INTRODUCTION

The Insolvency and Bankruptcy Code, 2016 (“IBC”) introduced a framework in India that marked a
pivotal shift in control from debtors to creditors. This monumental reform aimed at expediting debt
recovery in a time-bound manner, maximizing assets, promoting entrepreneurship, safeguarding
stakeholder interests, and facilitating the revival of distressed companies. IBC introduced a Corporate
Insolvency Resolution Process (“CIRP”), a procedure designed to prevent any situation that could
diminish a company’s value during financial distress. At the core of this process lies the concept of a
moratorium, temporarily halting recovery proceedings against the company. Notably, the IBC
addresses the critical issue of avoidable transactions, encompassing financial dealings by debtors
that disadvantage creditors or favor specific stakeholders. Such transactions, often carried out before
insolvency, are now classified as offenses under the IBC. This introduction delves into the significance
of avoiding transactions that could undermine the maximization of assets during insolvency,
shedding light on the crucial role played by the avoidance provisions in safeguarding the interests of
creditors and stakeholders.

AVOIDANCE TRANSACTIONS AND RELATED PARTIES

The UNCITRAL Legislative Guide on Insolvency Law (“UNCITRAL Guide”) recognizes the need for
greater scrutiny when reviewing transactions between a Corporate Debtor (“CD”) and its related
parties. It also suggests a longer lookback period to identify and address avoidance transactions
effectively.1

Section 5(24) of IBC discusses which entities and persons are related parties to a corporate debtor,
while Section 5(24A) of IBC discusses related parties in connection to an individual. Although other
provisions such as the Companies Act and SEBI define related parties, IBC defines the term
separately to ensure that those entities that are related to the Corporate Debtor can be identified
clearly since their presence can often negatively affect the insolvency process.

One of the duties of a Resolution Professional (“RP”)/Liquidator (as the case may be) is to examine
and identify if any transactions have been undertaken by the CD that qualify as preferential
transactions, undervalued transactions, transactions with the intent of defrauding creditors or for
any fraudulent purposes, or extortionate credit transactions (together “PUFE Transactions”). If the
RP/liquidator is of the opinion that any Avoidance Transaction has occurred, then he/she is obligated
to report the same to the Adjudicating Authority for necessary directions.2

If transactions are deemed Avoidable, the Adjudicating Authority can instruct the reversal of such
transactions. This may involve directing beneficiaries, especially related parties with a longer "look-
back period," to return any property or beneficial interest to the Corporate Debtor.

Regulation 35A of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016
provides the timeline for the RP regarding PUFE Transactions. The regulation states the time limits at
three levels,

1
UNCITRAL Legislative Guide on Insolvency Law, Paragraphs 182-184, pg 146, 2005
2
Regulation 35A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution for Corporate Persons)
Regulations, 2016
Level 1: RP has to form an opinion within 75 days from the insolvency commencement date as to
whether there are transactions referred to as PUFE transactions that have been taken place by CD
during the past period before the commencement of insolvency

Level 2: Further to forming an opinion as stated above, the RP may initiate a transaction
audit/forensic audit of the books of accounts and records of the CD and subsequently determine
within 115 days from the ICD about the presence of the transactions.

Level 3: Once a determination is made about the occurrence of the said transactions based on the
forensic audit report and RP’s own evaluation and study of the matter, he shall apply to the AA for
appropriate relief within 135 days, from the ICD. The RP is also duty-bound to share a copy of the
Application made to the AA with the Prospective Resolution Applicant so that it can be considered
and factored in by the PRA while submitting the Resolution Plan.

LOOK-BACK PERIOD

Under the scheme of the IBC, for a transaction to be considered an Avoidance Transaction, the
transaction is required to have occurred within a specified time period before/looking back from the
date of commencement of CIRP of the CD (“Lookback Period”). However, undervalued transactions
undertaken deliberately to keep the assets of the CD beyond the reach of its claimants and
transactions committed with the intent to defraud creditors or for any fraudulent purpose do not
require any look-back period for the consideration of the transaction as Avoidance Transactions.

Since the inception of IBC, there has been a general consensus that the Lookback Period is required
to be longer for related parties compared to unrelated parties, and there should be e should be
stricter scrutiny for transactions of fraudulent preference or transfer to related parties, for which the
“look back period” should be specified in regulations to be longer.3

The analysis of each Avoidance Transaction under IBC has been discussed below.

