Definition
Transactions entered into by a corporate debtor prior to insolvency that can be set aside by the Resolution Professional or Liquidator under the IBC — including preferential transactions, undervalued transactions, extortionate credit transactions, and fraudulent transactions.
The IBC Avoidance Provisions (Sections 43-51) allow the RP or Liquidator to challenge and reverse pre-insolvency transactions that unfairly depleted the debtor's assets: (a) Section 43-44: Preferential transactions — transactions giving unfair preference to a creditor during the 'look-back period' (12 months for non-related parties; 24 months for related parties); (b) Section 45-47: Undervalued transactions — transfers of assets for significantly less than market value in the same look-back periods; (c) Section 49: Extortionate credit transactions — credit obtained on extortionate terms in the 2 years before CIRP; (d) Sections 66-69: Fraudulent trading, wrongful trading, wrongful concealment — criminal provisions that may be invoked against directors and others.
Statutory Definition
Section 43(2), Insolvency and Bankruptcy Code, 2016: 'A corporate debtor shall be deemed to have given a preference, if — (a) there is a transfer of property or an interest thereof of the corporate debtor for the benefit of a creditor or a surety or a guarantor for or on account of an antecedent financial debt or operational debt or other liability owed by the corporate debtor; and (b) the transfer has the effect of putting such creditor, surety or guarantor in a beneficial position than it would have been in the event of a distribution of assets being made in accordance with section 53.'
Etymology & Origin
From 'avoidance' (the act of avoiding, making void, from Latin 'evitare' — to avoid) + 'transactions' (commercial dealings). 'Avoidance transactions' are transactions that the insolvency law allows to be 'avoided' (made void) — reversed — because they were done to circumvent fair distribution among creditors.
Full Legal Analysis
Avoidance Transactions: Clawing Back Pre-Insolvency Transfers
A company approaching insolvency may try to protect certain creditors (especially related parties) or hide assets. The IBC’s avoidance provisions are the claw-back mechanism: the RP or Liquidator can reach back in time and reverse these transactions — restoring assets to the liquidation estate for fair distribution. The “look-back period” creates a window of vulnerability — transactions during this period are scrutinised and may be challenged.
Preferential vs. Undervalued Transactions
(a) Preferential transaction (Section 43): A payment or transfer that puts one creditor in a better position than they would have been in liquidation. Example: repaying a related-party loan in full during the 24-month look-back period when all other creditors are getting 30 cents on the dollar in liquidation. (b) Undervalued transaction (Section 45): A transfer at a price significantly less than fair market value. Example: selling a factory worth Rs. 50 crores to a related party for Rs. 10 crores during the look-back period. Both can be set aside — the assets are returned to the liquidation estate for fair distribution.
Look-Back Periods
(a) Non-related parties: 12 months before the insolvency commencement date. (b) Related parties (promoters, directors, subsidiaries, holding companies): 24 months before the insolvency commencement date. The extended look-back for related parties reflects the presumption that related-party transactions are more likely to be structured to benefit insiders at the expense of external creditors.
“Avoidance transactions are the IBC’s time machine — reaching back before the insolvency date to undo the asset stripping and creditor favoritism that occurred when the company was failing. They restore fairness to the distribution process by ensuring that late-stage transactions that benefited insiders don’t reduce what’s available to all creditors equally.”
This Term in Indian Statutes
Insolvency and Bankruptcy Code, 2016, 2016
"A corporate debtor shall be deemed to have given a preference, if there is a transfer of property for the benefit of a creditor for an antecedent debt, which has the effect of putting such creditor in a beneficial position than in the event of distribution under section 53."
Preferential transaction: look-back 12 months (non-related) / 24 months (related parties); undervalued: same periods; set aside by RP/Liquidator to restore liquidation estate
