Avoidance Transactions Under IBC: Key Legal Updates 2025

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Avoidance Transactions Under the IBC: Statutory and Judicial Shifts, 2025

The Insolvency and Bankruptcy Code, 2016 (IBC) contains provisions to undo “avoidance transactions” deals made by a corporate debtor before insolvency that unfairly prefer some creditors or defraud others.

Chapter III (Sections 43–51) of the IBC empowers the Resolution Professional or Liquidator to avoid certain transactions, while Section 66 (in Chapter VI) deals separately with fraudulent or wrongful trading. The goal is to maximize the debtor’s asset pool and ensure all creditors share equitably, preventing any party from gaining an undue advantage.

Categories of Avoidance Transactions under the IBC

The IBC identifies four main types of avoidable transactions (often called “PUFE” transactions):

Preferential transactions (Section 43): Transfers made by the debtor that put one creditor in a better position than they would have been under an equal-priority liquidation. For example, if property is transferred to a creditor “for the benefit of a creditor for or on account of an antecedent debt” and it benefits that creditor more than in a pari-passu distribution. (Such transactions within 2 years to related parties or 1 year to others before the insolvency date can be unwound.)
Undervalued transactions (Section 45): Deals where the debtor gives value for substantially less than adequate consideration, typically gifts or sales at grossly low prices outside the ordinary course of business.
Transactions defrauding creditors (Section 49): A subset of undervalued transactions entered “to keep assets beyond the reach” of creditors or to prejudice their interests.
Extortionate credit transactions (Section 50): Financing arrangements where the terms are grossly unfair to the debtor (e.g. exorbitant interest or unconscionable conditions).

Each of these can be set aside by the National Company Law Tribunal (NCLT) on application by the Insolvency Resolution Process (IRP)/liquidator. (Section 44–47 prescribe the remedies available.) Notably, Section 66, fraudulent or wrongful trading is treated differently. It authorizes the Tribunal to order anyone “knowingly party” to business carried on with intent to defraud creditors to contribute to the debtor’s assets.

Legislative Intent and Statutory Scheme

The scheme of the IBC clearly separates avoidance remedies (Chapter III) from fraudulent trading (Section 66). This was intentional: the Code’s architecture grants the NCLT power to set aside specific transactions under Sections 43, 45, 50 (and related provisions) but does not empower it to “avoid” fraudulent business practices in the same way. The Insolvency and Bankruptcy Code (Amendment) Bill, 2025 further cements this distinction: it adds in Section 5 that an “‘avoidance transaction’ means a transaction as referred to in Sections 43, 45, 49 and 50”, and separately defines “‘fraudulent or wrongful trading’” under Section 66. Thus, the legislature explicitly excludes Section 66 from the definition of avoidance.

The Code’s intent is to protect the collective creditor pool. As the Delhi High Court has observed in Tata Steel BSL Limited v. Venus Recruiters Ltd., 2023 SCC OnLine Del 155, if avoidance remedies could not survive insolvency, beneficiaries of earlier fraudulent transfers would be “walking scot-free,” defeating the Code’s objective of preventing unjust enrichment. To guard against this, the proposed amendment clarifies that avoidance proceedings continue after resolution or liquidation.

In particular, the Bill, 2025 adds an explanation to Section 26 that completion of Corporate Insolvency Resolution Process (CIRP) or liquidation “shall not impact the continuation” of avoidance transactions, and amends Section 35 to require the liquidator to carry forward or initiate such proceedings. These changes codify the “clean slate” principle from Essar Steel India Ltd. Committee of Creditors v. Satish Kumar Gupta, Civil Appeal No. 8766-67 of 2019 and Ghanashyam Mishra and Sons Private Ltd. v. Edelweiss Asset Reconstruction Company Private Limited, Civil Appeal No.8129 of 2019 ensuring that secured or unsecured creditors ultimately benefit from any disgorged assets.

Judicial Interpretations and Key Decisions

Courts have grappled with how avoidances fit into resolution plans, leading to differing outcomes. One issue has been whether recoveries from avoidance actions vest in the corporate debtor (for all creditors) or can be assigned to a successful bidder. For example, the Venus Recruiters (2020) decision held (at single-judge level) that avoidance applications serve only the creditors of the old company, not the “new avatar” under the approved plan. The National Company Law Appellate Tribunal (NCLAT), following Venus, once held that assigning avoidance recoveries to a new promoter was impermissible.

