Dear Friends,


As you are aware that the Insolvency and Bankruptcy Code, 2016 has been introduced by the government with aims to maximise the value of company’s assets and resolution of insolvency status of company through resolution and conciliation. The main objective of the Code,2016 is  to restructure and resolve insolvency of corporate persons, partnership firms and individuals promptly for leveraging the maximum value of assets of such persons. While proceeding therewith to also promote the entrepreneurship as well as accessibility to credit. The liquidation of a Corporate Debtor is the last resort and primary objective is to save Corporate Debtor and pay the balance of creditors , government and other stakeholders through adoption of best resolution plan.



Since Corporate Debtors are governed by human being called directors and collectively called Board of Directors. The management of the company knows the financial status of a company well as against outsiders and at the time of insolvency position , they try to divert the assets of the company through various agreements or transactions ,so that their loss will be minimised at the time of liquidation.  In these conditions the assets of company is transferred on very less value and the creditors of the company left in lurch with no recovery prospects.



To protect lenders’ interests, the Code provides for avoidance of;

  1. Preferential (Sections 43 and 44);
  2. Undervalued (Section 45 to 48);
  • Extortionate (Sections 50 and 51) and
  1. Fraudulent (Section 49 and 66) transactions.


The main objective behind these provisions is to make available the assets of the corporate debtor for their resolution, making it run as a going concern, and liquidation. It also ensures that a particular creditor is not placed in a beneficial position vis-à-vis the other creditors.











Under the Section 43 IBC, RP can apply for avoidance or recovery of sums earned or lost by preferential transactions.

A transaction is considered preferential when:

a) the transaction relates to transfer of property or interest of the corporate debtor in favor of a creditor/surety/guarantor for or on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor and;

b) such transaction should have the effect of putting the creditor/surety/guarantor in a more beneficial position than it would have been in the event of a distribution of assets being made in accordance with Section 53.

PLEASE NOTE THAT :Such transactions should be made in a relevant time period, which is:

i)             two years preceding the insolvency commencement date in case of related party transactions, and

ii)            one-year preceding insolvency in all transactions which are not related party transactions.

Further, a transaction will not be preferential if;

a) it is made in ordinary course of business and

b) if it creates new value for the corporate debtor.


In Anuj Jain Interim Resolution Professional for Jaypee Infratech Limited v. Axis Bank Limited-the corporate debtor had mortgaged its property as collateral security for the debt of its holding company. It was held that the transaction can be avoided as it was for the benefit of a related party and that it was made within the look back period of two years. In the course of the judgement the court made the following observations:

  • A transaction will qualify as preferential transaction if it satisfies the three-fold test. It first has to fulfill the twin requirements of Section 43(4) and 43(2), and then it should not fall under the exceptions mentioned in Section 43(3). The intention of the parties or whether or not they anticipated that the transaction is preferential in nature is immaterial.
  • Look back period is to start from insolvency commencement date and not from the date on which Section 43 came into effect.

SECTION 43(3) PROVIDESthat a transaction will not qualify as preferential transaction if it is done in in the ordinary course of the business or financial affairs of the ‘corporate debtor or the transferee’.

ACCORDING TO SC THE PHRASE ‘corporate debtor or the transferee’ should be read as ‘corporate debtor and the transferee’. This purposive interpretation is required to make sure that inquiry remains focused on the affairs of corporate debtor and does not shift its focus towards the affairs of transferee.

In Venus Recruiter Private v. Union of India the question before the court was whether an application filed under Section 43 for avoidance of preferential transactions can survive beyond the conclusion of the resolution process and the role of the Resolution Professional in filing/pursuing such applications. It was held that RP cannot wear hat of ‘Former RP’ and pursue avoidance application in respect of preferential transactions after hat of Corporate Debtor has changed.


UNDER SECTION 45 the RP can approach the Adjudicating Authority for making an order to declare an undervalued transaction void or to reverse it. A transaction will be considered undervalued if the corporate debtor has made the transaction;

a) by way of a gift or

b) by paying a consideration which is significantly less than what the corporate debtor had paid for the asset.


PLEASE NOTE THAT : If such transaction was made in ordinary course of business, section 45 will not apply. The look back period is two years preceding insolvency commencement date in case of related party transactions, and one-year preceding insolvency in all transactions which are not related party transactions. The look back period should commence from the insolvency commencement date and not from the date on which section 43 came into effect.

In IDBI Bank vs. Jaypee Infratech Ltd the corporate debtor had transferred immovable property by way of mortgage without any consideration; the court held that the transaction was undervalued transaction.


