Avoidance of Undervalued Transactions under IBC

The Insolvency and Bankruptcy Code, 2016 (IBC) was introduced to ensure timely resolution of insolvency, maximise asset value, and balance the interests of all stakeholders. During the insolvency resolution or liquidation process, a corporate debtor is expected to deal with its assets in a fair and transparent manner. However, there are situations where the debtor engages in certain transactions that reduce the value of its assets, often to the disadvantage of creditors. Such dealings are known as avoidable transactions or vulnerable transactions.

Among these, undervalued transactions are of particular importance as they directly affect the liquidation value of the corporate debtor’s estate. The law, therefore, provides mechanisms to identify, examine, and reverse such transactions to safeguard the interests of creditors and ensure fair distribution of assets.

Concept of Undervalued Transactions

A corporate debtor facing financial distress may sometimes try to generate quick funds by transferring assets at a price much lower than their real value or even by making gifts. Though these acts may not always be intentional or fraudulent, their effect can seriously diminish the asset pool available for repayment to creditors.

To prevent such practices, the IBC lays down the concept of undervalued transactions under Sections 45 to 48. These provisions empower the resolution professional, liquidator, or creditors to apply to the Adjudicating Authority (National Company Law Tribunal – NCLT) to declare such transactions void and restore the corporate debtor’s position as it existed before the transaction.

Legal Framework under the IBC

The legal provisions dealing with undervalued transactions are contained in the following sections of the Code:

• Section 45 – Avoidance of Undervalued Transactions
• Section 46 – Relevant Period (Look-back Period)
• Section 47 – Application by Creditor in Cases of Undervalued Transactions
• Section 48 – Orders of the Adjudicating Authority
  

These provisions collectively ensure that undervalued transactions are identified, investigated, and reversed to protect the interests of creditors and maintain fairness in the insolvency process.

Definition under Section 45

Section 45(2) of the Code defines the circumstances in which a transaction is considered undervalued. A transaction is regarded as undervalued when the corporate debtor:

1. Makes a gift to any person; or
2. Enters into a transaction that involves the transfer of one or more assets by the corporate debtor for a consideration that is significantly less than the value of the consideration provided by the corporate debtor; and
3. Such transaction has not taken place in the ordinary course of business of the corporate debtor.

These provisions target situations where assets are sold, transferred, or otherwise disposed of at prices far below their actual worth, leading to depletion of the company’s estate.

The intention of the law is not to punish genuine commercial decisions but to prevent transactions that unjustly enrich a third party at the cost of creditors.

Application to the Adjudicating Authority

Under Section 45(1), if the liquidator or the resolution professional, after examining the corporate debtor’s transactions, finds that certain dealings were undervalued and made during the relevant period under Section 46, an application must be filed before the NCLT. The purpose of the application is to have those transactions declared void and their effects reversed.

This duty forms part of the responsibilities of the insolvency professional under Section 25(2)(j), which requires the professional to file applications for avoidance of transactions if necessary.

Relevant Time Period (Section 46)

The Code prescribes a look-back period to determine whether a transaction falls within the scope of undervalued transactions. Section 46 lays down that:

• If the transaction was made with any person other than a related party, it will be examined if it occurred within one year before the insolvency commencement date.
• If the transaction was made with a related party, the period extends to two years before the insolvency commencement date.

This ensures that only recent transactions—those made when the company was already showing signs of financial trouble—are scrutinised and not those that took place in the normal course of business long before insolvency.

Application by Creditor or Member (Section 47)

Sometimes, the liquidator or resolution professional may fail to identify or report an undervalued transaction. In such cases, Section 47 empowers a creditor, member, or partner of the corporate debtor to apply directly to the NCLT for relief.

The Adjudicating Authority, after examining the facts, can declare such transactions void and reverse their effects. Furthermore, if the NCLT finds that the liquidator or resolution professional had enough opportunity to identify the transaction but failed to report it, it may direct the Insolvency and Bankruptcy Board of India (IBBI) to initiate disciplinary proceedings against them.

This provision ensures accountability among insolvency professionals and gives creditors an independent right to seek redressal.

Orders of the Adjudicating Authority (Section 48)

After examining the application, the NCLT has wide powers to restore the position of the corporate debtor and protect the interests of creditors. The Tribunal may pass orders such as:

1. Restoring the position as it existed before the transaction and reversing its effects.
2. Requiring the return of property transferred as part of the transaction, to be vested back in the corporate debtor.
3. Releasing or discharging any security interest, in whole or in part, granted by the corporate debtor.
4. Requiring payment of benefits received by any person to the liquidator or resolution professional.
5. Ordering payment of consideration, as determined by an independent expert.
6. Initiating disciplinary action against the insolvency professional if negligence is found.

These orders aim to undo the harm caused by undervalued transactions and ensure that the creditors’ claims are not compromised by such deals.

Intentionally Undervalued Transactions

In certain cases, undervalued transactions are not merely negligent but are entered into with intent to defraud creditors or keep assets out of their reach. When such deliberate undervaluation occurs, the transaction falls under Section 49 (Transactions Defrauding Creditors).

Here, the NCLT has the authority to declare the transaction void, restore the earlier position, and protect the rights of victims. Unlike Sections 45 and 46, there is no look-back period under Section 49, since fraudulent intent is punishable irrespective of when it occurred.

Distinction between Undervalued and Fraudulent Transactions

While both undervalued and fraudulent transactions result in depletion of assets, there is a difference in their nature and intent:

Judicial Interpretation

The Supreme Court’s judgement in Anuj Jain, Interim Resolution Professional for Jaypee Infratech Ltd. v. Axis Bank Ltd. and Others (2020) clarified the legal understanding of avoidable transactions under the IBC, including preferential, undervalued, and extortionate transactions.

In this case, the Court analysed whether certain mortgages created by Jaypee Infratech Ltd. for loans taken by its parent company amounted to preferential or undervalued transactions. While the case primarily dealt with preferential transactions, the Court’s reasoning also guides the interpretation of undervalued dealings.

The Court held that while examining such transactions, the focus should not only be on the lender but on the ultimate beneficiary. It emphasised that the insolvency framework aims to prevent transactions that unfairly benefit one stakeholder at the cost of others.

This judgement reinforced that undervalued transactions cannot be justified merely because they occur in the usual course of the transferee’s business. What matters is whether the transaction was in the ordinary course of the corporate debtor’s business and whether it resulted in a reduction of asset value available to creditors.

Conclusion

The concept of undervalued transactions under the Insolvency and Bankruptcy Code plays a crucial role in maintaining the integrity of the insolvency resolution framework. It prevents corporate debtors from disposing of assets at inadequate values, thereby protecting creditors from unfair losses.

Sections 45 to 48 collectively provide a clear structure — from identifying undervalued transactions to determining the look-back period, enabling creditor applications, and granting wide powers to the Adjudicating Authority for reversal. Judicial interpretations, particularly the Anuj Jain decision, have strengthened the understanding of these provisions by emphasising fairness, transparency, and equitable treatment.

In practice, these rules act as a preventive and corrective mechanism. They discourage debtors from engaging in reckless or self-serving asset transfers and empower creditors and insolvency professionals to ensure that every transaction is evaluated through the lens of fairness and commercial reasonableness.

Ultimately, the avoidance of undervalued transactions ensures that insolvency proceedings achieve their core objective — maximisation of asset value, protection of stakeholder interests, and promotion of trust in the corporate insolvency framework of India.