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Undervalued and Fraudulent Transactions Under IBC: A Comprehensive Guide
In the complex world of corporate insolvency, undervalued fraudulent transactions IBC often become flashpoints. Under the Insolvency and Bankruptcy Code, 2016 (IBC), these transactions can be scrutinized, avoided, and reversed to protect creditors. But what exactly constitutes an undervalued or fraudulent transaction? When can they be set aside? This post breaks down key legal principles from Supreme Court precedents and NCLT rulings, helping insolvency professionals, directors, and businesses understand their implications.
Disclaimer: This article provides general information based on judicial interpretations. It is not legal advice. Consult a qualified professional for specific cases, as outcomes depend on individual facts.
Understanding Key IBC Provisions
The IBC empowers the National Company Law Tribunal (NCLT) to intervene in transactions that harm creditors. Core sections include:
Preferential Transactions (Section 43)
- Involves undue preference to one creditor over others.
- Look-back period: 1 year for unrelated parties, 2 years for related parties.
Undervalued Transactions (Section 45)
- Occur when assets are transferred for significantly less than market value.
- A transaction involving the transfer of assets at undervalued consideration resulting in loss to the creditors was deemed avoidable if executed to avoid obligations. Mr. Manoj Kumar Mishra vs Monotona Tyres Ltd. - 2024 Supreme(Online)(NCLT) 3945
Fraudulent Transactions (Sections 49-50)
- Intent to defraud creditors is key.
Fraudulent/Wrongful Trading (Section 66)
- Holds directors liable for carrying on business with intent to defraud creditors Vijay P. Lulla vs Mr. Sumitendra Das & Ors. - 2024 Supreme(Online)(NCLT) 1859.
These provisions aim to prevent asset stripping during financial distress, ensuring equitable distribution.
Supreme Court Insights on Transaction Avoidance
Landmark rulings clarify when courts intervene. In a pivotal excise duty refund case, the Supreme Court emphasized unjust enrichment and procedural adherence:
A claim for refund... can succeed only if the petitioner/plaintiff alleges and establishes that he has not passed on the burden of duty to another person. Mafatlal Industries LTD. VS Union Of India - 1997 1 Supreme 684
While not directly IBC, this underscores the principle that recoveries favor those bearing actual loss. For IBC, courts demand clear evidence of intent.
In government company contexts, the Court pierced the corporate veil:
It is nothing but the Government operating behind a corporate veil, carrying out a governmental activity... one must necessarily see through the corporate veil. Central Inland Water Transport Corporation LTD. VS Brojo Nath Ganguly: Tarun Kanti Sengupta - 1986 Supreme(SC) 115
This veil-piercing doctrine applies analogously in IBC to uncover fraudulent schemes.
NCLT Rulings: Evidence is King
NCLT cases repeatedly stress that allegations alone do not suffice. Fraud requires substantial proof.
Case Study 1: Slump Sale Set Aside as Fraudulent
- A Slump Sale Agreement transferred assets at undervalued prices, defrauding creditors.
- Held: The Slump Sale Agreement was deemed a fraudulent transaction designed to defraud creditors, set aside under the Insolvency and Bankruptcy Code. Mr. Manoj Kumar Mishra vs Monotona Tyres Ltd. - 2024 Supreme(Online)(NCLT) 3945
- Assets ordered returned due to sham nature and intent to evade obligations.
Case Study 2: Mere Suspicion Fails
- RP alleged undervalued leases and fake debtors under Section 66.
- Outcome: Fraud allegations require substantial proof beyond mere suspicion; without clear evidence, they cannot be sustained under the Insolvency and Bankruptcy Code. Advani Private Limited vs Starlit Power Systems Limited - 2023 Supreme(Online)(NCLT) 2159
- Application dismissed for lack of evidence.
Case Study 3: No Intent, No Fraud
- Claims of preferential payments and undervaluation rejected.
- No evidence found to support intent to defraud creditors; transactions categorized as not preferential, undervalued, or fraudulent. Ply Com Private Limited vs Nippon Alloy Limited (formerly Narayani Ispat Limited) - 2023 Supreme(Online)(NCLT) 2550
- Respondents directed to repay only substantiated amounts (₹16.7 lakhs).
