Insolvency and Bankruptcy - Law and Practice · Liquidation of Corporate Person

Avoidance Transactions and Fraudulent Trading under IBC

Updated 11 October 2026 · Fact-checked

Avoidance transactions are pre-insolvency deals of a corporate debtor that the liquidator or resolution professional asks the Adjudicating Authority to reverse: preferential, undervalued, extortionate credit and fraudulent transactions. Fraudulent or wrongful trading (section 66) makes the people behind such conduct pay into the debtor's assets. Solve questions by finding the type, the look-back period and the defence.

Understand Avoidance Transactions and Fraudulent Trading

When a company slides towards insolvency, its management may move assets out, favour some creditors or borrow on harsh terms. This hurts the creditors as a group. The Code lets the insolvency professional challenge such deals and bring value back into the pool for fair distribution.

The Code covers these transactions in Chapter III of Part II (sections 43 to 51) and Chapter VI (section 66). The text supplied here covers undervalued transactions (section 45), extortionate credit transactions (section 50) and fraudulent or wrongful trading (section 66). You must also know preferential transactions (section 43) from your study material. Section 46 sets the relevant period.

The key point is who applies. The liquidator or the resolution professional, as the case may be, examines the transactions and applies to the Adjudicating Authority (NCLT). For fraudulent trading under section 66(1), the application is made by the resolution professional. The professional cannot reverse a deal on his own. The Adjudicating Authority passes the order.

Undervalued transaction (section 45): the corporate debtor either makes a gift, or transfers assets for consideration significantly less than the value it provides. It must also be outside the ordinary course of business. The professional asks the Authority to declare it void and reverse its effect.

Extortionate credit (section 50): the debtor received financial or operational debt within two years before the insolvency commencement date, and the terms required exorbitant payments. Debt from a person providing financial services, in compliance with law, is never extortionate.

Fraudulent and wrongful trading (section 66): this goes after people, not just deals. Section 66(1) covers business carried on with intent to defraud creditors or for any fraudulent purpose. Those knowingly party to it may be ordered to contribute to the assets. Section 66(2) covers directors or partners who knew or ought to have known there was no reasonable prospect of avoiding CIRP and did not use due diligence to minimise creditor loss.

For individuals, section 164 has a parallel rule on undervalued transactions by a bankrupt, with a two-year period and a deemed rule for associates. Do not mix it up with the corporate rule.

Key rules to remember

Undervalued transaction (section 45(2)): Gift, OR transfer of assets for consideration significantly less than value given, AND not in ordinary course of business; The ordinary-course condition applies to both limbs. Remedy: Adjudicating Authority declares the transaction void and reverses its effect.
Who applies (section 45(1)): Liquidator or resolution professional → application to Adjudicating Authority; Applies for transactions made during the relevant period under section 46.
Extortionate credit (section 50(1)): Financial or operational debt received within 2 years before insolvency commencement date + exorbitant payments required; Explanation: lawful debt from a person providing financial services 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 made to contribute; Application by the resolution professional during CIRP or liquidation; the Authority fixes the contribution as it deems fit.
Wrongful trading (section 66(2)): Director or partner knew or ought to have known no reasonable prospect of avoiding CIRP + no due diligence to minimise creditor loss → contribution; Due diligence is judged by what is reasonably expected of a person doing the same functions in that debtor.
Liquidation Regulations, regulation 44A: Liquidator, with committee approval, states in the final report application how avoidance and trading proceedings continue after dissolution and how proceeds are distributed; As amended w.e.f. 02-06-2026, the words are 'with the approval' of the committee.
Individual bankrupt (section 164): Undervalued transaction within 2 years ending on bankruptcy application; with an associate, deemed undervalued; Ordinary-course defence is not available for associate transactions.

How to solve Avoidance Transactions and Fraudulent Trading questions

Use the same frame for any problem question: provision, facts, conclusion.

1Identify the type of transaction: preferential, undervalued, extortionate credit, or fraudulent or wrongful trading.
2State the provision in plain words with its conditions, quoting the section number only where you are sure of it.
3Check the timing. Was the deal in the relevant period under section 46, or for extortionate credit, within two years before the insolvency commencement date?
4Test each condition against the facts: gift or low consideration, ordinary course of business, exorbitant terms, intent or knowledge.
5Check defences and exclusions, such as ordinary course of business or lawful financial-services lending.
6Name the applicant: liquidator or resolution professional. Name the forum: Adjudicating Authority.
7State the remedy: transaction declared void and reversed, or persons made to contribute to the assets.
8Add one practical point, such as the liquidator's duty to record continuing proceedings in the final report.

Quickest way: Four-question screen

When to use it: Use when you have little time and the question asks whether a transaction can be avoided or a director made liable.