Preferential Transactions (Section 43)

Preferential Transactions are essentially transactions where an insolvent debtor makes a transfer to
or for the benefit of a creditor so that such beneficiary would receive more than what it would have
otherwise received through the distribution of bankruptcy estate.4

The UNCITRAL Guide defines ‘preferential transactions’ as “a transaction which results in a creditor
obtaining an advantage or irregular payment.”5

In India, preferential transactions are governed under Section 43 of IBC, which provides for the
preference given by the CD during or before the commencement of the Insolvency Resolution
Process. The section tries to invalidate the transactions which involve the transfer of property or
interest given for the benefit of the creditor, surety, or guarantor on account of debt or liabilities,
which have the effect of putting such creditor in a better position than other creditors.

3
Bankruptcy Law Reforms Committee, The Report of the Bankruptcy Law Reforms Committee Volume I:
Rationale and Design, Paragraph 5.5.7, Page 101 (November 2015)
4
Anuj Jain, Interim Resolution Professional for Jaypee Infratech Limited vs. Axis Bank Limited Etc. Etc. Civil
Appeal Nos. 8512-8527 of 2019
5
UNCITRAL Legislative Guide on Insolvency Law, Paragraphs 12(ff), pg 6, 2005
Transactions that are considered in as Preferential Transactions (Section 43(2))

As defined under section 43 (2) of IBC, a transaction will be said to be ‘preferential’ if:

 It involves a transfer of property or an interest in the property of a CD

 for the benefit of a creditor/ surety/ guarantor
 on account of an antecedent financial debt/ operational debt /other liabilities and
 Such a transfer has the effect of putting the said creditor/ surety/ guarantor in a beneficial
position than it would have been in the event of a distribution of assets being made in
accordance with section 53.

Transactions that are not deemed as preferential (Section 43(3))

 Transaction made in the ordinary course of business/ financial affairs.

 A transaction resulting in the enhancement of the security interest of the CD to the extent of
such security interest secures new value and was given at the time of or after the signing of a
security agreement that contains a description of such property as a security interest, and was
used by CD to acquire such property
 Transactions that were registered with an Information Utility on or before thirty days after the CD
receives possession of such property

Look Back Period in Preferential Transactions (Section 43(4))

 In case of a Related Party, two years before commencement of insolvency of the corporate
debtor
 In case where the party is not a related one, one year before commencement of insolvency of
the corporate debtor

Deemed ‘preferential’ transactions

An application can be made specifically by either an insolvency resolution professional or

a liquidator to the National Company Law Tribunal (NCLT) in case he decides that a corporate
debtor is given preference at a relevant time and can pass one or more orders. Some of the
orders as entailed in Section 44 of IBC are mentioned herein under:

 Transferred property to be vested in CD

 Discharge of any security interest created by CD
 Payment of money by person (who received benefits from the CD) towards liquidator or
insolvency professional, as directed
 Direct for a security or charge to be put on a property for discharge of a debt (financial or
operational.
Undervalued Transactions (Section 45)
The UNCITRAL Guide defines “undervalued transactions” as “Transactions where the value received
by the debtor as the result of the transaction with a third party was either nominal or non-existent,
such as a gift, or much lower than the true value or market price, provided the transaction occurred
within the suspect period.”6

6
UNCITRAL Legislative Guide on Insolvency Law, Paragraphs 174-176, pg 143, 2005
Section 45(2) of IBC states the following circumstances under which the transactions by the
corporate debtor shall be considered undervalued:
 Where the CD makes a gift to a person
 Where the corporate debtor enters into a transaction with a person which involves the
transfer of one or more assets by the CD for a consideration the value of which is significantly
less than the value of the consideration provided by the CD
 Where such transaction has not taken place in the ordinary course of business of the CD
This was also held in the case of Dipti Mehta, Resolution Professional, Prag Distillery Private
Limited vs. Shivani Amit Dhanukar MA 267 of 2018 In CP (I&B) 1067/NCLT/MB/2017.
Application for Transactions Deemed Undervalued:
 Section 45(1) of IBC, states that if the liquidator or the resolution professional, after
examination of the transactions of the CD, determines that certain transactions were made
during the relevant period under section 46, which were undervalued, he shall make an
application to the (“NCLT”) to declare such transactions entered by the CD as void and
reverse the effect of such transaction.
 In cases where the liquidator or the resolution professional fails to report an undervalued
transaction, the same can be reported by a creditor, a member (in case of a company), or a
partner (in case of a limited liability partnership) of the CD through an Application before the
NCLT, to declare the transaction void and reverse its effect. 7
Look Back Period
Transaction made with any person (not being a related person), one year before the insolvency
commencement date. Transaction made with a related person, two years before the insolvency
commencement date.
Defrauding Creditors (Section 49)
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.
The section does not have any look back period, as fraud operates as a nullity forever. However,
proceedings under Section 49 cannot continue in the absence of an ongoing insolvency resolution
or liquidation process. 8
Unlike other avoidable transactions, Section 49 requires intent on part of CD. In fact, it is the
presence of intent that transforms an undervalued transaction into a fraudulent transaction for
the above purposes.
After analyzing the provisions so far, it is essential to understand that Section 45 and Section 49
both deal with avoidance transactions, but the main distinction is that Section 49 is concerned
with undervalued transactions carried out with malafide or unlawful purposes, and no such
element is required under section 45. Likewise, section 45 has a look-back period, but section 49
does not because once fraud is committed, it is committed forever. The rationale behind the

