Avoidance transactions under the Insolvency and Bankruptcy Code, 2016 are transactions entered into by a corporate debtor prior to the insolvency commencement date that can be challenged and reversed by the resolution professional or liquidator because they unfairly deplete the debtor's estate or prejudice the interests of creditors. Under Indian law, Sections 43-51 and Section 66 of the IBC govern four categories of avoidance transactions: preferential transactions, undervalued transactions, fraudulent transactions, and extortionate credit transactions, collectively known as PUFE transactions.
Legal definition
The IBC does not use the term "avoidance transactions" as a defined term. Rather, it creates four separate categories of vulnerable transactions, each with distinct statutory tests:
Preferential transactions (Section 43): A transfer of property or interest in property to a creditor that has the effect of putting such creditor in a more beneficial position than it would have occupied in a distribution under Section 53. Lookback period: one year (two years for related parties).
Undervalued transactions (Sections 45-46): A transaction where the corporate debtor gives a gift, or enters into a transaction for consideration that is significantly less than the value of the consideration provided by the corporate debtor. Lookback period: one year (two years for related parties).
Fraudulent trading and wrongful trading (Section 66): Any business of the corporate debtor carried on with intent to defraud creditors, or where a director or partner knew or ought to have known that there was no reasonable prospect of avoiding insolvency. No lookback period limitation.
Extortionate credit transactions (Sections 50-51): A credit transaction where the terms are such as to require the corporate debtor to make exorbitant payments. Lookback period: two years preceding the insolvency commencement date.
How courts have interpreted this term
Anuj Jain (IRP for Jaypee Infratech Ltd.) v. Axis Bank Ltd. (2020) 8 SCC 401
The Supreme Court delivered the most comprehensive analysis of avoidance transactions under the IBC. The Court examined mortgages created by Jaypee Infratech Ltd. (JIL) over its properties in favour of lenders of its parent company Jaiprakash Associates Ltd. (JAL). The Court held that these third-party mortgages constituted preferential transactions under Section 43 because they placed JAL's lenders in a more beneficial position than other creditors of JIL. The Court established that the substance of the transaction, not its form, determines whether it is avoidable.
Sashidhar Kistampally v. IDBI Bank Ltd. (NCLAT, 2019)
The NCLAT clarified that the resolution professional has a statutory duty under Section 25(2)(j) to identify and file applications to avoid preferential, undervalued, fraudulent, or extortionate transactions. Failure to investigate and challenge such transactions may constitute a breach of the RP's fiduciary duty to the creditors.
Jaypee Infratech Ltd. — Avoidance Application (NCLT, 2019)
The NCLT applied the avoidance provisions to reverse mortgages worth approximately Rs. 8,600 crore created by JIL in favour of lenders of its holding company. This remains one of the largest avoidance orders by value in Indian insolvency history and was subsequently upheld by the Supreme Court in Anuj Jain.
Types of avoidance transactions
Indian insolvency law recognises four distinct categories, each with its own statutory test and lookback period:
- Preferential Transaction (Section 43): Unfair preference to a creditor. 1-year lookback (2 years for related parties).
- Undervalued Transaction (Sections 45-46): Inadequate consideration. 1-year lookback (2 years for related parties).
- Fraudulent Transaction (Section 66): Intent to defraud creditors. No lookback limitation.
- Extortionate Credit Transaction (Sections 50-51): Exorbitant credit terms. 2-year lookback.
Why this matters
Avoidance provisions are among the most powerful tools available in the Indian insolvency framework for clawing back assets that were improperly transferred before the insolvency commencement date. They serve the twin objectives of preserving the corporate debtor's estate for equitable distribution among all creditors and deterring asset-stripping by promoters and related parties in the twilight period preceding insolvency.
For practitioners, avoidance applications are a critical component of the insolvency professional's duties. The resolution professional must investigate the corporate debtor's transactions during the relevant lookback periods and file applications before the NCLT to reverse any transactions that fall within the statutory categories. In liquidation, the liquidator inherits this duty under Section 35(1)(n).
The practical significance of avoidance provisions is amplified in cases involving group companies and related-party transactions, where promoters may have siphoned assets from the corporate debtor to other group entities. The extended two-year lookback period for related-party transactions reflects the legislative recognition that insider transactions require closer scrutiny.
Related terms
Sub-types:
- Preferential Transaction
- Undervalued Transaction
- Fraudulent Transaction
- Extortionate Credit Transaction
- PUFE Transactions
Related procedures:
Frequently asked questions
Who can file an avoidance application under IBC?
During CIRP, the resolution professional may file avoidance applications under Sections 43, 45, 50, and 66 before the NCLT. During liquidation, the liquidator has this power under Section 35(1)(n). Additionally, creditors can request the RP or liquidator to investigate specific transactions.
What is the lookback period for avoidance transactions?
The lookback period varies by transaction type: one year for preferential and undervalued transactions (two years if the counterparty is a related party), two years for extortionate credit transactions, and no lookback limitation for fraudulent transactions under Section 66.
Can avoidance orders be passed against third parties?
Yes. The NCLT can order any person who was a party to the avoidable transaction to restore the position to what it would have been had the transaction not been entered into. This can include third-party creditors, group companies, or related parties who received the improperly transferred assets.
This entry is part of the Veritect Indian Legal Glossary, a comprehensive reference of Indian legal terminology grounded in statutory text and judicial interpretation.
Last updated: 2026-03-27. Veritect provides this content for informational purposes and does not constitute legal advice.