SECTION 49 deals with transactions defrauding creditors. The section will come into play if a corporate debtor has deliberately made an undervalued transaction under Section 45 in order to;

a) keep assets of the corporate debtor beyond the reach of any person who is entitled to make a claim against the corporate debtor; or

(b) in order to adversely affect the interests of such a person in relation to the claim.


PLEASE NOTE THAT :The section does not have any look back period, as fraud operates as a nullity forever. However, proceedings under Section 49 cannot continue in absence of an ongoing insolvency resolution or liquidation process.

Unlike other avoidable transactions, Section 49 requires intent on part of corporate debtor. In fact, it is the presence of intent that transforms an undervalued transaction into a fraudulent transaction for the above purposes.

If a transaction comes under purview of section 49, it can trigger penal provision of Section 69. Section 69 provides for punishment of corporate debtor or its officers for entering into fraudulent transactions.

SECTION 49 OF IBC,2016– Where the corporate debtor has entered into an undervalued transaction as referred to in sub-section (2) of section 45 and the Adjudicating Authority is satisfied that such transaction was deliberately entered into by such corporate debtor—

(a) for keeping assets of the corporate debtor beyond the reach of any person who is entitled to make a claim against the corporate debtor; or

(b) in order to adversely affect the interests of such a person in relation to the claim, the Adjudicating Authority shall make an order—

(i) restoring the position as it existed before such transaction as if the transaction had not been entered into; and

(ii) protecting the interests of persons who are victims of such transactions:

Provided that an order under this section—

(a) shall not affect any interest in property which was acquired from a person other than the corporate debtor and was acquired in good faith, for value and without notice of the relevant circumstances, or affect any interest deriving from such an interest, and

(b) shall not require a person who received a benefit from the transaction in good faith, for value and without notice of the relevant circumstances to pay any sum unless he was a party to the transaction.


SECTION 69 OF IBC,2016  – If an officer of the corporate debtor or the corporate debtor—

(a) has made or caused to be made any gift or transfer of, or charge on, or has caused or connived in the execution of a decree or order against, the property of the corporate debtor;

(b) has concealed or removed any part of the property of the corporate debtor within two months before the date of any unsatisfied judgment, decree or order for payment of money obtained against the corporate debtor,such officer of the corporate debtor or the corporate debtor, as the case may be, shall be punishable with imprisonment for a term which shall not be less than one year, but which may extend to five years, or with fine, which shall not be less than one lakh rupees, but may extend to one crore rupees, or with both:

Provided that a person shall not be punishable under this section;

i)             if the acts mentioned in clause (a) were committed more than five years before the insolvency commencement date; or

ii)            if he proves that, at the time of commission of those acts, he had no intent to defraud the creditors of the corporate debtor.



Section 50 allows RP to file an application for avoidance of extortionate credit transactions. Section 50 does not define the term extortionate transaction; instead it vests the power to do so in the IBBI.

Under the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 an extortionate transaction is one in which the debtor had to make exorbitant payments w.r.t the credit, or the terms were unconscionable under the principles of law relating to contracts.

However, if the impugned debt is extended by any person providing financial services and is in compliance with the law in force, the debt will not qualify as extortionate transaction.

In Shinhan Bank v. Sugnil India Private Limited, NCLT Delhi Bench held that an interest rate of 65% P.A. is extortionate and accordingly set aside the debt. The court held that since the interest rate was well-above the business standards as prevailing in the market it amounted to an extortionate transaction.


(1) Where the corporate debtor has been a party to an extortionate credit transaction involving the receipt of financial or operational debt during the period within two years preceding the insolvency commencement date, the liquidator or the resolution professional as the case may be, may make an application for avoidance of such transaction to the Adjudicating Authority if the terms of such transaction required exorbitant payments to be made by the corporate debtor.

(2) The Board may specify the circumstances in which a transactions which shall be covered under sub-section (1).

Explanation.—For the purpose of this section, it is clarified that any debt extended by any person providing financial services which is in compliance with any law for the time being in force in relation to such debt shall in no event be considered as an extortionate credit transaction.






Sections 25 and 35 of INC,2016 enumerates the duties of RP and the Liquidators. These duties includes certain actions in respect of avoidance transactions ( Preferential, Undervalued , Fraudulent and Extortionate Transactions). Sections 43,45, 50 and 66 of the Code mandate the RP and the Liquidator to file applications with the Adjudicating Authority(AA) seeking appropriate relief and directions permissible under the CODE,2016. Section 47 of the Code, inter alia, provides that the AA shall require the Insolvency and Bankruptcy Board of India (Board) to initiate a disciplinary action against the RP or the Liquidator, as the case may be, where he has not reported undervalued transactions to the AA.


