Corporate Insolvency Avoidance Transactions
Corporate Insolvency – Avoidance Transactions under IBC
1. Objective
Avoidance provisions aim to:
Reverse suspect transactions
Restore value to the corporate debtor
Protect creditor interests
Prevent asset stripping before insolvency
Governed under Sections 43–51 & 66 of IBC.
2. Types of Avoidance Transactions
| Type | Section | Core Idea |
|---|---|---|
| Preferential Transactions | Sec 43 | Favoring certain creditors before insolvency |
| Undervalued Transactions | Sec 45 | Assets transferred for inadequate consideration |
| Extortionate Credit Transactions | Sec 50 | Unfair loan terms exploiting debtor distress |
| Fraudulent / Wrongful Trading | Sec 66 | Directors/promoters defrauding creditors |
3. Preferential Transactions (Section 43)
A transaction is preferential if:
It benefits a creditor/surety/guarantor
Puts them in a better position in liquidation
Occurs within look-back period:
| Party | Period |
|---|---|
| Related party | 2 years |
| Others | 1 year |
Exceptions: ordinary course of business, security interest for new value.
4. Undervalued Transactions (Section 45)
Occurs when corporate debtor:
Gifts assets, or
Transfers assets for significantly lower value
Look-back: 1 year (others) / 2 years (related party).
5. Extortionate Credit Transactions (Section 50)
Loan terms that are:
Excessively high interest
Unconscionable
Exploitative
No strict look-back limit.
6. Fraudulent or Wrongful Trading (Section 66)
If directors:
Carried on business with intent to defraud, or
Failed to exercise due diligence
They may be personally liable.
7. Role of Resolution Professional (RP)
RP must:
Examine past transactions
File application before NCLT
Seek reversal/restoration
8. Remedies by NCLT
NCLT may:
Reverse transaction
Restore property
Release security
Direct compensation
9. Landmark Case Laws
1. Anuj Jain, IRP of Jaypee Infratech v. Axis Bank (SC, 2020)
Mortgages given to lenders of parent company held preferential; clarified “ordinary course of business” test.
2. Swiss Ribbons v. Union of India (SC, 2019)
Upheld constitutional validity of avoidance provisions; emphasized value maximization.
3. Venus Recruiters Pvt. Ltd. v. Union of India (NCLAT)
Discussed RP’s role in pursuing avoidance applications.
4. Tata Steel BSL Ltd. v. Venus Recruiters (NCLAT)
Clarified that avoidance applications survive even after resolution plan approval.
5. IDBI Bank Ltd. v. Jaypee Infratech Ltd. (NCLT/NCLAT)
Transactions examined as preferential and undervalued.
6. SBI v. Anuj Bajpai (NCLAT)
Interpreted elements of preferential transactions.
7. Rotomac Global Case (NCLT)
Fraudulent transactions by promoters scrutinized under Section 66.
10. Key Legal Tests
| Issue | Test Applied |
|---|---|
| Preference | Better position than in liquidation |
| Undervaluation | Inadequate consideration |
| Extortion | Unfair/excessive financial terms |
| Fraudulent trading | Intent to defraud |
Conclusion
Avoidance provisions ensure:
✔ Asset clawback
✔ Creditor protection
✔ Accountability of promoters
✔ Fair insolvency process
They act as a corrective mechanism to prevent abuse before CIRP.
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