7
Section 47 of IBC
8
Shiv Kant v. Juggilal Jute Mills Company Ltd CP No. (IB)40/ALD/2018.
clause is that anyone who has committed a criminal act with malice in mind cannot get away with
it by invoking a justification like the passage of time.
If a transaction comes under the purview of Section 49, it can trigger the penal provision of
Section 69. Section 69 provides for the punishment of corporate debtors or their officers for
entering into fraudulent transactions.
Extortionate credit transactions (Section 50)
An extortionate transaction is defined as the receipt of financial or operational debt within two
years after the insolvency beginning date at terms requiring the corporate debtor to make
extravagant payments, which may be avoided by an order of the adjudicating authority under
Section 50 of the IBC. Unlike the other avoidable transactions, such as those stated above, which
focus on the transfer of assets by the CD, extortionate transactions focus on the receipt of credit
by the CD, even when the end result is the transfer of value outside of the CD.
Fraudulent trading or Wrongful Trading (Section 66)
A transaction can be termed as wrongful trading/fraudulent trading if during the CIRP or a
liquidation process it is found that any business of the CD has been carried on with intent to
defraud creditors of the CD or for any fraudulent purpose. If the Adjudicating Authority adjudges
a transaction to be wrongful trading/fraudulent trading, then it may pass an order that any
persons who were knowingly parties to the carrying on of the business in such manner shall be
liable to make such contributions to the assets of the CD as it may deem fit. 9
In the case of transactions under Section 66 of the IBC there is no Lookback Period for identifying
transactions which could be considered wrongful trading/fraudulent trading. However, given that
the nature of the transaction, it typically only persons in the management of the CD who could
orchestrate a transaction to defraud creditors.
Therefore, in case the Adjudicating Authority determines that a transaction has taken place
within the meaning of Section 66 of the IBC, it may direct that a director or partner of the CD
(who qualify as the Related Parties of such CD), shall be liable to make such contribution to the
assets of the CD as it may deem fit, if:
a. before the Insolvency Commencement Date, such director or partner knew or ought to
have known that there was no reasonable prospect of avoiding the commencement of a
CIRP in respect of such CD; and
b. such a director or partner did not exercise due diligence in minimizing the potential loss
to the creditors of the corporate debtor.
LANDMARK CASES ON AVOIDABLE TRANSACTIONS
S.No. Name of the case Observations and Rulings of the Court
1. Anuj Jain Interim Resolution The Supreme Court of India clarified certain key
Professional for Jaypee aspects regarding preferential transactions under
Infratech Limited v. Axis Bank Section 43 of the IBC. Such preferential transactions
Limited and others (“Jaypee are one of the four categories of “avoidable”
Infratech”), CIVIL APPEAL NOS. transactions (i.e., those which may be annulled or
8512-8527 OF 2019 disregarded) under the IBC, the others being
undervalued, extortionate, and/or fraudulent
transactions.
9
Section 66(1) of IBC
 In Jaypee Infratech, the key issue before the Supreme
Court was whether certain mortgages created by
Jaypee Infratech Limited (the company under
insolvency) for loans availed by its parent company
Jaiprakash Associates Limited (“JAL”) amounted to
preferential transactions avoidable under Sections 43
and 44 of the IBC. The JAL and its promoters argued
that the beneficiaries of the mortgage were the
creditors in whose favor such mortgages had been
created, and accordingly, the “look-back” period
should be one year (as applicable in case of
transactions with unrelated parties). However, the
court found such transactions to be for the benefit of
a related party (subject to the “look-back” period of
two years) as they allowed JAL to avail a significantly
higher amount of lending from a larger number of
creditors.