What was done: gift, cheap sale, harsh loan, or running business to cheat creditors?
When: inside the relevant period or two-year window?
Any defence: ordinary course or lawful lender?
So what: who applies, and what order can the Authority pass?

Common mistakes in Avoidance Transactions and Fraudulent Trading

Treating an undervalued sale as avoidable even though it was in the ordinary course of business.
Students focus on the low price and skip the last line of section 45(2).
Fix: Always write that the transaction must not have taken place in the ordinary course of business.
Saying section 66 applies only to companies and only after liquidation starts.
Students link all avoidance rules to liquidation.
Fix: Section 66(1) applies during CIRP or liquidation. Section 66(2) is for an application by the resolution professional during CIRP.
Confusing wrongful trading with fraudulent trading.
Both sit in section 66 and both lead to contributions.
Fix: Fraudulent trading needs intent to defraud and knowing participation. Wrongful trading is about knowing or ought to have known, plus no due diligence.
Applying the two-year period of section 50 to every avoidance type, or using section 164 for a company.
Several provisions use two years and look similar.
Fix: Match the period to the section. Section 164 is for bankrupt individuals, not corporate debtors.
Treating any high-interest loan as extortionate credit.
Students read only 'exorbitant payments'.
Fix: Remember the Explanation: lawful debt from a person providing financial services is never extortionate.
Saying the liquidator can reverse the transaction directly.
Students forget the role of the Adjudicating Authority.
Fix: Write that the professional applies and the Authority declares void and reverses.

Worked examples

Example 1

Rohan Textiles Pvt Ltd, now in liquidation, transferred a warehouse worth ₹4,00,000 to its director's brother for ₹50,000 during the relevant period. It was not part of its business. Advise the liquidator.

Show the solution

Type: undervalued transaction under section 45.
Test: the consideration of ₹50,000 is significantly less than the ₹4,00,000 value given by the corporate debtor.
Ordinary course: the facts say the sale was not in the debtor's business, so the last condition is met.
Timing: the transfer was in the relevant period under section 46, so section 45(1) applies.
Procedure: the liquidator examines the transaction and applies to the Adjudicating Authority.

Answer: The liquidator should apply to the Adjudicating Authority to declare the transfer void and reverse its effect, so the warehouse or its value returns to the liquidation estate.

Example 2

Meera Steels Ltd's directors kept ordering goods on credit for months, though they knew there was no reasonable prospect of avoiding CIRP, and took no steps to limit creditors' losses. CIRP has begun. Can the directors be made liable?

Show the solution

Type: wrongful trading under section 66(2).
Applicant: the resolution professional, during CIRP.
Condition (a): before the insolvency commencement date, the directors knew or ought to have known there was no reasonable prospect of avoiding CIRP. The facts show this.
Condition (b): they did not exercise due diligence in minimising creditor loss. The facts show this.
Test of diligence: what is reasonably expected of a person performing the same functions in this debtor. Nothing suggests they met it.
Fraud is not needed for section 66(2), so intent to defraud need not be proved.

Answer: Yes. On the resolution professional's application, the Adjudicating Authority may direct the directors to contribute to the assets of Meera Steels Ltd as it deems fit.

Exam tips

Write the section number and the exact condition. Examiners reward the condition test, not just the heading.
In problem questions, tie each fact to a condition: value gap, ordinary course, knowledge, due diligence.
Always name the applicant and the forum, then the order the Authority can pass.
Mention regulation 44A when the question is about the final report or what happens to pending proceedings after dissolution.
Use a short contrast: avoidance deals target transactions, while section 66 targets persons.

Practice questions from Liquidation of Corporate Person

Avoidance Transactions and Fraudulent Trading in other exams

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

CMA FinalAvoidance Transactions and Offences

Avoidance Transactions and Fraudulent Trading: frequently asked questions

What is the difference between preferential and fraudulent transactions under the IBC?

A preferential transaction favours certain creditors or guarantors before insolvency and is dealt with in section 43. Fraudulent trading under section 66 is about carrying on business to defraud creditors or for a fraudulent purpose. The first reverses a deal, the second makes persons contribute.

What is an undervalued transaction under section 45 IBC?

It is a gift, or a transfer of assets for consideration significantly less than the value the debtor provides. It must also be outside the ordinary course of business. The professional applies to the Adjudicating Authority to declare it void.

What is wrongful trading under the IBC?

Under section 66(2), a director or partner can be made to contribute if they knew or ought to have known there was no reasonable prospect of avoiding CIRP and did not exercise due diligence to minimise creditor loss. The application is made by the resolution professional during CIRP.

Can proceedings continue after the liquidation ends?

Regulation 44A of the Liquidation Process Regulations requires the liquidator to state in the final report application how avoidance and trading proceedings will be pursued after dissolution or closure. It also covers how proceeds will be distributed. The liquidator acts with the committee's approval.