Avoidance Transactions & Personal Liability (Sections 43-66 IBC): Preferential, Undervalued, Extortionate & Fraudulent Trading Actions against Ex-Promoters

Avoidance Transactions & Personal Liability (Sections 43, 45, 50 & 66): Preferential, Undervalued, Extortionate & Fraudulent Trading Litigation

Published by: Sumanjari & Co. Advocates

Section 1: Executive Overview & Practical Reality

In the aftermath of a corporate debtor being admitted into the Corporate Insolvency Resolution Process (CIRP), the primary focus of creditors and the Resolution Professional (RP) rapidly pivots from operational management to asset claw-back and promoter accountability. In the months leading up to formal insolvency, distressed promoters routinely engage in aggressive pre-insolvency asset stripping: granting preferential mortgages to favored lenders, executing undervalued sales of prime corporate real estate to family-owned shell entities, repaying unsecured loans to relatives while defaulting on institutional debt, and creating fraudulent trading encumbrances. Sections 43, 45, 50, and 66 of the Insolvency and Bankruptcy Code, 2016 (IBC)—collectively termed the "PUFE" provisions (Preferential, Undervalued, Fraudulent, and Extortionate transactions)—provide the statutory artillery to unwind these transactions, claw back corporate wealth, and hold errant promoters personally liable without limitation.

In actual practice before NCLT benches and the NCLAT, avoidance litigation is an evidentiary marathon anchored in forensic accounting. Resolution Professionals are under an express statutory duty under Regulation 35A of the CIRP Regulations to form an opinion, make a determination, and file formal avoidance applications within strict regulatory timelines (typically within 135 days of CIRP commencement). However, corporate debtors and beneficiary transferees vigorously defend these applications, invoking the statutory "ordinary course of business" defense under Section 43(3), challenging the look-back "twilight periods," and arguing that the NCLT lacks jurisdiction to adjudicate avoidance claims after a Resolution Plan has been approved.

The jurisprudence governing avoidance litigation has crystallized through monumental rulings of the Supreme Court of India in cases such as Anuj Jain (Jaypee Infratech), Venus Recruiters, and Gluckrich Capital. Litigators representing Resolution Professionals, Committee of Creditors (CoC) members, or defending corporate promoters must master the forensic accounting metrics, the statutory look-back windows, the shift in evidentiary burdens, and the post-CIRP survivability of Section 66 fraudulent trading applications. Successfully prosecuting or defending a PUFE application dictates whether billions of rupees in diverted assets are restored to the corporate estate or permanently lost.

Section 2: Statutory & Regulatory Framework

The statutory architecture regulating avoidance transactions and personal liability is codified under Chapter III of Part II of the IBC, 2016, and the CIRP Regulations, 2016:

