Preferential and Fraudulent Transactions in Insolvency

What is a preferential transaction under the IBC?

A preferential transaction is one that unfairly puts one creditor ahead of the rest just before insolvency. Section 43 of the IBC says a company gives a preference if it transfers property or an interest in property for the benefit of a creditor, surety or guarantor, for or on account of an antecedent financial or operational debt, and the transfer has the effect of putting that person in a better position than it would have had in a distribution under section 53. Both limbs must be met.

Take each element in turn. There must be a transfer: a payment, a transfer of goods or property, or the creation of a security interest. It must be for the benefit of a creditor, surety or guarantor. It must be for an antecedent debt, meaning a debt that already existed when the transfer was made; paying cash on delivery for fresh goods is not paying an antecedent debt. And it must improve the recipient's position compared with what it would get in liquidation under the section 53 waterfall, where unsecured creditors often recover very little.

The law does not require any intention to prefer. Section 43 looks at effect, not motive. A managing director who repaid a supplier because the supplier was shouting the loudest, not because he wanted to favour him, has still given a preference if the elements are met. That is the main difference between a preferential transaction and a fraudulent one.

The four avoidance transactions at a glance

The IBC calls these avoidance transactions, and since the 2026 amendment it defines the term in section 5(2A) to cover sections 43, 45, 49 and 50. This table sets out the basics of each.

The look-back period is measured backwards from the relevant start date. Before the 2026 amendment that was the insolvency commencement date, which is the date of admission. The amendment counts it from the date the insolvency application was filed and also covers the period between filing and admission. Check which version applies to your case, because the dates of older CIRPs were fixed under the earlier text.

Who is a related party, and why does it double the look-back?

A related party of a company is defined widely in section 5(24) of the IBC. It includes directors, partners and key managerial personnel and their relatives, firms and private companies in which a director is a partner, director or holds more than two per cent of the share capital, holding, subsidiary and associate companies, and persons on whose advice the board is accustomed to act. Section 43(4) gives a two-year look-back for preferences to related parties (other than employees) and one year for everyone else. Section 46 does the same for undervalued transactions.

The reason is practical. Insiders know when a company is in trouble well before outsiders do, and they are best placed to get their money out first. In the cases that come to us, the related-party transactions that get challenged are usually ordinary-looking: repayment of a director's unsecured loan, payment of a relative's 'consultancy' invoices, advance rent to a firm owned by a promoter, or a group company being paid in full while outside suppliers were not. The resolution professional's first exercise is to map the related parties and then read the bank statements for payments to them over the full two years.

Which payments are protected: ordinary course of business and new value

Section 43(3) protects two kinds of transfer, and most defences turn on them. The first is a transfer made in the ordinary course of business or financial affairs of the company or the transferee. In Anuj Jain v Axis Bank (2020), the Jaypee Infratech case, the Supreme Court read this exclusion so that the transfer must be in the ordinary course of business of the company as well as of the person who received it. A regular monthly payment to a raw-material supplier on normal credit terms will usually qualify. A sudden lump-sum repayment of an overdue loan, or a mortgage created over the company's land to secure a group company's borrowing, usually will not; the mortgages in that case were held to be preferential transactions in favour of a related party.

The second exclusion is security for new value. If the company acquires property and creates a security interest over it to secure fresh money (new value) given at or after the time of the security agreement, used to acquire that property, and the security is registered with an information utility within thirty days of the company getting possession, it is not a preference. This protects genuine new lending against new assets. It does not protect a lender who took fresh security for an old, unsecured debt as the company was going under.

A third point is not an exclusion but often decides the case: the 'better position' test. A creditor that was already fully secured, and would have been paid in full from its security in a liquidation anyway, is not put in a better position by a payment. That argument has helped secured lenders whose security comfortably covered the debt. It does not help an unsecured creditor that was paid in full when others recovered a fraction.

What is an undervalued transaction under section 45?

An undervalued transaction is a gift, or a transfer for consideration significantly less than the value the company gave, made outside the ordinary course of business. Section 45 covers a company that made a gift of an asset, or transferred an asset for a price significantly less than its value, where the transaction was not in the ordinary course. A factory sold to a promoter's relative at half its market value, a car written down and sold to a director for a token amount, or the company's receivables assigned to a group concern for nothing are typical examples.

Value is the battleground. The resolution professional usually relies on a registered valuer's report showing the asset was worth much more. The recipient replies with its own valuation, evidence of the condition of the asset at the time, encumbrances that reduced its value, or market conditions that justified the price. The word 'significantly' matters: a sale ten per cent below an optimistic valuation is not the same as a sale at a third of value. Section 48 allows the NCLT to order the property back, payment of the difference, release of any security given, and other consequential directions. Under the substituted section 47, if the resolution professional does not act, a creditor or member can bring the application.

When is a transaction fraudulent under section 49, and why does no time limit apply?

