Avoidance Transactions Under IBC explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
One of the most powerful tools available to Resolution Professionals and liquidators under the IBC 2016 is the ability to challenge and reverse transactions that occurred before the corporate insolvency process began. Sections 43-51 of IBC provide the framework for "avoidance transactions" — transactions that unfairly benefited insiders or prejudiced creditors.
Overview of Avoidance Provisions
| Section | Type | Look-back Period |
|---|---|---|
| 43-44 | Preferential transactions | 2 years (related) / 1 year (unrelated) |
| 45-46 | Undervalued transactions | 2 years (related) / 1 year (unrelated) |
| 50-51 | Extortionate credit transactions | 2 years |
| 66 | Fraudulent / wrongful trading | No limit (any time before CIRP) |
Preferential Transactions (Section 43)
What Makes a Transaction Preferential?
A transaction is preferential when:
- It was made during the look-back period
- It was for the benefit of a creditor, surety, or guarantor
- The transaction has the effect of putting the creditor in a better position in a notional liquidation than they would otherwise have been
Key Tests
- Was the transaction at fair value? (If yes, not preferential)
- Was it in the ordinary course of business? (Ordinary course is a defense)
- Was it to a related party (higher scrutiny — 2-year look-back)
Example
A company pays off a bank loan of Rs.10 crore 6 months before CIRP is initiated. This was done knowing the company was insolvent. If the bank is an unrelated party — preferential (within 1 year). The RP can apply to NCLT to have the payment reversed and Rs.10 crore restored to the estate.
Undervalued Transactions (Section 45)
- Corporate debtor transferred assets at significantly less than fair market value
- Recipient gave consideration less than the market value
- Classic examples: selling factory at 50% of value to a related party; making a gift of real estate
- Defense: Transaction was in good faith; company was not insolvent at the time; adequate consideration was given
Fraudulent Trading (Section 66)
The most powerful but most difficult to prove:
- Business carried on with intent to defraud creditors
- NCLT can impose personal liability on directors/officers to contribute to corporate assets
- No time limit
- Wrongful trading: Directors who knew (or ought to have known) that insolvency was inevitable but continued to incur debt — can be personally liable (borrowed from UK Insolvency Act).
- Key case: CIRP proceedings post-IL&FS collapse, NCLT examined transactions pre-collapse
Process for Challenging Avoidance Transactions
- RP/Liquidator identifies suspicious transactions during CIRP/liquidation
- RP files application with NCLT citing relevant section (43/45/50/66)
- NCLT issues notice to the transaction counterparty
- Counterparty responds; parties may submit evidence
- NCLT passes order: set aside transaction, order restoration of assets, impose personal liability
- Appeal: NCLAT → Supreme Court
Practical Impact
- Significant tool in large CIRP cases — Jet Airways, DHFL, Yes Bank (AT1 bonds controversy)
- Deterrent: Promoters cannot clean out company assets and then file insolvency
- Financial creditors (CoC) encourage RP to pursue avoidance applications to enhance estate value
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Get Free ConsultationKey Facts About Avoidance Transactions Under IBC
- Applies in: All states across India, under the relevant central law.
- Mode: Mostly online via the official government portal.
- Typical timeline: Ranges from a few days to a few weeks depending on the case.
- Non-compliance: May attract penalties, interest or late fees.
- Expert help: TaxClue completes the entire process end to end for you.
What are avoidance transactions under IBC?
IBC Sections 43-51 allow the RP/liquidator to challenge transactions made by the corporate debtor before CIRP commenced that prejudiced creditors: preferential transactions (Section 43), undervalued transactions (Section 45), extortionate credit transactions (Section 50), and fraudulent trading (Section 66).
What is a preferential transaction?
Section 43: A transaction where the corporate debtor gave a preference to a creditor (paid one creditor over others) within the look-back period (2 years for related parties; 1 year for others) that put the creditor in a better position than they would have been in the normal course of liquidation.
Over 90% of compliance penalties in India arise from missed due dates — timely handling can save businesses thousands of rupees each year.
Avoidance Transactions Under IBC: a key compliance topic in Indian tax and corporate law that businesses and individuals must understand to remain compliant.