• Section 43, IBC, 2016 (Preferential Transactions): Applies where a corporate debtor has given a preference in the form of a transfer of property or interest therein to a creditor, surety, or guarantor for or on account of an antecedent debt, which puts that person in a more beneficial position than they would have been in the event of a distribution under Section 53 waterfall.
• Statutory Look-Back ("Twilight") Period (Section 43(4)): (i) Two years preceding the insolvency commencement date for transactions with "related parties"; (ii) One year preceding the insolvency commencement date for transactions with third parties.
• Statutory Exceptions (Section 43(3)): Preference shall not include: (a) transfer made in the ordinary course of the business or financial affairs of the corporate debtor or the transferee; or (b) transfer creating a security interest in property acquiring new value.
• Section 45, IBC, 2016 (Undervalued Transactions): Applies where the corporate debtor makes a gift to a person, or enters into a transaction with a person which involves the transfer of one or more assets for a consideration the value of which is significantly less than the value of the consideration provided by the corporate debtor. Look-back period: two years for related parties, one year for others (Section 46).
• Section 50, IBC, 2016 (Extortionate Credit Transactions): Applies where the corporate debtor has received financial or operational credit involving terms that require exorbitant payments or are unconscionable under the principles of contract law. Look-back period: two years preceding the insolvency commencement date.
• Section 66, IBC, 2016 (Fraudulent Trading or Wrongful Trading): The ultimate personal liability engine:
• Section 66(1) (Fraudulent Trading): If during CIRP or liquidation it appears that any business of the corporate debtor has been carried on with intent to defraud creditors or for any fraudulent purpose, the Adjudicating Authority may direct that any persons who were knowingly parties to the carrying on of the business shall be personally liable to make such contributions to the assets of the corporate debtor as it deems fit. Crucially, Section 66 has zero statutory look-back period.
• Section 66(2) (Wrongful Trading): Imposes personal liability on a director if before the insolvency commencement date, such director knew or ought to have known that there was no reasonable prospect of avoiding the commencement of CIRP, and failed to exercise due diligence in minimizing potential loss to creditors.
• Regulation 35A, IBBI (CIRP) Regulations, 2016 (Mandatory Timeline): (1) The RP shall form an opinion within 75 days of insolvency commencement date whether the corporate debtor has been subjected to any transaction under Sections 43, 45, 50, or 66; (2) The RP shall make a determination within 115 days; and (3) The RP shall apply to the Adjudicating Authority for appropriate relief within 135 days.
• Section 44, IBC, 2016 (Orders in Cases of Preferential / Undervalued Transactions): Vests the NCLT with plenary remedial powers: vesting property in the corporate debtor, releasing or discharging security interests, directing any person to pay sums, and reversing accounting entries.

Section 3: Landmark Judicial Precedents

Judicial enforcement of PUFE provisions and promoter liability has been authoritatively settled by the Supreme Court of India and the NCLAT:

• Anuj Jain (IRP for Jaypee Infratech Ltd.) v. Axis Bank Ltd. & Ors., (2020) 8 SCC 401: The magnum opus on Section 43 preferential transactions. The Supreme Court laid down the exhaustive step-by-step test for establishing preference: (i) Analyze whether the transfer was for the benefit of a creditor, surety, or guarantor on account of an antecedent debt; (ii) Determine whether it put the beneficiary in a more favorable position than under Section 53; (iii) Verify whether it falls within the relevant look-back period; and (iv) Scrutinize whether it falls within the "ordinary course of business" exception. Crucially, the Supreme Court held that mortgaging Jaypee Infratech's unencumbered land parcels to secure multi-crore loans for its holding company (Jaiprakash Associates Ltd.) was a classic preferential transaction under Section 43, and not in the ordinary course of business, directing the complete release and restoration of the land to the corporate debtor.
• Tata Consultancy Services Ltd. v. Cyrus Investments Pvt. Ltd., (2021) 9 SCC 449: Reaffirmed that transactions executed by promoters for the collateral benefit of holding entities or affiliated sister companies without reciprocal commercial value violate fundamental fiduciary duties and corporate entity boundaries, directly attracting avoidance scrutiny upon insolvency.
• Delhi High Court in Venus Recruiters Pvt. Ltd. v. Union of India & Ors., 2020 SCC OnLine Del 1479 (Overruled by NCLAT / Supreme Court): The Delhi High Court had held that avoidance applications under Section 43 to 66 cannot survive post-approval of a resolution plan. However, the NCLAT and the Supreme Court in subsequent rulings definitively clarified that where the resolution plan provides for the continuation of avoidance proceedings and specifies who receives the proceeds, avoidance applications survive plan approval and can be prosecuted for the benefit of creditors.
• Gluckrich Capital Pvt. Ltd. v. State Bank of India & Ors., 2023 SCC OnLine SC 1187: The Supreme Court held that Section 66 applications for fraudulent trading can be maintained directly by the Resolution Professional or Liquidator. The Court affirmed that Section 66 is not bound by any statutory look-back window; fraudulent transactions spanning multiple preceding years can be examined to fix personal liability on directors.
• Kapil Wadhawan v. Piramal Capital & Housing Finance Ltd., (2023) SCC OnLine NCLAT 112: The NCLAT held that promoters who siphoned funds through complex webs of pass-through shell entities and unhedged developer loans cannot hide behind formal board approvals. Under Section 66, intent to defraud is established through forensic fund trails, and directors are personally liable to reimburse the full value of diverted funds.