The Supreme Court held that the term “or” in such

provision must be read as “and”. The court, relying on
the scheme and objective of the IBC observed that the
relevant consideration for the purpose of Section 43 is
the conduct and affairs of the corporate debtor and to
disregard such transactions which appear to minimize
the potential loss to other stakeholders in the affairs
of the corporate debtor, particularly its creditors.
Accordingly, even if a preferential transaction is
undertaken in the ordinary course of the business of
the transferee company, it would be included within
the purview of a preferential transaction as long as it
is not in the ordinary course of the business of the
corporate debtor.
2. IDBI Bank v. Jaypee Infratech In this case, the CD transferred immovable property
Ltd, Company Petition No. (IB) by way of mortgage without any consideration.
77/ALD/2017 The court held that a transaction can be said to be
an undervalued transaction, if the consideration for
entering into the transaction was significantly lower
than what it would have otherwise been had
entered at an arm’s length basis. Hence, in this case
the court held that the mortgage would be covered
under sections 45(1) of IBC and will be treated as
undervalued transactions.
3. Tata Steel BSL Ltd v. Venus The Delhi HC introduced a significant change stating
Recruiters (LPA 37/2021) that applications under avoidable transactions
initiated by the Resolution Professional (“RP”) shall
continue irrespective of the finalization of the
Resolution Plan and the conclusion of CIRP.

The decision in Tata Steel was the result of an

appeal against the decision of a single judge of the
Delhi High Court in Venus Recruiters v Union of
India (‘Venus’), which had held that once the CIRP
had concluded, any avoidance applications filed
before the Resolution Plan were to be rendered
infructuous.
4. Shinhan Bank v. Sugnil India In this case, the NCLT Delhi Bench held that an
Private Limited, Company interest rate of 65% P.A. is extortionate and
Petition No. IB- 492/ND/2018 accordingly set aside the debt. The court held that
since the interest rate was well above the business
standards prevailing in the market, it amounted to
an extortionate transaction.
5. Levit v. Ingersoll Rand, *74 f.2d The court held that look-back period shall be
(7th Cir. 1989) determined on the basis of the ultimate beneficiary of
the transaction, that is, whether the beneficiary is an
outside creditor or an inside creditor.
6. Downs Distributing Co Pty Ltd In this case, the Australian High Court held that
vs. Associated Blue Star Stores “ordinary course of business” means “that the
Pty Ltd, (1948) 76 CLR 463 transaction must fall into place as part of the
(Aust.) undistinguished common flow of business done, that
it should form part of the ordinary course of business
as carried on, calling for no remark and arising out of
no special or particular situation.” However, it is
relevant to note that the Supreme Court did not
interpret the meaning of the phrase “financial affairs”
for the purpose of Section 43 of the IBC.
7. Aditya Kumar Tibrewal RP v. Om The time limits under CIRP Regulation 35A are
Prakash Pandey, Company directive in nature. These time limits cannot be
Appeal (AT) (Insolvency) No. 483 generalized for all cases but will depend upon the
of 2022. facts and situations of each case. Avoidance
applications cannot be simply rejected due to the
reason that they are filed beyond the time limits of
Regulation 35A. If there are the existence of genuine
reasons and situations by which the filing of the
avoidance application is delayed and filed beyond the
time limits, such applications can be entertained and
admitted.
 8. Phoenix Arc v. Spade Financial In this case the appellants were excluded from
Services Limited, AIR 2021 SC 77 Committee of Creditors as they were related party to
the corporate debtor. The court held that the
definition of the expression ‘related party’ in Section
5(24) is exhaustive since the expression is defined to
“mean” what is set out in Clauses (a) to (m). According
to the court, the definition describes a commutative
relationship between the corporate debtor and the
related party.

CONCLUSION

The risk of related parties compromising the CD’s value is effectively addressed through
comprehensive safeguards within the IBC framework. Whether during the two-year lookback period
before insolvency, the CIRP, or in implementing a resolution plan, the IBC establishes a robust system
for identifying and preventing avoidance transactions with related parties. This approach not only
aligns with a key objective of the IBC - resolving insolvency - but also emphasizes the importance of
maximizing value, preserving assets, and safeguarding the interests of all stakeholders involved with
the CD.