Regulation 35A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 requires the RP to form an opinion whether the corporate debtor (CD) has been subjected to any avoidance transaction on or before the 75th day of the insolvency commencement date (ICD). Where he is of the opinion that the CD has been subjected to any transactions covered under the aforesaid sections, he shall make a determination, on or before the 115th day of the ICD, under intimation to the Board. Further, he shall apply to the AA for appropriate relief on or before the 135th day of the ICD. These provisions aim to claw back the value lost through avoidance transactions, in sync with objective of maximisation of value of the assets of the CD.


The Code, read with Regulations, has demarcated responsibilities of an insolvency professional in corporate insolvency resolution process (CIRP) and liquidation process. To enable the insolvency professional and the committee of creditors (CoC) to have a complete and clear understanding of their roles and responsibilities in a CIRP, the Board, on 1st March, 2019, issued an indicative charter of their responsibilities, prepared in consultation with the three Insolvency Professional Agencies.


Since the CoC does not exist in the liquidation process, the Liquidator has independent and exclusive duties. The emerging jurisprudence is bringing further clarity about their roles in corporate insolvency proceedings.







The AA has disposed of a few applications relating avoidance transactions. Some matters have travelled up to the Supreme Court.


The observations in the following two matters provide guidance to the insolvency professional and stakeholders as well.:


(i) Mr. Ram Ratan Kanoongo Applicant Vs. Mr. Sunil Kathuria & Others. [MA 436/2018 in CP No.172/IBC/NCLT/MB/MAH/2017] Since certain transactions appeared to be fraudulent or preferential in nature during the CIRP of Saana Syntex Pvt. Ltd. (CD), the RP filed an application Under Section 19, 45 & 66 of the Insolvency and Bankruptcy Code, 2016. . The CD could not be revived and, therefore, liquidation commenced. The AA observed that if there is a syphoning off funds of the CD, it is important that the same be brought back for the completion of liquidation proceedings.


HELD THAT : “Section 43 & 45 start with the phrase “Where the liquidator or the RP…….”, hence it can be understood that the avoidance or preferential or undervalued transactions can be handled even at the stage of Liquidation.”


(ii) Anuj Jain Interim Resolution Professional for Jaypee Infratech Limited Vs. Axis Bank Limited Etc. Etc. [Civil Appeal Nos. 8512-8527/2019] In this landmark judgement, the Supreme Court clarified the duties and responsibilities of the RP in respect of avoidance transactions.


It held that the RP shall-

(i) sift through all transactions relating to the property/interest of the CD backwords from the ICD(Insolvency Commencement Date)  and up to the preceding two years;


(ii) identify persons involved in the transactions and put them in two categories:

(a) related party under section 5(24), and

(b) remaining persons;


(iii) identify which of the said transactions of preceding two years, the beneficiary is a related party of the Corporate Debtor and in which the beneficiary is not a related party.


The sub-set relating to unrelated parties shall be trimmed to include only the transactions preceding one year fromthe ICD(Insolvency Commencement Date;






(iv) examine every transaction in each of these sub-sets to find out whether

(a) the transaction is of transfer of property of the CD or its interest in it; and

(b) beneficiary involved in the transaction stands in the capacity of creditor/surety/guarantor;


(v) scrutinise the shortlisted transactions to find, if the transfer is for or on account of antecedent financial debt/operational debt/other liability of the CD;


(vi) examine the scanned and scrutinised transactions to find, if the transfer has the effect of putting such creditor/surety/guarantor in beneficial position, then it would have been in the event of distribution of assets under section 53. If answer is in the affirmative, the transaction shall be deemed to be of preferential, provided it does not fall within the exclusion under section 43(3); and then


(vii) apply to the AA for necessary orders, after carrying out the aforesaid volumetric and gravimetric analysis of the transactions.


The Supreme Court observed that the parameters and the requisite enquiries as also the consequences in relation to different types of avoidance transactions are different. It clarified that once transactions are held as preferential; it is not necessary to examine whether these are undervalued and/or fraudulent. In preferential transaction, the question of intent is not involved and by virtue of legal fiction, upon existence of the given ingredients, a transaction is deemed to be of giving preference at a relevant time, while undervalued transaction requires different enquiry under sections 45 and 46 where the AA is required to examine the intent, if such transactions were to defraud the creditors. .





This article  isissued for the sole purpose of educating the readers . it is suggested to   refer to the Code and the Rules/Regulations and relevant case laws or seek professional advice if  intends to take any action or decision in any matter under the Code.