Avoidance Transactions Under IBC
Table of Contents
In September 2025, it was reported that applications seeking recovery of approximately ₹3.90 lakh crore in Avoidance Transactions Under IBC had been filed with the National Company Law Tribunal (NCLT). Despite the large amount claimed, reports indicate that only ₹7,516 crore had been successfully recovered by September 2025, from applications totaling ₹3.76 lakh crore. This significant difference highlights the difficulties in pursuing these cases, including delays in litigation and asset depletion. An avoidance transaction is a deal or transfer carried out by a company’s management prior to insolvency to defraud creditors, unfairly favor certain parties, or improperly strip assets. The goal of identifying and reversing these “avoidable” transactions is to maximise the value of the corporate debtor’s estate for equitable distribution among all creditors. Addressing these transactions is crucial for a fair and effective corporate insolvency resolution process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC).
What are Avoidance Transactions Under IBC?
Avoidance Transactions Under IBC are deals made by a corporate debtor that are detrimental to creditors. The resolution professional (RP) or liquidator can apply to the NCLT to reverse these transactions, aiming to recover assets and improve the financial position of the company for the benefit of all creditors. The IBC mentions four types of Avoidance Transactions Under IBC
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Preferential Transactions (Section 43): These occur when an asset is transferred to a creditor, surety, or guarantor to settle a prior debt, giving them an advantage they wouldn’t have in liquidation.
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Undervalued Transactions (Section 45): These involve transferring assets as a gift or for a consideration significantly below market value.
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Extortionate Credit Transactions (Section 50): These are business activities undertaken with the intention to defraud creditors, potentially leading to personal liability for directors or partners.
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Fraudulent Transactions (Section 66): These involve a company being compelled to accept credit terms requiring excessive and unreasonable payments.
Legal Provisions Governing Avoidance Transactions Under IBC
- Sections 43 to 51 and 66 of IBC govern avoidance transactions, which are designed to protect the interests of creditors and ensure equitable distribution of assets during insolvency proceedings.
- The RP or Liquidator is responsible for identifying, forming an opinion on, and filing applications with the NCLT for the avoidance transactions covered under sections 43, 45, 50 and 66, with specific timelines mandated by Regulation 35A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations).
- Role of Adjudicating Authority, which is the NCLT or the National Company Law Appellate Tribunal (NCLAT) has the power to hear and adjudicate avoidance applications, even after the conclusion of the CIRP, and can issue orders for the avoidance of transactions, direct the recovery of assets, and determine the treatment of such recoveries for the benefit of all creditors. The authority’s role is confined to verifying statutory compliance and does not extend to re-assessing the commercial decisions of the Committee of Creditors (CoC).
₹3.90 Lakh Crore in Avoidance Transactions: The Data
An estimated ₹3.90 lakh crore in avoidance transactions were reported to the Adjudicating Authority under India’s IBC, with the top 10 companies, led by Dewan Housing Finance Corporation (DHFL), accounting for a significant share of this value. These transactions, which include preferential, undervalued, fraudulent, and extortionate deals, are aimed at recovering assets diverted before insolvency proceedings to protect the interest of creditors. Despite the large reported value, recovery is often delayed and occurs post-insolvency, with the government not centrally tracking recoveries, which impacts the overall value available to creditors. The persistence of such transactions reflects systematic loopholes in financial and corporate governance, including the use of shell companies and cross- border structures to obscure asset transfers. The slow adjudication process, with many cases pending, undermines the IBC’s objective of maximising the value of corporate debtor assets for the benefit of all stakeholders. Further, legal experts point to systematic delays, lack of timely asset attachment, and the dissipation of assets through related parties as key reasons for low recovery rates, with tangible assets like land being easier to recover than financial transactions.
Judicial Precedents on Avoidance Transactions Under IBC
In Jaypee Infratech Ltd. Interim Professional v. Axis Bank Ltd, the Supreme Court clarified the ‘ordinary course of business’ defense under section 43 of the IBC, ruling that the term ‘or’ in section 43(2) must be interpreted as “and”/ This means a transaction is not exempt from being classified as preferential if it is in the ordinary course of the transferee’s business. The Supreme Court further addressed the distinction between avoidance transactions under Chapter III and fraudulent or wrongful trading under section 66 in Piramel Capital and Housing Finance Limited v. 63 Moons Technologies Limited & Ors which involve an examination of directors’ conduct, is not an “avoidance transaction” in the same sense as those under Chapter III. In Tata Steel BSL Ltd. v. Venus Recruiter Private Ltd. & Ors., the Delhi High Court clarified that avoidance applications can survive the conclusion of the corporate insolvency resolution process and that the RP is not rendered functus officio regarding these applications, as their benefit is intended for creditors. Further, in Sahaara India v. Shri Nandakisho Vishnupant Deshpande and Anr. that the Adjudicating Authority cannot classify a transaction as preferential on its own initiative, the responsible lies with the RP to apply for its avoidance. This reinforces the procedural requirement that avoidance actions must be formally initiated by the RP.