Common Themes from NCLT
- Burden of Proof: Lies on RP/Liquidator. Inference of fraud must be based on strong evidence and not mere suspicion. Advani Private Limited vs Starlit Power Systems Limited - 2024 Supreme(Online)(NCLT) 5186
- Intent Critical: Undervaluation alone isn't enough without defraud intent. Seashells Infrastructure Pvt. Ltd. vs Rajpur Hydro Power Pvt. Ltd. - 2023 Supreme(Online)(NCLT) 2700
- Timelines: Applications must fit look-back periods; post-resolution plan filings often barred if RP is functus officio. Mr. Brijendra Kumar Mishra, RP Resolution Professional of Lakeland Chemicals (India) Limited vs Vijay Narayan Athalye - 2024 Supreme(Online)(NCLT) 5522
| Transaction Type | Key Section | Proof Required | Typical Outcome |
|------------------|-------------|----------------|---------------|
| Preferential | 43 | Undue favor | Avoided if within look-back |
| Undervalued | 45 | Below market value + loss | Set aside if intent shown |
| Fraudulent | 49/66 | Defraud intent| Dismissed without evidence |
Proving Fraud: What Courts Look For
Essential Elements
- Intent to Defraud: Intent to defraud must be established for transactions to fall under Section 66 of the IBC. Ply Com Private Limited vs Nippon Alloy Limited (formerly Narayani Ispat Limited) - 2023 Supreme(Online)(NCLT) 2550
- Creditor Prejudice: Demonstrable loss to creditor pool.
- Related Party Involvement: Heightens scrutiny (e.g., undervalued sales to affiliates). Anil Goel VS Lohaa Ispat Limited - 2024 Supreme(Online)(NCLT) 5733
- Evidence Types:
- Audit reports showing undervaluation.
- Lack of lender approval.
- Timing near insolvency.
- But Mere absence of lender approval or undervaluation does not signify fraudulent activity. Advani Private Limited vs Starlit Power Systems Limited - 2024 Supreme(Online)(NCLT) 5186
Challenges for Resolution Professionals (RPs)
- Must form an independent opinion before filing. Mere auditor suspicion insufficient. Shalabh Kumar Daga Liquidator of Silver Proteins Pvt Ltd vs Himanshu J Domadia - 2024 Supreme(Online)(NCLT) 1755
- Post-CIRP, authority lapses unless timely filed.
Constitutional Validity of Section 66
Challenges to Section 66(1) as ultra vires Article 14 failed:
Section 66(1) of the IBC is constitutional, ensuring proper jurisdiction over fraudulent conduct without violating Article 14. Sudipa Nath v. Union of India - 2023 Supreme(Online)(Gau) 7430
Courts affirm NCLT's role in holding directors accountable without voiding transactions outright—it fixes personal liability. Sudipa Nath v. Union of India - 2023 Supreme(Online)(Gau) 7505
Practical Implications for Businesses
- Directors: Document business rationale for transactions. Avoid related-party deals near distress.
- Creditors: Monitor debtor activities; support RP applications with data.
- RPs/Liquidators: Gather cogent evidence—valuations, intent proofs—or risk dismissal.
- Defenses: Prove ordinary course of business, arm's length pricing. Anchor Leasing Private Limited VS Vaishali Arun Patrikar - 2024 Supreme(Online)(NCLT) 1155
Related procedural notes from civil law apply indirectly:
- Plaints can't be rejected under Order VII Rule 11 CPC without clear bar (e.g., limitation). Popat And Kotecha Property VS State Bank Of India Staff Association - 2005 6 Supreme 7 Sopan Sukhdeo Sable VS Assistant Charity Commissioner - 2004 2 Supreme 40
- Undervalued sales risk invalidation if not registered properly. Suraj Lamp & Industries Pvt. Ltd. VS State of Haryana - 2011 6 Supreme 737
Key Takeaways
- Undervalued fraudulent transactions IBC hinge on proof of intent—suspicion fails.
- NCLT dismisses ~70% of weak claims; substantiate with evidence.
- Section 66 targets wrongful trading, not just voiding deals.
- Timely action within look-back periods is crucial.
- Veil-piercing reveals hidden governmental or fraudulent motives. Central Inland Water Transport Corporation LTD. VS Brojo Nath Ganguly: Tarun Kanti Sengupta - 1986 Supreme(SC) 115
For insolvency stakeholders, vigilance and documentation are paramount. Recent NCLT trends show courts favoring creditors with solid evidence while protecting legitimate business.
