SY.

LLB – A

Roll No. 58
Name: Shekhar Atul Panse
Subject: The Insolvency and Bankruptcy Code, 2016
(IBC)
Topic: Undervalued Transactions
 Undervalued Transactions

Introduction
In troubling times, a corporate debtor may engage itself into transactions that promise
easy cash which might include making a gift or selling of assets for significantly less
amount of money. Although, such kind of transactions might not be done with an
intention to defeat the creditors, however, as a consequence, there can be a clear
reduction of the assets of a corporate debtor reducing the percentage of claim amount to
be awarded to its creditors.
The Insolvency and Bankruptcy Code, 2016 (IBC) contains four types of avoidable
transactions- preferential, undervalued, defrauding creditors and extortionate
transactions. Usually, the avoidable transactions should be made within the prescribed
relevant time or look back period. Look back period is the relevant time up to which an
RP or a liquidator can go back to scrutinize an expected avoidable transaction.

Legal Provisions

Section 45: Avoidance of undervalued transactions.

45. (1) 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)
1[**] 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
in accordance with this Chapter.
(2) 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: Relevant period for avoidable transactions.
46. (1) In an application for avoiding a transaction at undervalue, the liquidator or the
resolution professional, as the case may be, shall demonstrate that—
(i) such transaction was made with any person within the period of one year preceding
the insolvency commencement date; or
(ii) such transaction was made with a related party within the period of two years
preceding the insolvency commencement date.
(2) The Adjudicating Authority may require an independent expert to assess evidence
relating to the value of the transactions mentioned in this section.
Section 47: Application by creditor in cases of undervalued transactions.
47. (1) Where an undervalued transaction has taken place and the liquidator or the
resolution professional as the case may be, has not reported it to the Adjudicating
Authority, a creditor, member or a partner of a corporate debtor, as the case may be,
may make an application to the Adjudicating Authority to declare such transactions
void and reverse their effect in accordance with this Chapter.
(2) Where the Adjudicating Authority, after examination of the application made under
sub-section (1), is satisfied that—
(a) undervalued transactions had occurred; and
(b) liquidator or the resolution professional, as the case may be, after having sufficient
information or opportunity to avail information of such transactions did not report such
transaction to the Adjudicating Authority,
it shall pass an order—
(a) restoring the position as it existed before such transactions and reversing the effects
thereof in the manner as laid down in section 45 and section 48;
(b) requiring the Board to initiate disciplinary proceedings against the liquidator or the
resolution professional as the case may be.
Section 48: Order in cases of undervalued transactions.
48. The order of the Adjudicating Authority under sub-section (1) of section 45 may
provide for the following:—
(a) require any property transferred as part of the transaction, to be vested in the
corporate debtor;
(b) release or discharge (in whole or in part) any security interest granted by the
corporate debtor;
(c) require any person to pay such sums, in respect of benefits received by such person,
to the liquidator or the resolution professional as the case may be, as the Adjudicating
Authority may direct; or
(d) require the payment of such consideration for the transaction as may be determined
by an independent expert.
Section 66: Fraudulent / wrongful trading (mechanism for undervalued
transactions)
If the RP, during the CIRP, finds the business of corporate debtor has been carried on to
defraud creditors or for any other fraudulent purpose, the NCLT may on the application
by the RP pass an order that any persons (including the directors, officers) who were
knowingly parties to such business, shall be liable to make contributions toward the
assets of the corporate debtor as the NCLT directs.

Case Law

The Hon'ble Supreme Court of India in Anuj Jain Interim Resolution Professional
for Jaypee Infratech Limited v. Axis Bank Limited and others clarified the scope of
avoidable transactions including preferential transactions, undervalued transactions and
extortionate transactions. The judgment negated the traditional commercial realities and
banking operations contemplating the lender as the sole entity, having a security interest
as a financial creditor under the Code. The case primarily dealt with preferential
transactions, however, the guidelines of the same pertains to undervalued transactions as
well. The Court opined that emphasis would not be laid upon the primary lenders
against whom the security interest is created, instead upon the ultimate beneficiary of
the transaction.

In IDBI Bank vs. Jaypee Infratech Ltd. (JIL) the corporate debtor had transferred
immovable property by the way of mortgage without any consideration; the court held
that the transaction was undervalued transaction – declared it as void, and restored the
original position, as summarized below:

Basically, JIL (the corporate debtor) had, under its real estate township project,
promised to deliver a certain amount of units. However, the corporate debtor not only
delivered lesser units, but as its financial hardships mounted, it defaulted on its loans,
was declared an 'NPA', and dragged to NCLT under the IBC for CIRP by IDBI (acting
as lead applicant). IBC was amended and homebuyers were now to be treated as
Financial Creditors, and the homebuyers of the current case were now a part of the
CoC holding 60% voting share. After much negotiation, submissions & rejection of
resolution plans, the authority finally concluded the following:

"It is true the collateral security is common practice in loan transactions. It is on record
that in this case, the Corporate Debtor was under liquidity crunch and its accounts were
declared NPA by LIC and other creditors. The Joint Lender Forum was formed to deal
with the situation. Hut the Corporate Debtor entered into the transaction even without
taking prior approval of Joint Lender Forum and mortgaged its unencumbered land in
favour of the lenders of the JAL.

The said mortgage of immovable properties, i.e. of the unencumbered land of the
corporate debtor has been made without any consideration to the corporate debtor.
Therefore the said transaction is covered under the umbrella of Sec. 45(1) of the Code
and will be treated as an undervalued transaction as defined under section 45 of the
Code is also clear that these transactions are undertaken during the relevant period of 2
years from the date of initiation of Corporate Insolvency Process as provided under
section 46(1)(ii) of the Code. Therefore, this issue is also decided positively, in favour
of applicant Resolution Professional and against the Corporate."

Conclusion

Numerous buyers with a financial capacity look out for distressed businesses.
Oftentimes, the buyers/creditors are incautious which ultimately hampers their recovery
during insolvency proceedings of distressed businesses. Many debtors try easy returns
during stressful times and engage themselves into avoidable deals such as undervalued
transactions. However, the NCLT has the power to reverse the effect of such a
transaction protecting the interests of bonafide creditors.
References:
https://ibclaw.in/
https://www.legitquest.com/case/idbi-bank-limited-v-jaypee-infratech-limited/16CC99
https://www.ibbi.gov.in/