Home
blog-post

Undervalued Transactions under IBC

UNDERVALUED TRANSACTION UNDER THE INSOLVENCY AND BANKRUPTCY CODE, 2016

In troubling times, a corporate debtor may engage itself into transactions that promises easy cash which might include making a gift or selling of assets for significantly less amount of money. Although, such kind of transactions might not be done with an intention to defeat the creditors, however, as a consequence, there can be a clear reduction of the assets of a corporate debtor reducing the percentage of claim amount to be awarded to its creditors.

The Section 45(2)[1] of the Insolvency and Bankruptcy Code, 2016 states the following circumstances under which the transactions by the corporate debtor shall be considered undervalued:

  • Where the corporate debtor makes a gift to a person
  • Where the corporate debtor enters into a transaction with a person which involves the transfer of one or more assets by the corporate debtor for a consideration the value of which is significantly less than the value of the consideration provided by the corporate debtor
  • Where such transaction has not taken place in the ordinary course of business of the corporate

APPLICATION FOR TRANSACTIONS DEEMED UNDERVALUED

  • The Section 45(1)[2] of the Insolvency and Bankruptcy Code, 2016, states that if the liquidator or the resolution professional after examination of the transactions of the corporate debtor determines that certain transactions were made during the relevant period under section 46, which were undervalued, he shall make an application to the National Company Law Tribunal (NCLT) to declare such transactions entered by the Corporate Debtor as void and reverse the effect of such transaction.
Relevant Time Period/ Look Back Period (Section 46)[3]
Transaction made with any person (not being a related person), one year before the insolvency commencement date.Transaction made with a related person, two years before the insolvency commencement date.
  • In cases where the liquidator or the resolution professional fails to report an undervalued transaction, the same can be reported by a creditor, a member (in case of a company) or a partner (in case of a limited liability partnership) of the corporate debtor through an Application before the NCLT, to declare the transaction void and reverse its effect[4].

POWER OF THE NATIONAL COMPANY LAW TRIBUNAL

After examination of the Application, the NCLT has the power to pass the following orders:

Where the application is made by the liquidator or the insolvency professional[5]:  Where the application is made by the creditor, member or a partner of the corporate debtor:[6]      Where the corporate debtor deliberately/ intentionally entered into an undervalued transaction for securing its assets against a claimant or to adversely affect the interest of claimant:[7]
The order of the NCLT may require any property transferred as part of the transaction, to be vested in the corporate debtor   The order of NCLT may provide for release or discharge (in whole or in part) any security interest granted by the corporate debtor;The order of NCLT may 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.   The order of NCLT may require the payment of such consideration for the transaction as may be determined by an independent expert.The NCLT may pass an order restoring the position as it existed before such transactions and reversing the effects thereof.   The NCLT may pass an order requiring the Board to initiate disciplinary proceedings against the liquidator or the resolution professional as the case may be.      The NCLT shall make an order restoring the position as it existed before such transaction as if the transaction had not been enteredThe NCLT shall make an order protecting the interests of persons who are victims of such transaction  
  

The Hon’ble Supreme Court of India in Anuj Jain Interim Resolution Professional for Jaypee Infratech Limited v. Axis Bank Limited and others[8], clarified the scope of avoidable transactions including preferential transactions, undervalued transactions and extortionate transactions. The judgment negated the traditional commercial realities and banking operations contemplating the lender as the sole entity, having a security interest as a financial creditor under the Code. The case primarily dealt with preferential transactions, however, the guidelines of the same pertains to undervalued transactions as well.  The Court opined that emphasis would not be laid upon the primary lenders against whom the security interest is created, instead upon the ultimate beneficiary of the transaction.

CONCLUSION Numerous buyers with a financial capacity look out for distressed businesses. Often times, the buyers/creditors are incautious which ultimately hampers their recovery during insolvency proceedings of distressed businesses. Many debtors try easy returns during stressful times and engages themselves into avoidable deals such as undervalued transactions. However, the NCLT has the power the reverse the effect of such a transaction protecting the interests of bonafide creditors.


[1] Section 45(2) of the Insolvency and Bankruptcy Code, 2016

[2] Section 45(1) of the Insolvency and Bankruptcy Code, 2016

[3] Section 46 of the Insolvency and Bankruptcy Code, 2016

[4] Section 47 of the Insolvency and Bankruptcy Code, 2016

[5] Section 48 of the Insolvency and Bankruptcy Code, 2016

[6] Section 47(2) of the Insolvency and Bankruptcy Code, 2016

[7] Section 49 of the Insolvency and Bankruptcy Code, 2016

[8] Civil Appeal Nos. 8512-8527 of 2019

For more information please contact us at : info@ssrana.com