Read more : What is Form G in IBC – Invitation for Expression of Interest
Challenges in Addressing Avoidance Transactions
- There are often delays in the insolvency process because avoidance applications are complex, requiring lengthy fact-finding. Further, such legal issues may be treated as a separate litigation issue that may continue even after the main insolvency resolution process has concluded.
- Tracing and proving fraudulent transfers is difficult due to the intentional concealment of assets and the use of complex transactions, necessitating extensive forensic audits and evidence gathering to meet the high burden of proof.
- Resistance from beneficiaries involves heavily contesting avoidance applications and employing legal tactics, such as repeated appeals and vexatious filings, to delay proceedings and retain ill-gotten assets.
- The NCLT or NCLAT may be overturned as their caseload increases with Avoidance Transactions Under IBC, which leads to significant backlogs, delays in adjudicating such applications, and a tendency to de-prioritise these matters in favour of the main insolvency and liquidation proceedings.
Impact of avoidance transactions on CIRP and Creditors
a. For Financial Creditors: Recovery potential increases when avoidance transactions are reversed, as it expands the pool of assets available to satisfy their claims and mitigates the “haircuts” they must take.
b. For Operational Creditors: Ensuring equitable treatment during the CIRP requires reversing preferential transactions that benefited some creditors at the expense of others, aligning with the core objective of the IBC .
c. For Resolution Applicants: Avoiding such transactions results in a cleaner balance sheet for the corporate debtor, provides a more accurate valuation, and ensures transparent liability by uncovering hidden liabilities, which can be factored into a resolution plan.
Measures to Strengthen the Framework
- Implementing advanced forensic audit procedures and early warning systems can help identify fraudulent activities and preferential transactions at an initial stage.
- Providing continuous training and upskilling for insolvency professionals ensures they have the expertise to handle complex cases and evolving financial landscapes.
- Utilizing data analytics and blockchain can provide a transparent and secure record of financial transactions, making it easier to detect and prevent suspicious asset transfers.
- Establishing specialized benches focused on insolvency cases, particularly for such issues, can significantly reduce delays and ensure quicker resolution of disputes.
Conclusion
Avoidance transactions remain a major hurdle in insolvency resolution. Despite the identification of these transactions, actual recoveries remain significantly low and indicate a major cap between legal provisions and enforcement. The government has mandated early reporting by RPs and requires resolution professionals to outline how these cases will be pursued post-CIRP, but delays and asset dissipation continue to undermine recovery efforts.
FAQs
Q1. What are avoidance transactions under the IBC?
Avoidance transactions under the IBC are specific financial dealings conducted by a corporate debtor before insolvency that harm creditors’ interest.
Q2. Who can challenge Avoidance Transactions Under IBC during CIRP?
The Resolution Professional is empowered to challenge avoidance transactions during CIRP.
Q3. What happens if an avoidance transaction is proven?
If an avoidance transaction is proved, the Adjudicating Authority can order the reversal of its effects, including restoring the position as it existed prior to the transaction, settling aside debt, requiring the repayment of benefits received, or relinquishing security interests, with the recovered assets or funds benefiting the creditors of the corporate debtor.
Q4. How does reversal of such transactions benefit creditors?
Reversal of transactions benefits creditors by allowing them to challenge and undo transfers made to defraud them, thereby restoring assets to the company’s estate and ensuring a fair distribution among all creditors, as seen in cases where a transaction at an undervalue is reversed even after the asset has been returned.
Q5. Why are Avoidance Transactions Under IBC difficult to detect and adjudicate?
They are difficult to detect and adjudicate due to inadequate bookkeeping by debtors, limited cooperation from promoters and key employees, the complexity of forensic audits, involving multiple transactions, and the resulting prolonged litigationg and delays in the adjudication process.
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