A transaction defrauding creditors is an undervalued transaction entered into deliberately to put assets beyond the reach of creditors or to adversely affect their interests. Section 49 has no look-back period. If the resolution professional can show the company deliberately moved assets out to defeat creditors, the NCLT can reverse the transaction however long ago it took place, subject to the protection for third parties.

Because intent has to be shown, these applications rely on circumstances: the timing of the transfer relative to a recall notice or a decree, the relationship between the parties, whether any money actually changed hands, whether the company kept using the asset after 'selling' it, and whether the transfer left the company unable to pay. A shop transferred by the company to a director's spouse two weeks after the bank's recall notice, with the company still running from it on a nominal rent, is the kind of fact pattern that persuades a bench.

The proviso to section 49 protects a person who acquired an interest in the property from someone other than the company, in good faith, for value and without notice of the fraud. So if the spouse in that example has since sold the shop to an unrelated buyer who paid market price and knew nothing, the buyer is usually safe, and the order is made against the spouse for the value instead. The same transaction can also be an offence under section 69 of the IBC, which punishes officers who transfer or conceal company property with intent to defraud creditors.

What is an extortionate credit transaction?

It is credit given to the company in the two years before insolvency on terms that required exorbitant payments or were unconscionable under the law of contract. Section 50 allows the resolution professional or liquidator to challenge such a transaction, and section 51 lets the NCLT set aside or vary its terms, require repayment of amounts received under it, or release security created for it.

There is a large exception. Debt extended by a person providing financial services in compliance with the law in force is not treated as extortionate. Banks, NBFCs and other regulated lenders charging interest in line with their regulatory framework are therefore outside section 50. The section is aimed at private lenders, often connected with the promoters, who charged punishing rates, monthly 'penalties' or one-sided terms when the company was desperate. These applications are less common than preference and undervaluation cases, but they are worth looking for when the books show large interest payments to individuals.

The provisions that matter

How does the resolution professional find these transactions?

Mostly through a transaction audit. Early in the CIRP the resolution professional appoints an auditor, often a firm of chartered accountants with forensic experience, to review the company's books and bank statements for the look-back period. The auditor flags payments to related parties, large or unusual payments, transfers of fixed assets, new securities created, write-offs of receivables, and gaps where records are missing. The resolution professional then forms an opinion, discusses it with the Committee of Creditors and decides which applications to file.

The auditor works from documents, and gaps in the records count against the company's insiders. Where the company did not hand over books or the accounting software was 'not available', the auditor will say so, and the resolution professional may also seek directions against the former management under section 19. Creditors can help by giving the resolution professional what they know: invoices showing goods were diverted, correspondence promising payment from a group company, or information about properties transferred.

The 2026 amendment strengthened the creditors' hand. Under the substituted section 47, if the resolution professional or liquidator fails to report or act on an avoidance transaction or fraudulent trading, a creditor, member or partner can apply to the NCLT. If the NCLT finds, after giving the professional a hearing, that he failed in his duty, it must direct the IBBI to start disciplinary proceedings against him. When Advocate B.K. Singh acts for a creditor in a CIRP, he asks for the transaction audit report early and reads its annexures rather than its summary, because the transactions that matter are sometimes listed and then dismissed in a single line.

How an avoidance application runs before the NCLT

The procedure is the same in substance for all four types. It runs as an interlocutory application within the company's insolvency case.

1. Transaction audit and opinion

   The resolution professional reviews the audit report, forms an opinion on which transactions are avoidable, and records the basis. The Committee of Creditors is kept informed, though the decision to file is the resolution professional's.

2. Filing the application

   The resolution professional (or the liquidator, or a creditor under section 47) files an interlocutory application in the company's case before the NCLT bench, naming the recipients of each transaction as respondents and annexing the audit report, bank entries, documents and valuation reports relied on.

3. Notice and reply

   The NCLT issues notice to the respondents, who file replies with their documents: invoices, agreements, proof of ordinary course dealings, valuation reports and anything showing the transfer was for fresh value. The applicant files a rejoinder.

4. Hearing

   The bench hears arguments, usually on the documents. Oral evidence is rare. Matters can take months, because the bench is also handling the main CIRP and many other cases, and adjournments are common.

5. Order and compliance

   If the transaction is set aside, the NCLT passes orders under section 44, 48, 49 or 51: return of the property, payment of a sum, release of security or other directions. Either side can appeal to the NCLAT within 30 days, extendable by 15 days, under section 61.

The appeal route and its limitation are covered in our post on appeals to the NCLAT. A respondent who wants to settle can also offer to return part of the money; the resolution professional or the committee can accept a negotiated figure, and the NCLT records it.

Does an avoidance application survive after the resolution plan is approved or the company is liquidated?

Yes, after the 2026 amendment it clearly does. Before the amendment, courts and tribunals had differed on whether an avoidance application pending when a resolution plan was approved could continue, and who would get the money if it succeeded. Some decisions held that once the CIRP ended, the resolution professional had no standing to pursue it; others allowed it to continue so that the wrongdoers did not escape. Respondents used the uncertainty to delay hearings until the plan was approved.