Section 4: Stage-by-Stage Procedural Roadmap

Executing an avoidance litigation campaign from forensic audit to recovery follows a disciplined five-stage statutory protocol:

• Phase 1: Forensic Audit & Transaction Audit Appointment (Days 1–45):
• The Resolution Professional, upon taking custody of books of account under Section 17/18, appoints an independent forensic auditor (empaneled Chartered Accountant firm).
• Scope of Transaction Audit: (a) Review of bank statements across all operating accounts; (b) Scrutiny of related-party transactions (Form AOC-2 / Section 188); (c) Physical asset verification vs. fixed asset registers; (d) Identification of pre-insolvency mortgages and cash transfers.
• Phase 2: Formal Determination under Regulation 35A (Days 46–115):
• Forensic auditor submits draft Forensic Audit Report (FAR) / Transaction Audit Report (TAR).
• RP forms an independent opinion within 75 days, and makes a formal determination within 115 days regarding specific transactions falling under Sections 43, 45, 50, and 66.
• Issue formal show-cause letters to beneficiary transferees and suspended directors demanding explanations within 7 days.
• Phase 3: Drafting & E-Filing Avoidance Applications (Days 116–135):
• Draft separate, independent Interlocutory Applications (IAs) under Form NCLT-1 before the Adjudicating Authority: (i) Section 43 IA for preferential transfers; (ii) Section 45 IA for undervalued sales; (iii) Section 66 IA for fraudulent trading against directors. Avoid composite filing of all PUFE sections in a single vague application.
• Attach the certified Transaction Audit Report, bank statement trails, registered property sale deeds, and valuation reports demonstrating the undervaluation delta.
• E-file on the NCLT portal before the 135-day deadline prescribed by Regulation 35A.
• Phase 4: Pleadings & Injunction against Asset Dissipation (Days 136–210):
• Move urgent interim prayers under Section 44 / Rule 11 seeking: (a) freezing of bank accounts of the beneficiary entities; (b) injunction restraining transferees from selling, mortgaging, or creating third-party rights on the claw-back properties.
• Respondents file Replies within 3 weeks; RP files Rejoinder within 2 weeks.
• Phase 5: Final Adjudication & Recovery Order (Days 211–330+):
• Final arguments on statutory look-back windows, ordinary course of business, and fraudulent mens rea.
• The NCLT passes a final order under Section 44 / Section 66: (i) canceling preferential mortgages; (ii) ordering re-vesting of properties in the corporate debtor; and (iii) passing a personal monetary decree against suspended directors under Section 66(1).

Section 5: Tactical Offenses, Defenses & Critical Pitfalls to Avoid

Offensive Playbook for Resolution Professionals & Creditors:

• The Disjunctive Section 66 Unlimited Look-Back Strike: Unlike Sections 43 and 45—which are strictly confined to the 1-year or 2-year look-back periods—Section 66 has no statutory time limit. If forensic analysis reveals that promoters diverted corporate funds into family trusts four or five years prior to CIRP, frame the application strictly under Section 66(1) (fraudulent trading). The NCLT has unlimited retrospective reach to order personal restitution under Gluckrich Capital.
• The Anuj Jain "Ordinary Course of Business" Dismantling: When a favored creditor or bank argues that an asset mortgage or debt settlement was made in the "ordinary course of business" under Section 43(3), apply the strict Anuj Jain test. Prove that mortgaging corporate land to secure loans of a third party or parent company has zero connection with the debtor's routine manufacturing or trading operations. If the transaction lacks direct reciprocal benefit, the exception fails completely.
• Structuring Avoidance Recoveries in the Resolution Plan: Ensure that the Resolution Plan explicitly provides that the proceeds of ongoing avoidance applications under Sections 43 to 66 shall accrue exclusively to the benefit of the Committee of Creditors (or allocated pro-rata), and that the RP / CoC shall retain the right to prosecute the applications post-plan approval under the settled Venus Recruiters appellate jurisprudence.