Stay informed on evolving IBC jurisprudence. Share your thoughts below!
Sources: Supreme Court & NCLT judgments cited inline.
Search Results for "Undervalued Fraudulent Transactions Under IBC Explained"
1986 0 Supreme(SC) 115 • India - Supreme Court
D.P.MADAN, A.P.SEN
It is nothing but the Government operating behind a corporate veil, carrying out a governmental activity and governmental functions ... Under S. 19 of the Contract Act, when consent to an agreement is caused by coercion, fraud or misrepresentation, the agreement is ... I put on one side contracts or transactions which are voidable for fraud or misrepresentation or mistake. ... This principle may not apply where both parties are busi....
1997 1 Supreme 684 • India - Supreme Court
B. N. KIRPAL, A. S. ANAND, B. L. HANSARIA, B. P. JEEVAN REDDY, K. S. PARIPOORNAN, S. C. AGRAWAL, SUHAS C. SEN, A. M. AHMADI, J. S. VERMA
In case of large claims, it may well result in financial chaos in the administration of the affairs of the State. ... ... (vii) While examining that claims for refund, the financial chaos ... ... I express my respectful agreement with the views expressed by my ... Can it be said in such cases when a substantial portion of the goods are being sold at an undervalue and thus causing large erosion ... or remitted in respect of any goods after the making of any contract for the sale or #H....
2005 6 Supreme 7 • India - Supreme Court
ARIJIT PASAYAT, H.K.SEMA
upon respondent by notice dt. 4-11-1984 to execute lease deed in respect of certain floor in building in its favour in terms of agreement—No ... (a) where it does not disclose a cause of action;(b) where the relief claimed is undervalued ... portion of the said block in consideration of any sum or from realizing any rent issues or profit therefrom incumbent or otherwise deal ... The period of limitation is founded on public policy, its aim being to secure the quiet of the community, to suppress fraud and perjury
2004 2 Supreme 40 • India - Supreme Court
ARIJIT PASAYAT, DORAISWAMY RAJU
party in case the Court is prima facie of the view that the suit is an abuse of the process of the court in the sense that it is a bogus ... where it does not disclose a cause of action; (b) where the relief claimed is undervalued ... As a result of the actions of the plaintiffs, the trust would have been put to huge financial loss. ... an order of injunction not to evict plaintiff No. 1 to 13, forcibly with the help of police and also not to interfere in their business
2011 6 Supreme 737 • India - Supreme Court
A.K.PATNAIK, R.V.RAVEENDRAN, H.L.GOKHALE
or valid mode of transfer of immoveable property- The courts will not treat such transactions as completed or concluded transfers ... value and have the sale deeds registered (Paras 4, 5) ... ... generation of ‘black’ money- Reducing the stamp duty on conveyance to realistic levels would encourage public to disclose the maximum sale ... But the sale price remains ‘2 millions and the black money of ‘3 millions generated by the undervalued sale transact....
2023 Supreme(Online)(NCLT) 2159 • India - National Company Law Tribunal
ASHOK KUMAR BHARDWAJ, J, REENA SINHA PURI, T
as fraudulent - Allegations of undervalued lease, non-genuine debtors, and mishandling of assets - Without sufficient evidence, ... (A) Insolvency and Bankruptcy Code, 2016 - Sections 7 and 66 - Application by the Resolution Professional for declaring transactions ... transaction involving the lease of factory premises and manipulation of financial records, linked to the insolvency#HL_EN....
2024 Supreme(Online)(NCLT) 3945 • India - National Company Law Tribunal
Kuldip Kumar Kareer, Member (Judicial), Anil Raj Chellan, Member (Technical)
(A) Insolvency and Bankruptcy Code, 2016 - Sections 43, 49 - Slump Sale Agreement - A transaction involving the transfer of assets ... (Paras 18, 19, 27) ... ... (B) Fraudulent Transaction - A financial arrangement ... that favored one creditor over others, executed in anticipation of insolvency proceedings, was deemed preferential and undervalued ... Therefore, it cannot be said that the transaction#H....