The amendment provides that completion of the CIRP, the liquidation or dissolution does not affect proceedings relating to avoidance transactions or fraudulent and wrongful trading. A liquidator can continue such proceedings, or start them on the basis of the resolution professional's investigation without re-investigating. Who receives the recovery is usually dealt with in the resolution plan itself, which may give it to the creditors or to the successful applicant, so committee members should read that clause carefully before voting. For respondents, delay is no longer a strategy; the application will be heard on its merits.

I have received notice of an avoidance application. How do I defend it?

Start by checking whether the transaction falls within the look-back period at all. Work out the relevant date under the version of the Code that applies, then the date of the transfer, and then ask if you count as a related party. A one-year window that has been miscounted, or a recipient wrongly labelled as a related party, disposes of the application at the threshold.

Next, test each element. Was it an antecedent debt, or were you paid for fresh goods or services at the time? Was the payment in the ordinary course of business for both sides, consistent with your past dealings, credit periods and invoice pattern? Were you secured, so that the payment did not improve your position? For an undervaluation claim, was the price fair at the time, and do you have a valuation or market evidence to show it? For a section 49 claim, is there any real evidence of intent beyond the timing? A supplier who can produce two years of invoices showing the same 45-day payment cycle before and after the challenged payment has a strong ordinary course defence.

Finally, consider good faith and value. If you bought the asset from someone other than the company, paid market value and had no notice, the provisos to sections 44 and 49 protect you. Put this on affidavit with your payment trail. Our page on NCLT practice in Delhi explains how the New Delhi benches list interlocutory applications, which matters when you are planning a defence that may take several hearings.

Documents that decide avoidance cases

Both sides end up relying on the same categories of papers. Collect them early, because bank records older than a few years can take time to obtain.

Red flags a transaction audit looks for

• Payments to insiders after the first default. Repayments to directors, relatives and group companies after the company stopped paying its bank.
• New security for old debt. A charge or mortgage created in favour of an existing unsecured creditor shortly before insolvency.
• Asset sales to connected buyers. Property, vehicles or machinery sold to related parties, especially without an independent valuation.
• Write-offs and credit notes. Receivables written off or large credit notes issued to customers connected with the promoters.
• Round-tripping. Money paid out to a vendor and coming back to a director or group company soon after.
• Corporate guarantees for group debts. The company guaranteeing or securing loans of a holding or sister company, as in the Jaypee case.
• Missing records. Gaps in books or bank statements for exactly the months that matter.

What happens to the people behind these transactions?

The avoidance provisions are civil; they reverse the transaction and recover value. The persons behind them can face more. A director who caused the company to enter preferential or fraudulent transactions may face a section 66 application for fraudulent or wrongful trading, an offence under section 69 of the IBC, and, depending on the facts, cheating or criminal breach of trust charges under sections 318 and 316 of the Bharatiya Nyaya Sanhita for conduct after 1 July 2024. Large frauds can draw an SFIO investigation or an ED case where the funds are proceeds of a scheduled offence.

There is a commercial consequence too. Under section 29A(g), a person who was a promoter or in management of a company in which the NCLT has found preferential, undervalued, extortionate or fraudulent transactions is ineligible to submit a resolution plan for it. Promoters hoping to buy back the company through the CIRP should understand that an avoidance order can end that hope. Our post on section 12A settlements explains the alternative, which has to be pursued early.

What to do this week

The steps depend on which side you are on.

• If you are a creditor: ask the resolution professional whether a transaction audit has been commissioned and when the report is expected.
• If you are a creditor: write to the resolution professional with any specific transaction you know about, with documents, and keep proof of sending.
• If you are on the Committee of Creditors: read the clause in each resolution plan that says who gets avoidance recoveries before you vote.
• If you have received notice: note the next date and the time given for your reply; do not let it pass while you gather papers.
• If you have received notice: work out the look-back dates yourself and check if you fall within the related party definition in section 5(24).
• If you have received notice: collect two years of invoices, ledgers and bank entries to show your normal dealing pattern.
• If you bought an asset from a connected person: assemble your proof of payment and anything showing you had no notice of the company's position.

Getting the application or the defence right

Avoidance cases are won on dates and documents. For applicants, the work is turning an audit report into a clear case for each transaction, with the element-by-element proof the NCLT expects. For respondents, it is finding the exclusion that fits and proving it with the business's own records. Neither side benefits from a general allegation of fraud or a general denial.

Advocate B.K. Singh's practice before the NCLT and NCLAT covers both sides of these applications, and the questions he asks first are usually the same: what is the relevant date, who is related to whom, and what did the payment pattern look like before the challenged transfer. If you want an advocate to read the audit report or the application served on you and tell you where the case stands, you can send the papers through our online enquiry. For creditors filing claims in the same CIRP, our post on filing your claim with the resolution professional explains the claim forms and deadlines, and our insolvency advice page sets out the wider work we do for creditors and debtors.