Defensive Shields for Suspended Directors & Beneficiaries:

• The Strict Twilight Period Expiry Shield: For Section 43 and Section 45 claims, examine the precise date on which the transfer deed was executed and registered versus the Insolvency Commencement Date. If a transaction with a third party occurred 1 year and 2 days prior to CIRP initiation, or 2 years and 1 day for a related party, it is statutorily insulated from claw-back under Sections 43 and 45.
• The Bona Fide Purchase for Value Defense (Section 44 Proviso): If representing a third-party buyer facing an undervalued transaction claim under Section 45, prove that: (i) the buyer acquired the interest in good faith and for valuable market consideration; and (ii) the buyer had no knowledge or notice of the corporate debtor's distressed financial condition. Under the proviso to Section 44, a bona fide purchaser for value is protected.
• The Section 66(2) Due Diligence Safe Harbor: For directors defending a wrongful trading claim, produce board minutes, financial turnaround plans, and professional restructuring advice proving that the directors reasonably believed the company could avoid insolvency, and took every proactive step to minimize losses to creditors.

Critical Pitfalls to Avoid:

• Filing a Generic "PUFE Mashup" Application: Filing a single, sloppy omnibus application clubbing Sections 43, 45, 50, and 66 together without specifying which transaction falls under which section. NCLT benches routinely dismiss generic applications for lack of specific statutory pleadings under Anuj Jain.
• Relying Solely on the Forensic Audit Report: Treating the forensic auditor's report as conclusive evidence without the RP independently analyzing the findings. The RP must apply independent mind and state specific grounds under Regulation 35A.
• Failing to Implead the Beneficiary Transferees: Filing avoidance applications only against the suspended directors while failing to implead the third-party transferees or banks who hold the property or benefit. An order under Section 44 cannot be passed without hearing the affected property holder.

Section 6: Ready-to-Use Court Drafting Template

Below is an unabridged, practical model Interlocutory Application (IA) under Section 43 read with Section 44 and Section 66 of the IBC, 2016, filed by a Resolution Professional before the National Company Law Tribunal, Allahabad Bench at Prayagraj, seeking avoidance of preferential transfers and personal restitution against promoters.

BEFORE THE NATIONAL COMPANY LAW TRIBUNAL

ALLAHABAD BENCH AT PRAYAGRAJ

INTERLOCUTORY APPLICATION NO. ______ OF 2026

IN

COMPANY PETITION (IB) NO. 94/ALD/2025

(Under Section 43, Section 44 read with Section 66 of the Insolvency and Bankruptcy Code, 2016 and Regulation 35A of the IBBI [CIRP] Regulations, 2016)

IN THE MATTER OF:

MR. ASHOK KUMAR VERMA,

Resolution Professional of M/s Prayag Heavy Engineering Private Limited,

Reg. No.: IBBI/IPA-002/IP-N00214/2018-2019/10682,

Office at: Chamber No. 14, High Court Road, Civil Lines, Prayagraj, UP - 211001.

...APPLICANT / RESOLUTION PROFESSIONAL

VERSUS

1. MR. DHARMENDRA PRASAD YADAV,

Suspended Managing Director, Prayag Heavy Engineering Pvt. Ltd.,

R/o 14-A, George Town, Prayagraj, UP - 211002.

...RESPONDENT NO. 1 / SUSPENDED DIRECTOR

2. MRS. SHAKUNTALA YADAV,

Suspended Director, Prayag Heavy Engineering Pvt. Ltd.,

R/o 14-A, George Town, Prayagraj, UP - 211002.

...RESPONDENT NO. 2 / SUSPENDED DIRECTOR

3. M/S SANGAM REALTY VENTURES PRIVATE LIMITED,

Through its Director, Mr. Dharmendra Prasad Yadav,

Registered Office at Plot No. 8, Naini Industrial Area, Prayagraj, UP - 211008.

(Related Party Beneficiary Transferee)

...RESPONDENT NO. 3 / RELATED PARTY

4. KOTAK MAHINDRA BANK LIMITED,

Civil Lines Branch, Prayagraj, UP - 211001.

