The Insolvency and Bankruptcy Code, 2016 is a dynamic law, evolving with the emerg- ing needs of stakeholders. One of the key features of the code is provisions related to avoidable transactions, also known as vulnerable transactions. When an entity becomes insolvent, in order to maintain the financial position certain transactions are avoided, such transactions are called avoidable transactions. Such protective measures are im- portant as often companies held by promoter groups transfer value from assets to other group companies for their own benefit, further it also contributes in achieving the the main objectives of the code including credit availability, maximisation of value of assets and balance of interests. Section 536 & 537 of Companies Act, 1956 and Section 328 to 331 of Companies Act, 2013 also deals with similar provisions.
Under section 25(2)(j) of the code, it is the duty of Resolution Professional(RP) to file the application for avoidance of transactions in accordance with Chapter III of the code, it further obligates the RP to form an opinion on avoidable transactions on or before 75th day of CIRP and on or before 115th day, determine such transactions and inform IBBI, further on or before 135th day of CIRP, make an application to Adjudicating Authority(AA) for appropriate relief. The corporate debtor(CD) has to avoid such transac- tions only during relevant period. Under the code, there are four categories of avoidable transaction i.e. preferential transactions, undervalued transactions, extortionate credit transactions and fraudulent transactions.
Section 43 of IBC deals with preferential transactions. It surceases the transaction that will disturb the distribution of assets during liquidation process. A transaction is consid- ered to be preferential transaction when there is transfer of property or interest of the CD for the benefit of a creditor, surety or guarantor on account of an antecedent debt or lia- bility and such a transfer has the effect of putting the beneficiary in a better position than he would have been if the assets were distributed according to Section 53 of the code. Certain transfers are not considered preferential transactions, these include transactions made in ordinary course of the business of the CD or any transfer of security interest creating new value or a transfer registered with an information utility on or before 30 days after the CD receives possession.
The period up to which the transactions may be challenged is called the Look-Back peri- od. this section provides the look-back period in case of a related party as 2 years pre- ceding the insolvency commencement date and 1 year preceding the insolvency com- mencement date for there parties. The distinction is made between an “inside creditor” and an “outside credit”.
Under Section 45(2) of the IBC, a transaction is considered to be undervalue when gift is given or transfer of assists for consideration significantly less than the value of the con- sideration provided by the CD and such transaction has not taken place in the ordinary course of business. In other words the the relevant factor to determine whether a trans- action is undervalued would be the cost of acquisition of the asset by the corporate debtor. In an application for avoiding a undervalue transaction, the liquidator or the RP has to demonstrate that the look-back period of such transaction was made with a relat- ed party within the period of two years or with any person within the period of one year preceding the insolvency commencement date. Whenever the RP or liquidator come across such transaction, he has to make an application to a tribunal to declare such transaction as null and void and reverse the effect of the same.
Section 50 of IBC deals with extortionate credit transactions. it include transactions where the corporate debtor obtains a credit facility with exorbitant rate of interest or un- fair credit terms like incorporating default provisions. The section is applied when fair principles of lending are contravened. Another condition includes in case where lending is unconscionable under the principles of law of contracts i.e. signing agreement without reading the contents or under intimidation. Unlike other transactions, which seek to ad- dress transfer of assets, extortionate transactions address receipt of credit by the corpo- rate debtor.
In Shinhan Bank v. Sugnil India Private Limited and others, the NCLT Delhi bench found the agreed 65% rate of interest per annum amounts to an extortionate transaction. It fur- ther observed, generally a maximum interest rate of 24% per annum is accepted in pri- vate loans.
Section 49 of the code deals with transactions with the intent of defrauding the creditors. they are undervalued transactions ‘deliberately’ entered into by the CD with the intention of keeping assets of the corporate debtor beyond the reach of creditors or adversely af- fect the interests of the person who is entitled to make a claim against the CD. Unlike other avoidable transactions, there is no look-back period i.e. there is no time limit for challenging fraudulent transactions following the general principle, fraud vitiates every- thing. The important element required is that there should be deliberate act on the part of the corporate debtor with the intention to keep the assets beyond reach or adversely effect the claim of a person.
Section 69 of the code, individual of a company undertaking such transactions shall be punishable with imprisonment for a term of up to five years and a fine up to rupees one crore. If a liquidator notices such a transaction, he can make an application to the Adju- dicating Authority, which once satisfied passes an order restoring the position as it exist- ed before such transaction and protecting the interest of such persons.
The parties shall have access to the latest financial position of a company before entering into any transfer agreement, especially involving transfer of assets of the company. In case of financial distress, the risk of such avoidable transactions should be considered and appropriate action shall be taken accordingly. The company should also have sufficient documented evidence that the transaction was for fair value and in good faith and such a transaction was undertaken based on reasonable diligence. The provisions of IBC provides protection to people who enter into transactions in good faith. It is crucial for the contracting parties and creditors to know their rights and should be aware of the latest changes in the law regarding the remedies available to them in case of fraudulent transactions.