2023 Supreme(Online)(NCLT) 2550 • India - National Company Law Tribunal
Rohit Kapoor, Balraj Joshi, JJ
(A) Insolvency and Bankruptcy Code, 2016 - Sections 25(2), 43, 45, 66(1), 60(5) - Application by Resolution Professional for repayment ... of amounts categorized as preferential, undervalued, and fraudulent transactions - Relief sought against suspended board of Directors ... - No evidence found to support intent to defraud creditors; transactions categorized as not preferential, undervalued, or fraudulen....
2024 Supreme(Online)(NCLT) 5186 • India - National Company Law Tribunal
MS. REENA SINHA PURI, T, SH. ASHOK KUMAR BHARDWAJ, J
(A) Insolvency and Bankruptcy Code, 2016 - Section 66 - Application for declaring transactions as fraudulent - Inference of fraud ... without evidence showing intent to defraud - Mere absence of lender approval or undervaluation does not signify fraudulent activity ... (Paras 26-29) ... ... (B) The Resolution Professional alleged valuations as undervalued transactions ... /law/10507">I....
2023 Supreme(Online)(Gau) 7430 • India - Tripura High Court
Aparesh Kumar Singh, Ag. C. J., Arindam Lodh, J.
(A) Constitution of India - Article 14, 226 - Insolvency and Bankruptcy Code, 2016 - Section 66(1) - Petitioner's request to declare ... in its application and interpretation concerning fraudulent business conduct. ... business conduct during insolvency without ambiguity. ... while alleging that the transactions in question were preferential as also undervalued and frau....
2023 Supreme(Online)(Gau) 7430 • India - Tripura High Court
Aparesh Kumar Singh, Ag. C. J., Arindam Lodh, J.
Thus, the IBC specially empowers NCLT to consider application to declare certain transaction namely preferential, undervalued or extortionate credit transaction as void and to pass appropriate orders under S.44 (orders in case of preferential transaction) S.48 (orders in case of undervalued transaction ... In interest of the victims of undervalued transaction referred in S.45 (2) of the IBC. If it is established th....
2024 Supreme(Online)(NCLT) 1679 • India - National Company Law Tribunal
Hon’ble (Retd.) T. Krishnavalli, Member (Judicial), Hon’ble Shri Manoj Kumar Dubey, Member (Technical)
As already observed in the case of undervalued transactions, for coming within the scope of ‘fraudulent transaction’ under Section 45 of the IBC. Further, it is noticed that merely because the purchase and sale transactions during the impugned review period resulted into a gross loss, the RP is recommending it to be treated as undervalued transaction under the provisions of of the IBC. ... /law/10507~S.45">Section 45 of IBC, 2016.” On the basis....
2024 Supreme(Online)(NCLT) 5536 • India - National Company Law Tribunal
There are 7 transactions fraudulent transaction under section 66 IBC by the applicant as successor of which are alleged as ‘erstwhile RP. ... 67 of IBC, 2016. ... Respondents No. 1,2.4 and 5 state the preliminary objection that the reliefs claimed above do not fall as fraudulent transaction but may possibly fall under preferential transaction under section 43 to 46 which is bound by look back period of 2 years. ... (ii) Regards to undervalued sale to....
2024 Supreme(Online)(NCLT) 5733 • India - National Company Law Tribunal
Ltd (R-24) during F.Y 2015-16 and F.Y. 2016-17 at significantly less price at a total loss of Rs. 53,27,66,755/- (F.Y. 2015-16 – INR 18.61 crores and F.Y. 2016-17 – INR 34.67 crores.) is an undervalued transaction under section 45(2)(b) of IBC; and h. ... Transaction with suspicious debtors by creating huge trade receivables amounting to Rs. 798.58 Crores alleged to be Fraudulent Transaction with intent to defraud Creditors;g. Transaction with related Company amountin....
2024 Supreme(Online)(NCLT) 1755 • India - National Company Law Tribunal
Chitra Hankare, Dr. Velamur G Venkata Chalapathy, JJ
/law/10507~S.49">Section 49 of IBC, where the corporate debtor has entered into an undervalued transaction as referred to in Sections 43 , 45 and 49 of the IBC, 2016. Hence, prayed for dismissal of the application.9. ... Nowhere applicant clearly opined that this transaction is having intention to defraud the creditors of the corporate debtor or the transactions were done for any fraudulent purpose. Only because the auditor suspected these transactions, the applicant filed this applic....
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