(Preferential Creditor Bank)

...RESPONDENT NO. 4 / PREFERENTIAL CREDITOR

APPLICATION UNDER SECTION 43 AND SECTION 44 READ WITH SECTION 66 OF THE INSOLVENCY AND BANKRUPTCY CODE, 2016 FOR AVOIDANCE OF PREFERENTIAL AND FRAUDULENT TRANSACTIONS EXECUTED IN FAVOR OF RELATED PARTIES AND FOR DISGORGEMENT OF SIPHONED FUNDS.

THE APPLICANT ABOVENAMED MOST RESPECTFULLY SHOWETH:

1. APPOINTMENT OF APPLICANT AND TIMELINESS UNDER REGULATION 35A:

Vide order dated 14th November 2025 passed in CP (IB) No. 94/ALD/2025, CIRP was initiated against M/s Prayag Heavy Engineering Private Limited ("Corporate Debtor"). The Applicant was confirmed as Resolution Professional by the CoC. In compliance with Regulation 35A of the CIRP Regulations, the Applicant appointed M/s S.R. Batliboi & Associates, Chartered Accountants, to conduct a comprehensive Transaction Audit. Based on the Forensic Audit Report dated 12th February 2026, the Applicant formed his independent opinion and made his determination within the statutory window, filing the present application within 135 days of insolvency commencement.

2. PARTICULARS OF THE PREFERENTIAL & FRAUDULENT TRANSACTIONS:

A. UNLAWFUL CREATION OF PREFERENTIAL MORTGAGE UNDER SECTION 43:

On 12th September 2024 (exactly 14 months prior to CIRP initiation, falling squarely within the 2-year look-back period for related parties under Section 43(4)(a)), Respondents No. 1 and 2 executed an equitable mortgage over the Corporate Debtor's prime freehold industrial land measuring 18,000 sq. meters situated at Plot No. 12, Industrial Area, Naini, valued at INR 24,00,00,000/- (Rupees Twenty-Four Crores), in favor of Respondent No. 4 Bank. Crucially, the said mortgage was executed not to secure any fresh loan for the Corporate Debtor, but exclusively to secure pre-existing personal credit facilities and loans availed by Respondent No. 3 (a related-party shell entity owned 100% by Respondents No. 1 and 2).

B. SATISFACTION OF ANUJ JAIN (JAYPEE INFRATECH) CRITERIA:

The transaction squarely satisfies all four limbs of the test laid down by the Hon'ble Supreme Court in Anuj Jain v. Axis Bank Ltd., (2020) 8 SCC 401:

(i) It involved a transfer of property rights of the Corporate Debtor for the benefit of a related entity (Respondent No. 3);

(ii) It had the effect of putting Respondent No. 3 and Respondent No. 4 in a more beneficial position than in Section 53 liquidation distribution;

(iii) It was executed within the 2-year twilight period; and

(iv) It was NOT in the ordinary course of business, as giving third-party mortgages without commercial consideration is outside the manufacturing charter of the Corporate Debtor.

C. FRAUDULENT DIVERSION AND PERSONAL LIABILITY UNDER SECTION 66(1):

Between April 2023 and October 2025, Respondents No. 1 and 2 siphoned INR 11,85,00,000/- from the primary operating accounts of the Corporate Debtor into Respondent No. 3 under the fraudulent guise of 'unsecured machine lease advances'. The forensic audit establishes that zero machinery was ever leased or delivered. Under Section 66(1), Respondents No. 1 and 2 are personally liable to make full restitution to the corporate estate.

3. PRAYERS:

Wherefore, the Applicant most respectfully prays that this Hon'ble Adjudicating Authority may graciously be pleased to:

(a) Declare the equitable mortgage dated 12.09.2024 created over the Corporate Debtor's industrial land at Plot No. 12, Naini, Prayagraj, in favor of Respondent No. 4 Bank, as an avoidable preferential transaction under Section 43 of the Code, and declare the mortgage null, void, and of no legal effect;

(b) Pass an order under Section 44(1)(c) directing Respondent No. 4 Bank to immediately release and discharge the title deeds of the said Naini industrial land and restore unencumbered physical custody to the Applicant RP;

(c) Pass an order under Section 66(1) holding Respondents No. 1 and 2 personally liable for fraudulent trading, directing them jointly and severally to pay and contribute the siphoned sum of INR 11,85,00,000/- along with interest at 12% per annum back to the corporate estate of the Corporate Debtor;

(d) Pass such further and other orders as this Hon'ble Tribunal may deem fit and proper in the interests of justice.

