Answer By law4u team
During the liquidation of a company under the Insolvency and Bankruptcy Code (IBC), 2016, certain past transactions are scrutinized to ensure that the corporate debtor did not unfairly divert assets, favor specific creditors, or engage in fraudulent activities before the liquidation began. These are known as avoidance transactions, and the liquidator plays a vital role in identifying and reversing such deals to recover value for equitable distribution among creditors.
Types of Avoidance Transactions Under IBC
Preferential Transactions (Section 43)
Transactions that give undue preference to certain creditors, especially within two years before the insolvency commencement date (if related party) or one year (if unrelated party).
Undervalued Transactions (Section 45)
Transactions where assets are sold for less than their value, without receiving equivalent consideration, and made within two years (related party) or one year (unrelated).
Extortionate Credit Transactions (Section 50)
Transactions involving unfair or excessive interest or charges for credit extended, usually in the last two years before insolvency.
Fraudulent Transactions (Section 66)
Transactions done with intent to defraud creditors or conceal assets, regardless of the time frame.
How Avoidance Transactions Are Handled in Liquidation
Transaction Audit
The liquidator conducts a transactional audit with the help of independent professionals to identify suspect transactions.
Filing Application to NCLT
If an avoidance transaction is found, the liquidator files an application with the Adjudicating Authority (NCLT) for reversal or appropriate relief.
NCLT’s Role
Reviews evidence, conducts hearings, and if satisfied, passes an order to reverse the transaction or direct compensation or recovery.
Clawback of Assets
Reversed transactions may result in assets or money being clawed back into the liquidation estate for fair distribution.
Involvement of Stakeholders
Creditors and stakeholders may assist in identifying such transactions and may also challenge or support the liquidator’s findings.
Consequences of Avoidance Transaction Orders
Beneficiaries may be required to return gains or assets.
Fraudulent actors may face penalties or criminal charges under IBC or other laws.
Liquidation estate value may increase, benefiting all creditors equally.
Helps restore fairness and prevents asset siphoning.
Key Challenges in Handling Avoidance Transactions
Proving Intent in case of fraudulent deals.
Tracing Assets if diverted through multiple entities.
Legal Delays due to hearings and counterclaims.
Limited Timeframes to identify and act within liquidation period.
Consumer Safety Tips (for creditors and professionals)
Stay updated on all transaction audit reports.
Inform liquidator of any suspicious pre-liquidation dealings.
Participate in hearings if you are an affected party.
Maintain proper documentation and history of claims.
Support fair liquidation practices to protect collective interests.
Example
A corporate debtor, six months before entering insolvency, transferred a large property to a related party at half its market value without a legitimate business reason.
Steps taken:
During liquidation, the liquidator reviews the books and flags the transaction as undervalued and involving a related party.
A forensic audit confirms lack of consideration and unfair valuation.
The liquidator files an application under Section 45 with NCLT.
After review, the NCLT sets aside the transaction and orders the related party to return the asset or its fair value.
The recovered value is added to the liquidation estate and distributed among creditors.
