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Corporate and Economic Laws · Insolvency and Bankruptcy Code, 2016

Avoidance Transactions and Offences under the IBC

Updated 11 October 2026 · Fact-checked

Avoidance transactions are deals made by a corporate debtor before insolvency that unfairly reduce assets available to creditors. The liquidator or resolution professional applies to the Adjudicating Authority to void them. To solve a question, identify the transaction type, check the look-back period and the test, then state the remedy and who applies.

Understand Avoidance Transactions and Offences

When a company is heading for insolvency, its assets belong in practice to its creditors. Some promoters move assets out, give gifts, or borrow on harsh terms. The Code lets the insolvency professional challenge such deals and bring value back into the pool.

There are four main heads: preferential transactions (Section 43), undervalued transactions (Section 45), extortionate credit transactions (Section 50) and fraudulent or wrongful trading (Section 66). Under the Code, the resolution professional or liquidator examines the debtor's transactions and, if a transaction fits one of these heads and falls in the relevant period, files an application before the Adjudicating Authority.

An undervalued transaction under Section 45(2) is one where the corporate debtor (a) makes a gift to a person, or (b) transfers one or more assets for a consideration significantly less than the value of the consideration the debtor provides. In both cases it must not be in the ordinary course of business of the corporate debtor. The relevant period is set by Section 46. If the Authority is satisfied, it declares the transaction void and reverses its effect.

An extortionate credit transaction under Section 50 involves the receipt of financial or operational debt during the two years before the insolvency commencement date, on terms that required exorbitant payments by the debtor. The liquidator or resolution professional may apply for avoidance. Debt given by a person providing financial services, in compliance with any law in force for that debt, is never treated as extortionate.

Section 66 deals with fraudulent trading and wrongful trading. Fraudulent trading: during CIRP or liquidation, if business was carried on with intent to defraud creditors or for any fraudulent purpose, the Authority may order those knowingly party to it to contribute to the debtor's assets. Wrongful trading: on an application by the resolution professional during CIRP, a director or partner may be made to contribute if, before the insolvency commencement date, they knew or ought to have known there was no reasonable prospect of avoiding CIRP and did not exercise due diligence to minimise loss to creditors.

The liquidation regulations also deal with what happens next. A liquidator may assign a not readily realisable asset, which includes assets underlying proceedings on these transactions, with prior approval of the committee. In the final report application, the liquidator must set out, with the committee's approval, how avoidance and fraudulent or wrongful trading proceedings will be pursued after dissolution or closure, and how proceeds will be distributed.

Key rules to remember

Undervalued transaction (Section 45(2))
Gift, OR transfer of assets for consideration significantly less than value given by the debtor; AND not in ordinary course of business
Both limbs (gift or low-value transfer) must also pass the ordinary-course exclusion. Applies in the relevant period under Section 46.
Who applies (Section 45(1))
Liquidator or resolution professional → application to Adjudicating Authority → transaction declared void and effect reversed
The professional applies only after examining the debtor's transactions and determining that undervalued transactions occurred in the relevant period.
Extortionate credit (Section 50)
Debt received within 2 years before insolvency commencement date + exorbitant payments required
Financial-services debt compliant with law in force is never extortionate.
Fraudulent trading (Section 66(1))
Business carried on with intent to defraud creditors or for any fraudulent purpose → persons knowingly parties may be ordered to contribute
Applies during CIRP or liquidation; application is by the resolution professional.
Wrongful trading (Section 66(2))
Director/partner knew or ought to have known no reasonable prospect of avoiding CIRP + no due diligence to minimise creditor loss → contribution
Application by the resolution professional during CIRP. Due diligence is judged by what is reasonably expected of a person in the same functions.
Record retention (IRP Regulations, reg. 39A(3))
Electronic copy of records: minimum 8 years; physical copy: minimum 3 years, from completion of CIRP or conclusion of related proceedings, whichever is later
Records on preferential, undervalued, extortionate and fraudulent or wrongful trading transactions are specifically listed for preservation. Note that the text supplied also contains a different version of regulation 39A; check the latest text before the exam.

How to solve Avoidance Transactions and Offences questions

Use this sequence for any case-based question on avoidance transactions or wrongful trading.

  1. 1Read the facts and list each transaction with its date, parties and consideration.
  2. 2Fix the insolvency commencement date and work out the relevant period for each transaction.
  3. 3Classify each transaction: preferential, undervalued, extortionate credit, or fraudulent or wrongful trading.
  4. 4Apply the test for that head, such as gift or significantly lower consideration for undervalued, or exorbitant payments for extortionate.
  5. 5Check the exclusions, such as ordinary course of business, or lawful financial-services debt.
  6. 6Name who applies and before whom: the resolution professional or liquidator before the Adjudicating Authority.
  7. 7State the remedy: transaction declared void and effect reversed, or contribution to the debtor's assets.
  8. 8Conclude clearly for each transaction and cite the section if you are sure of it.

Quickest way: Three-question screen

When to use it: Use for MCQs and short case scenarios where time is tight.

  1. Ask: was it a gift or a transfer for far less value? If yes and outside ordinary business, think Section 45.
  2. Ask: was it borrowing on exorbitant terms within two years before commencement? If yes, think Section 50, unless it is lawful financial-services debt.
  3. Ask: was business run to defraud, or did directors ignore a clear slide into CIRP? Think Section 66, fraud or wrongful trading.
  4. Remember the remedy: avoidance is by application to the Adjudicating Authority; Section 66 means contribution to assets.

Common mistakes in Avoidance Transactions and Offences

  • Treating every below-market sale as undervalued.

    Students ignore the ordinary-course exclusion.

