IT gives a gist of how undervalued transactions are dealt with under IBC

1. UNDERVALUED TRANSACTIONS
UNDER INSOLVENCY AND
BANKRUPTCY CODE, 2016
BY DIVYA KATHURIA
LLM(BUSINESS LAWS)

2. Avoidance Of Specified Transactions Under Insolvency And
Bankruptcy Code, 2016(generally called, avoidance provisions)
• Whenever a person is declared as insolvent, certain transactions undertaken
during the process of insolvency or even before that are avoided to overturn their
effects on the finances of the corporate debtor.
• Ss. 43-51 of the Code deal with avoidance of certain transactions.
• Transactions are divided into three categories: preferential transactions,
UNDERVALUED TRANSACTIONS and extortionate credit transaction.
• For avoiding or setting aside the transactions there is a "relevant period" which
is prescribed under various provisions of the code. Transactions undertaken
during this "relevant period" only can be avoided.
• Also known as “uncommercial transactions” under certain jurisdictions.

3. VULNERABLE TRANSACTIONS
o Transactions undervalued or fraudulent shall be considered vulnerable to interests of creditors or
stakeholders
o A combination of sections 45, 49, 66 and 69 of the Insolvency and Bankruptcy Code, 2016 (the
Code) requires and empowers the liquidator to apply to the National Company Law Tribunal
(NCLT) for appropriate orders in case the Liquidator comes across any vulnerable transactions
during the process of liquidation.
o Such transactions:-
a. may either be with respect to breach of applicable law, or
b. deleterious to the interests of creditors or stakeholders, or
c. transactions that are not in good faith.

4. What are Undervalued transactions: S. 45(2)
• Relevant period prescribed under S. 46 important to determine if transaction
undervalued for purpose of avoidance by RP or liquidator
• If avoided, the subject of transaction would be included in “liquidation estate” or would
be used to pay off creditors
• A transaction at undervalue is an arrangement entered into by an officer of the company
to transfer an asset to a third party for less than its full value, or for no return
• At a time when a company can easily comprehend that it may have to apply for
insolvency proceedings anytime.
• This is covered under S. 45 of the IBC, 2016.
• S. 45(2) defines undervalued transactions as where a corporate debtor :-
a. Makes a gift to a person; or
b. transfer of one or more assets by the corporate debtor for significantly less amount of
consideration, AND
c. not taken place in the ordinary course of business

5. S. 45(1)
• Liquidator or resolution professional (RP) examines (BOUND TO) if
any undervalued transaction[S.45(1)] made during relevant time
period(S.46)
• SHALL make application to adjudicating authority
• To declare them as VOID and REVERSE the effect of such transaction

6. Intent behind provision
• Such transactions are common and easy discourse for a company that
anticipates liquidation or insolvency to save its assets
• It is done to put assets beyond reach of RP or liquidator who can easily
include that in ‘liquidation estate’ or can use it to pay back creditors
• This is obviously prejudicial to creditors’ or stakeholders’ interests
• So, provision seeks to curb such fraudulent practices, for if these go
uncaught, very purpose of the Code would be defeated

7. WHAT IF LIQUIDATOR OR RP DOESN’T
INFORM: S. 47
• Creditor empowered to make such an application to adjudicating authority
• After examining, authority may pass relevant order of restoring and reversing
effect of transaction
• Also, if there was sufficient information to find out such a transaction,
authority shall require the Board to initiate disciplinary proceedings against
liquidator or RP

8. S. 48: ORDER IN CASES OF UNDERVALUED
TRANSACTIONS
• require any property transferred as part of the transaction, to be vested in the
corporate debtor;
• release or discharge (in whole or in part) any security interest granted by the
corporate debtor;
• require any person to pay such sums, in respect of benefits received by such
person, to the liquidator or the resolution professional as the case may be, as the
Adjudicating Authority may direct; or
• require the payment of such consideration for the transaction as may be
determined by an independent expert.

9. S. 49- TRANSACTIONS DEFRAUDING CREDITORS:
REQUISITES FOR RESTORING POSITION
• It deals with undervalued transaction u/s. 45 that were DELIBERATELY entered
into
• Adjudicating Authority is satisfied that:-
A. such transaction was deliberately entered into TO KEEP ASSETS BEYOND
REACH OF ANY PERSON ENTITLED TO MAKE CLAIM AGAINST DEBTOR
B. to adversely affect the interests of such a person in relation to the claim
NOTE:- Adjudicating authority shall also make order to protect interests of who are
victims of such transactions along with restoring position in relation to transaction

10. EXEMPTIONS UNDER S. 49
• shall not affect any interest in property which was acquired from a person other
than the corporate debtor and was acquired in good faith, for value and without
notice of the relevant circumstances, or affect any interest deriving from such an
interest
• shall not require a person who received a benefit from the transaction in good
faith, for value and without notice of the relevant circumstances to pay any sum
unless he was a party to the transaction

11. Difference between S. 45 and 49(both pertain to
avoidance of undervalued transactions)
S. 45
• Presence of any motive is NOT
required
• a look- back period has been
provided for undervalued
transactions under S. 46
• Undervalued transaction-a
matter of fact, no intention
matters
S. 49
• Deals with transactions undertaken
with mala fide or wrongful intent
• no limitation period for fraudulent
transactions covered under sections
49 and 66 of the Code
• The intent is “once a fraud, always
a fraud”
• Inserted for so-called ‘willful
defaulters’. So, no claw back period

12. RELEVANT PERIOD
• PROVIDED FOR UNDER SECTION 46
• Provides for relevant period of all avoidable transactions
• transaction made with any person within the period of one year preceding the
insolvency commencement date; or
• transaction made with a related party within the period of two years preceding
the insolvency commencement date.
NOTE: an independent expert may be required by NCLT to assess evidence relating
to the value of the transactions

13. RELATED PARTY
• S. 24A added by 2nd Amendment of 2018 to Code to define “related party”
• In relation to individual, it means: relative of individual or spouse of individual;
• his partner in any LLP or partnership firm;
• trustee of a trust of which he is beneficiary;
• A pvt. Co. in which individual is director and holds along with his relatives more
than 2% of share capital
• A public co. in which individual is director and holds along with his relatives more
than 2% of paid up share capital
• a body corporate whose board of directors, managing director or manager, in the
ordinary course of business, acts on the advice, directions or instructions of the
individual

14. RELATED PARTY (Cont….)
•LLP or a partnership firm whose partners or employees in the ordinary course of
business, act on the advice, directions or instructions of the individual
•a person on whose advice, directions or instructions, the individual is accustomed
to act;
•a company, where the individual or the individual along with its related party,
own more than fifty per cent. of the share capital of the company or controls the
appointment of the board of directors of the company
•Earlier, code defined ‘related party’ only in the context of a corporate. It was
silent on related party and relatives in context of individual or promoters, giving
rise to ambiguities and litigations.
•Now, definition covers relatives leading up to fourth generation of an
individual and his/her spouse.

15. FROM WHERE DID WE IMPORT
• Section 423 of the IA 1986- UK
• The law on avoidance in the UK provides for close scrutiny of transactions
entered into with persons connected with the company (other than employees) by
incorporating longer time periods in relation to which such transactions can be
challenged.
• Thus, while the relevant time period for avoiding preferences is six months prior
to the onset of insolvency, the time period is increased to two years in the case of
persons connected with the company

16. Thank you
&
have a great day ahead.