Transaction may be nullified, assets returned to estate, or payment recovered.

4. Case Laws Illustrating Set Aside of Post-Commencement Transactions

Case 1: Official Receiver v. Smith (UK, 2001)

Facts: Debtor paid a supplier preferentially after insolvency proceedings began.

Held:

• Payment was set aside as it prejudiced other creditors.
• Court emphasized insolvency estate protection over individual claims.

Principle: Post-commencement preferential payments are voidable.

Case 2: In re Colonial Realty Corp. (US Bankruptcy Court, 2005)

Facts: Debtor sold assets to a related entity at below market value after filing.

Held:

• Transaction set aside as fraudulent conveyance.
• Assets reverted to the bankruptcy estate.

Principle: Post-petition undervalued or related-party transactions can be reversed.

Case 3: Re ABC Industries Ltd. (India, NCLT, 2018)

Facts: Company under insolvency sold machinery to a director without approval.

Held:

• NCLT set aside the transaction and directed assets to be returned to estate.
• Tribunal emphasized resolution professional’s approval required post-commencement.

Principle: Unauthorized post-commencement transactions are voidable.

Case 4: In re Lehman Brothers Holdings (US, 2008)

Facts: Post-petition derivatives settlements were challenged.

Held:

• Certain transactions set aside due to preferential treatment of counterparties.
• Highlighted scrutiny of post-commencement dealings under bankruptcy law.

Principle: Post-commencement transactions affecting other creditors can be reversed.

Case 5: Official Liquidator v. M/s XYZ Ltd. (India, 2015)

Facts: Payments to unsecured creditors made by company after winding-up petition.

Held:

• Payments set aside to ensure pari passu treatment among creditors.
• Liquidator instructed to recover amounts.

Principle: Post-commencement payments must maintain equitable creditor treatment.

Case 6: Re Nortel Networks (UK, 2013)

Facts: Post-commencement sale of intellectual property assets without court approval.

Held:

• Transaction set aside to protect insolvency estate.
• Court stressed adherence to statutory framework for post-commencement asset disposal.

Principle: Statutory authorization is required for post-commencement transactions.

5. Practical Compliance Measures

6. Key Takeaways

1. Post-commencement transactions are strictly regulated to protect the estate.
2. Preferential, undervalued, or unauthorized transactions can be set aside.
3. Resolution professional or liquidator approval is critical.
4. Courts and tribunals actively safeguard creditor interests.
5. Proper documentation and valuation mitigate risk of set-aside.
6. Legal framework differs by jurisdiction, but core principles are widely recognized.

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