    Fix: Always test whether the deal took place in the ordinary course of business. If it did, Section 45 does not apply.

  • Applying the two-year period to undervalued transactions.

    Section 50 states two years expressly, so students carry that over to every head.

    Fix: Section 45 refers to the relevant period under Section 46. Do not state a period for it unless you are sure of it. Two years is stated in Section 50 for extortionate credit.

  • Calling a lawful bank loan at high interest extortionate.

    Students focus on the high rate and miss the Explanation.

    Fix: Debt from a person providing financial services, in compliance with law in force, is never extortionate.

  • Saying wrongful trading needs intent to defraud.

    Fraudulent and wrongful trading are blurred together.

    Fix: Fraudulent trading needs intent to defraud or fraudulent purpose. Wrongful trading needs knowledge or constructive knowledge ('ought to have known') of no reasonable prospect of avoiding CIRP, plus lack of due diligence.

  • Thinking wrongful trading applies to any employee or lender.

    Students read 'persons' in Section 66(1) and apply it to Section 66(2).

    Fix: Section 66(2) targets a director or partner of the corporate debtor. Section 66(1) covers any persons knowingly party to fraudulent business.

  • Forgetting what happens to avoidance proceedings after the liquidation ends.

    Students stop at the Adjudicating Authority's order.

    Fix: Recall that the liquidator's final report application must state how such proceedings will be pursued after dissolution or closure and how proceeds will be distributed, with the committee's approval.

Worked examples

Example 1

Aarav Textiles Ltd, a corporate debtor, transferred a warehouse to a relative of its director for ₹10,00,000 when the warehouse was worth ₹80,00,000. This was not part of its regular business. The resolution professional wants to challenge it. Advise.

Show the solution
  1. Classify: a transfer of an asset for consideration far below its value fits Section 45(2)(b).
  2. Test the gap: ₹10,00,000 against ₹80,00,000 is significantly less. The difference is ₹70,00,000.
  3. Check the exclusion: the sale was not in the ordinary course of business, so the exclusion does not help.
  4. Check timing: the transfer must have been made in the relevant period under Section 46. This must be confirmed against the insolvency commencement date.
  5. Remedy: the resolution professional files an application before the Adjudicating Authority to declare the transaction void and reverse its effect.

Answer: The transaction is undervalued under Section 45(2)(b), provided it falls in the relevant period under Section 46. The resolution professional can apply to the Adjudicating Authority to have it declared void and reversed.

Example 2

Meera Engineering Pvt Ltd entered CIRP. Its directors continued to take supplier credit for months after they knew the company could not avoid insolvency, and did nothing to protect creditors. Separately, a private lender not providing financial services charged exorbitant payments on a loan taken 18 months before commencement. Discuss the position.

Show the solution
  1. Directors' conduct: they knew there was no reasonable prospect of avoiding CIRP before commencement and did not exercise due diligence to minimise creditor loss. This matches Section 66(2).
  2. Procedure: the resolution professional applies during CIRP, and the Adjudicating Authority may direct the directors to contribute to the debtor's assets as it deems fit.
  3. Test due diligence: it is judged by what is reasonably expected of a person carrying out the same functions in that company.
  4. Loan: financial or operational debt received 18 months before commencement is within the two-year period under Section 50.
  5. Terms: exorbitant payments were required. The Explanation protects only lenders providing financial services in compliance with law, which this lender is not.
  6. Remedy: the resolution professional or liquidator may apply to avoid the extortionate credit transaction.

Answer: The directors face a wrongful trading application under Section 66(2) and may be ordered to contribute to the assets. The loan is a potential extortionate credit transaction under Section 50 because it is within two years and the terms were exorbitant, and the Explanation does not protect this lender.

Exam tips

  • In case scenarios, underline dates first. Time periods decide whether a transaction can be challenged.
  • Learn the exact limbs of Section 45(2): gift, or low-value transfer, plus the ordinary-course exclusion.
  • Be able to contrast fraudulent trading (intent to defraud) with wrongful trading (knew or ought to have known, no due diligence).
  • In MCQs, watch for the Section 50 Explanation about lawful financial-services debt.
  • Cite section numbers only for those you are sure of: 43, 45, 46, 50 and 66 are safe from the text supplied.

Practice questions from Insolvency and Bankruptcy Code, 2016

Avoidance Transactions and Offences in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Avoidance Transactions and Offences: frequently asked questions

What is an undervalued transaction under the IBC?

It is a gift, or a transfer of assets for consideration significantly less than the value the debtor gives, made outside the ordinary course of business. The resolution professional or liquidator can apply to the Adjudicating Authority to declare it void and reverse its effect.

What is the difference between fraudulent trading and wrongful trading?

Fraudulent trading requires business carried on with intent to defraud creditors or for any fraudulent purpose, and covers persons knowingly party to it. Wrongful trading applies to a director or partner who knew or ought to have known there was no reasonable prospect of avoiding CIRP and failed to exercise due diligence.

Is a high-interest bank loan an extortionate credit transaction?

Not if the debt is extended by a person providing financial services in compliance with law in force. The Explanation to Section 50 says such debt is in no event extortionate.

Who files the application to avoid a transaction?

The liquidator or the resolution professional, as the case may be, files it before the Adjudicating Authority. For wrongful trading under Section 66(2), the application is made by the resolution professional during CIRP.

How long must a resolution professional keep records of avoidance transactions?

Under the CIRP Regulations, the electronic copy of records must be kept for a minimum of eight years and the physical copy for a minimum of three years, from completion of CIRP or conclusion of related proceedings, whichever is later. Records on preferential, undervalued, extortionate and fraudulent or wrongful trading are specifically included.