Avoidance Transactions under the IBC

Avoidance transactions are pre-insolvency dealings that improperly reduce the debtor's assets or favour particular persons and can therefore be challenged during insolvency proceedings. The Insolvency and Bankruptcy Code, 2016 enables the adjudicating authority to reverse specified preferential, undervalued, extortionate or fraudulent dealings, thereby protecting the insolvency estate and equitable distribution among creditors.

Transactions covered by the Code

The Code identifies the following forms of objectionable pre-insolvency conduct:

• A preferential transaction under Section 43 benefits a creditor, surety or guarantor for an antecedent liability and places that person in a more beneficial position than under liquidation distribution.
• An undervalued transaction under Section 45 involves a gift or transfer for significantly less consideration and is not undertaken in the ordinary course of business.
• A transaction defrauding creditors under Section 49 is an undervalued transaction deliberately designed to keep assets beyond creditors' reach or prejudice their claims.
• An extortionate credit transaction under Section 50 requires exorbitant payments or contains terms that are unconscionable under contract-law principles.
• Fraudulent or wrongful trading under Section 66 can result in persons responsible being ordered to contribute to the corporate debtor's assets.

Relevant look-back periods

The Code examines transactions completed before the insolvency commencement date because improper transfers may precede the formal default process.

• For preferential and undervalued transactions, the look-back period is two years for transactions with related parties and one year for other persons.
• For extortionate credit transactions, the relevant period is two years before the insolvency commencement date.
• Statutory exclusions, including specified transactions in the ordinary course of business, prevent every earlier transfer from becoming avoidable.

Examination and consequences

The resolution professional or liquidator examines relevant transactions and may apply to the National Company Law Tribunal, which functions as the adjudicating authority for corporate persons. A transaction is not automatically void merely because it falls within a look-back period.

• The Tribunal may restore transferred property, release or revive security interests, direct repayment of benefits, or otherwise reverse the transaction's effect.
• In fraudulent or wrongful trading cases, the Tribunal may order responsible persons to contribute to the corporate debtor's assets.