Undervalued transaction under the Insolvency and Bankruptcy Code, 2016 is a transaction where a corporate debtor either makes a gift to a person, or enters into a transaction with a person for a consideration that is significantly less than the value of the consideration provided by the corporate debtor, thereby depleting its estate to the detriment of creditors. Under Indian law, undervalued transactions are governed by Sections 45 and 46 of the IBC, with a lookback period of one year from the insolvency commencement date, extended to two years for related parties.
Legal definition
Section 45(1) of the Insolvency and Bankruptcy Code, 2016 provides:
If the liquidator or the resolution professional, as the case may be, on an examination of the transactions of the corporate debtor referred to in sub-section (2) determines that certain transactions were made during the relevant period under section 46, which were undervalued, he shall make an application to the Adjudicating Authority to declare such transactions as void and reverse the effect of such transaction.
Section 45(2) defines an undervalued transaction:
A transaction shall be considered undervalued where the corporate debtor —
(a) makes a gift to a person; or
(b) enters into a transaction with a person which involves the transfer of one or more assets by the corporate debtor for a consideration the value of which is significantly less than the value of the consideration provided by the corporate debtor, and such transaction has not taken place in the ordinary course of business of the corporate debtor.
Section 46 prescribes the relevant period:
In an application for avoiding a transaction at undervalue, the relevant period is one year preceding the insolvency commencement date, or two years in the case of a related party as defined under Section 5(24).
How courts have interpreted this term
Anuj Jain (IRP for Jaypee Infratech Ltd.) v. Axis Bank Ltd. (2020) 8 SCC 401
While the primary focus of this case was on preferential transactions, the Supreme Court's observations on the interplay between Sections 43 and 45 are instructive. The Court noted that a single transaction can potentially be challenged as both preferential and undervalued, and that the resolution professional should plead all applicable grounds. The Court also observed that the creation of a mortgage by JIL for the benefit of JAL's creditors without receiving any consideration could be characterised as an undervalued transaction (gift of a security interest).
Sanjay Kumar Agarwal v. State Bank of India (NCLT, Mumbai, 2019)
The NCLT held that the test for an undervalued transaction requires comparison of the value received by the corporate debtor with the value given. The phrase "significantly less" imports a test of material inadequacy, not mere inadequacy. A transaction where the corporate debtor received 80% of the fair market value may not be undervalued, but a transaction at 30% of fair market value would clearly qualify.
RBL Bank Ltd. v. MBL Infrastructures Ltd. (NCLAT, 2020)
The NCLAT clarified that the resolution professional bears the initial burden of establishing that the transaction was at an undervalue. Once the RP demonstrates a significant disparity in consideration, the onus shifts to the counterparty to justify the price. The Tribunal also noted that the ordinary course of business exception in Section 45(2)(b) applies only to arm's-length commercial transactions, not to gratuitous transfers or gifts.
Why this matters
Undervalued transaction provisions protect the corporate debtor's estate from asset-stripping in the period preceding insolvency. Without these provisions, a corporate debtor could transfer valuable assets to related parties or friendly third parties at nominal prices, leaving nothing for legitimate creditors when insolvency eventually occurs. The lookback period creates a window during which such transactions are vulnerable to scrutiny and reversal.
For practitioners, undervalued transactions are particularly relevant in cases involving group companies and related-party transfers. Promoters may attempt to transfer valuable real estate, intellectual property, or business divisions from the distressed corporate debtor to solvent group entities at below-market prices. The extended two-year lookback period for related parties under Section 46 reflects the heightened risk of self-dealing in such transactions.
A key challenge in undervalued transaction claims is establishing the "value" of the consideration. Unlike preferential transactions, which focus on the effect of the transaction relative to a hypothetical Section 53 distribution, undervalued transactions require an independent assessment of fair market value — often necessitating expert valuation evidence.
Related terms
Broader concept:
Sibling categories:
Frequently asked questions
What is the difference between an undervalued and a preferential transaction?
A preferential transaction gives a creditor a better position than it would have received in a Section 53 distribution (relative test). An undervalued transaction involves the corporate debtor receiving significantly less value than it gave (absolute test). A single transaction can be both preferential and undervalued.
Can gifts by a corporate debtor be reversed under the IBC?
Yes. Section 45(2)(a) specifically includes gifts made by the corporate debtor within the definition of undervalued transactions. A gift made within the lookback period can be declared void, and the NCLT can order the recipient to restore the property or pay its value to the corporate debtor's estate.
Does the ordinary course of business exception apply to all undervalued transactions?
No. The exception in Section 45(2)(b) applies only to transactions that have taken place in the ordinary course of business. Gifts under Section 45(2)(a) are not protected by this exception. Additionally, transfers to related parties at below-market prices are unlikely to qualify as ordinary-course transactions.
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.