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White Black Legal – International Law Journal · ISSN 2581-8503
CREDITOR’S RIGHTS UNDER IBC, 2016 FOR AVOIDABLE TRANSACTIONS: A CRITICAL ANALYSIS
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Abstract
CREDITOR’S RIGHTS UNDER IBC, 2016
FOR AVOIDABLE TRANSACTIONS: A CRITICAL ANALYSIS
AUTHORED BY - SIMRAN CHETWANI
(SVKM’s Pravin Gandhi College of Law, Mumbai)*
ABSTRACT:
Immoral and unethical corporate practices which help escape
liabilities and debts, have been a growing phenomenon in India over the past
few years. In light of recent events, the laws and rules pertaining to these
have been severely enhanced. The Insolvency and Bankruptcy Code ,2016 provides
for such practices under the head of ‘Avoidable Transactions’ . The
professionals appointed under the Code are instilled with the duty of
recognising and reporting such transactions. However, there does exist a lacuna
in cases where the Insolvency Professional’s fail to carry out their duty.
Creditors being the largest stakeholders have been given certain rights to
approach the legal authorities in case of such failures. Yet, there exists an
inadequacy as these rights are extremely limited and do not uphold the purpose
and objective of the Code.
This paper thus deals with the critical analysis of the rights of
these large stakeholders in relation to the defrauding transactions carried out
by the corporate debtors. It highlights the inferences by legal bodies and
legislative committees and provides a two-fold approach to this developing
concept and its insubstantial applicability.
I.
INTRODUCTION
The
four types of Avoidable Transactions[1]
provided under the Insolvency and Bankruptcy Code, 2016 are intended to defeat,
hinder or delay creditors from collecting their claims.[2]
These transactions change the financial position and credibility of the
corporate debtor who otherwise may not need the rigorous insolvency procedures
at all.
Under
§45(2) of the Code[3], a
transaction is considered as ‘undervalued’ if it is in the form of a gift or the consideration of which is
significantly lesser than the value of consideration provided by the corporate
debtor. Such a transaction takes place outside the ordinary course of business
of the corporate debtor[4].
The Resolution Professional has the responsibility of protecting and preserving
the assets of the debtor[5],
thus it is the duty of the RP to file an application for avoidable transactions
under §25(j) of the Code. In addition to this, Regulation 35A of the Insolvency
and Bankruptcy Board of India (Insolvency Resolution Process for Corporate
Persons) Regulations, 2016[6]
prescribes a timeline for the RP to carry out the necessary requirements and
file an application for the avoidable transactions.
In
addition to this, the Code also provides a remedy to the creditors in case the
professional fails to carry out his duties. Section 47 of the Code allows a creditor to file an application to reverse the effect of an undervalued transaction. However, this
is a conditional provision under the Code, which only permits such an
application if the Resolution or the
Liquidator has erroneously not reported it to the Adjudicating Authority.[7]
II.
ANALYSIS
While providing a useful remedy to
the creditors in vain, its ambit and nature has been widely debated. The
underlying reason being that it
does not include any other avoidable transaction and is barred by the
limitation of time under Section 46 of the Code. Additionally, the nature of
such transactions and the objective of the Code suggests that a creditor must
not be allowed to challenge such transactions independently, thus conferring
the right exclusively[8]
to the professionals. This is considered essential to
carry out fair and equitable proceedings considering the nature of such grave
allegations and the penalties that come with it.
The
nature and scope of each avoidable transaction prescribed under the Code
differs from the others. There are different set of parameters to adjudge each
such transaction. For this the requisite enquiries as well as the consequences
differ. Material facts are required to prove each transaction and each
parameter of such transactions as well.[9]
This makes it essential for a professional to oversee such transactions. This
will not only prevent frivolous applications but also ensure that the correct
requirements are adhered to. Contrary to this, it has been perceived that some
transactions may have the characteristics of more than one of these different
classes, depending upon the individual circumstances.[10]
Though there are certain variants distinguishing the transactions, they are
based on common objectives[11].
Accordingly, the remedy shall not be limited only to one class.
Some
experts also believe that bestowing an independent right may invite multiple
baseless applications by multiple creditors. Such vexatious applications will
also result in inordinate delays of the judicial time if they are not backed by
sufficient evidence to support them. This may also disrupt the stipulated time
for the CIRP process. [12]
On
the other hand, it is argued that if the IP does not diligently carry out his
obligations and fails to report transactions of such grave nature, the
creditors have no remedy to bring up applications against the other avoidable
transactions. Additionally, invoking such provisions for irregular transactions
may result in recovery of assets or their values which will not only benefit
the creditors but also promote fair commercial conduct[13]
and commercial morality.[14]
Thus,
it is observed that with the development
of this sector, there exists a lacunae in the rights provided to creditors
pertaining to Avoidable Transactions. However, it is believed that ambiguity
will be resolved with the development of the Code and its practical application
with time. The Hon’ble Supreme Court has also laid emphasis on the need of the
authorities to be attentive towards the objective of the code and has recently
acknowledged that the Code is a new legislation which is still progressing to take a proper shape. [15]
[1] Anuj Jain v. Axis
Bank Limited and Ors, MANU/SC/0228/2020 (India).
[2] United Nations
Commission on International Trade Law, UNCITRAL Legislative Guide on Insolvency
Law: (New York: United Nations, 2005). available from
https://www.uncitral.org/pdf/english/texts/insolven/05-80722_Ebook.pdf at pg.141 ¶170.
[4] Sec. 45(2), The Insolvency and Bankruptcy Code, 2016, (India). See also, Pandurang v. Vishwanath, AIR 1939 Nag 20 (India).
[5] Sec. 25(1), The Insolvency and
Bankruptcy Code, 2016, (India). See
also Committee
of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and Ors. (2019) 8 MLJ 524. (India).
[6] Reg.35A, The Insolvency and
Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons)
Regulations, 2016. (India).
[10] United Nations
Commission on International Trade Law, UNCITRAL Legislative Guide on Insolvency
Law: (New York: United Nations, 2005). available from
https://www.uncitral.org/pdf/english/texts/insolven/05-80722_Ebook.pdf pg.141 ¶170.
[13] United Nations
Commission on International Trade Law, UNCITRAL Legislative Guide on Insolvency
Law: (New York: United Nations, 2005). available from
https://www.uncitral.org/pdf/english/texts/insolven/05-80722_Ebook.pdf ¶152 pg.136.
How to Cite This Article
SIMRAN CHETWAN, CREDITOR’S RIGHTS UNDER IBC, 2016 FOR AVOIDABLE TRANSACTIONS: A CRITICAL ANALYSIS., White Black Legal – International Law Journal, ISSN: 2581-8503, Vol. Volume 2, Issue VOLUME 2 ISSUE 8, April 2026. Available at: https://www.whiteblacklegal.co.in/details/creditors-rights-under-ibc-2016-for-avoidable-transactions-a-critical-analysis-by-simran-chetwani
Author & Publication Record
Authors: SIMRAN CHETWAN
Year: Apr-2022 | Volume: 2 | Issue: 8
Approved ISSN: 2581-8503 | Country : Delhi, India
Year: Apr-2022 | Volume: 2 | Issue: 8
Approved ISSN: 2581-8503 | Country : Delhi, India
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