However, the Supreme Court’s recent ruling in Piramal Capital & Housing Finance Ltd. v. 63 Moons Technologies Ltd. & Ors. (Civil Appeals Nos. 1632–1634 of 2022) has significantly clarified these questions. In that case, the Committee of Creditors (CoC) of Dewan Housing Finance Corporation Limited (DHFL) (now Piramal) had agreed that recoveries from Section 66 applications would go to the successful resolution applicant (Piramal), while Chapter III recoveries would remain for creditors.

The NCLAT struck this down, citing Venus Recruiters. The Supreme Court disagreed in full, overruling the NCLAT’s interference with the plan. It held that transactions under Section 66 are not “avoidance” transactions at all, since the NCLT cannot “avoid or set aside” fraudulent trading in the same manner.

The Piramal bench emphasized that the approved resolution plan, negotiated by the CoC to maximize value should stand unless it is “palpably perverse.” It found no perversity in Piramal’s deal: valuing the Sec.66 claims at ₹1 was reasonable, given the uncertainties of recovery. The Court reiterated the settled rule from Essar Steel and Ghanashyam Mishra that the CoC’s commercial wisdom is sacrosanct in evaluating a plan.

The SC also faulted the NCLAT’s reliance on Venus Recruiters, noting that a subsequent Division Bench (in Tata Steel BSL v. Venus Recruiters) had called the single-judge’s reasoning into question. Importantly, the Court held that under the CIRP regulations (Regulation 37(a) of the CIRP Regs.), a resolution plan may provide for transfer of all or part of the assets. Thus, there was nothing invalid about allocating the Sec.66 recoveries to Piramal’s bid.

2025 Amendments and Ongoing Reforms

Legislative reforms in 2025 have now enshrined many of these principles. Besides the definition of “avoidance transaction” in Section 5, the 2025 Act (Bill No. 107 of 2025) explicitly ensures that avoidance proceedings survive insolvency. As noted, it will insert an explanation to Sec.26 and amend Sec.35 to make clear that a resolution or liquidation order does not nullify pending avoidance applications.

Separately, the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 were amended in 2022 to let prospective resolution applicants (PRAs) specify in their plans how proceeds from avoidance proceedings will be treated. Regulation 38(2)(d) now explicitly allows a plan to “provides for the manner in which proceedings in respect of avoidance transactions”. The Supreme Court noted that, although Piramal’s plan predated that amendment, the legislature clearly intended to give the CoC freedom to deal with such assets. In fact, the Court observed that the 2022 amendment simply codified what the IBC always envisioned – that the CoC can strategically transfer or retain certain claims including avoidance recoveries as part of maximizing value.

Finally, the Code’s “clean slate” policy has been bolstered. The Amendment Bill adds a new sub‑section to Section 31 confirming that once a plan is approved, all claims not included in the plan stand extinguished. This underlines that avoidance applications properly prosecuted must be included or resolved in the plan. Taken together, the 2025 statutory changes and the Piramal ruling leave little doubt: avoidance applications remain live after a plan, their proceeds are ultimately for the creditors, and a CoC may lawfully structure a plan even giving only token value to contentious claims as long as it is bona fide and compliant with law.

Conclusion

The IBC’s avoidance provisions (Sections 43–50) are designed to claw back unfair pre-insolvency transfers for the collective creditor benefit. The Supreme Court’s 2025 judgment confirms that fraudulent trading (Sec.66) lies outside that definition and reaffirms that commercial decisions by the CoC will not be second-guessed absent arbitrariness. New legislation now codifies the distinction and ensures avoidance actions continue post-resolution.

Practitioners should note that, going forward, any resolution plan can validly allocate avoidance recoveries in line with CoC approval, subject to the general duty to maximize creditor value. The Piramal case, together with the 2025 amendments, provides clarity on these points and underscores that the ultimate aim is to protect creditors’ interests and uphold the finality of approved plans.

These issues gain sharper clarity when read with the IBC (Amendment) Bill 2025, which proposes key changes to the Code.