THROUGH LEGAL COUNSEL:

SUMANJARI & CO. ADVOCATES

Counsel for the Resolution Professional

Chambers: Chamber No. D-311, Block D, Allahabad High Court, Lucknow Bench, Lucknow.

Place: Prayagraj / Lucknow

Dated: 22nd September 2026

Section 7: Practical FAQs

Q1: What is the exact difference between the look-back "twilight periods" under Section 43 (Preferential) and Section 66 (Fraudulent Trading) of the IBC?

Answer: This is a critical statutory distinction. Under Section 43(4) of the IBC, the look-back period for preferential transactions is strictly time-bound: it extends to two years preceding the insolvency commencement date for transactions with "related parties," and one year for transactions with unrelated third parties. In sharp contrast, Section 66(1) for fraudulent trading has zero statutory look-back limitation period. The Supreme Court in Gluckrich Capital (2023) affirmed that fraudulent transactions spanning multiple preceding years can be examined to fix personal financial liability upon errant directors and promoters.

Q2: Can a mortgage created by a corporate debtor over its own assets to secure the loan of its parent or holding company be avoided as a preferential transaction?

Answer: Yes, absolutely. This was the exact factual scenario in the landmark Supreme Court ruling of Anuj Jain (IRP for Jaypee Infratech Ltd.) v. Axis Bank Ltd. (2020) 8 SCC 401. The Supreme Court held that mortgaging a corporate debtor's unencumbered assets to secure loans availed by its holding company (Jaiprakash Associates Ltd.) constitutes a textbook preferential transaction under Section 43. Furthermore, the Court rejected the banks' defense that such a mortgage was in the "ordinary course of business," ruling that giving away corporate security for third-party debts without reciprocal commercial value cannot be considered routine business, directing the complete release of the mortgaged lands back to the corporate debtor.

Q3: Does the Resolution Professional have the legal authority to continue prosecuting avoidance applications under Sections 43 to 66 after a Resolution Plan has been approved?

Answer: Yes, provided the approved Resolution Plan contains specific provisions governing the continuation of avoidance applications. Following appellate rulings overturning the restrictive view in Venus Recruiters, established IBC jurisprudence affirms that if the resolution plan approved by the CoC and NCLT explicitly stipulates that avoidance proceedings shall survive plan approval and specifies whether the recovered proceeds will accrue to the benefit of the creditors or the resolution applicant, the applications survive and must be prosecuted to finality.

Q4: What is the "ordinary course of business" exception under Section 43(3), and how can a creditor prove it?

Answer: Under Section 43(3)(a), a transfer shall not be deemed a preference if it was made in the "ordinary course of the business or financial affairs of the corporate debtor or the transferee." To succeed in this defense, a creditor must prove that the transaction was routine, customary, and aligned with standard historical business practices between the parties. For example, regular monthly payments made against ongoing supply invoices on customary credit terms fall within the ordinary course. However, extraordinary debt settlements, granting sudden security over fixed assets for old unsecured loans, or transferring inventory during active default are outside the ordinary course and will be avoided.

Sumanjari & Co. Advocates

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Bar Council of India Statutory Disclaimer: This publication is compiled and published strictly for educational, scholarly, and strategic informational guidance of the bar, bench, corporate clients, and litigants navigating corporate insolvency resolution and IBC litigation. In compliance with the Bar Council of India Rules, this document does not constitute advertisement, personal communication, solicitation, invitation, or legal advice. Receipt or reading of this guide does not establish an attorney-client relationship. Litigants are expressly advised to seek personalized legal counsel based on the specific facts, jurisdictional nuances, and evidentiary matrix of their respective matters before initiating or defending litigation.