Avoidance transactions under the IBC: PUFE, explained
Companies rarely slide into insolvency without someone trying to move value out first — a favoured creditor repaid, an asset sold cheap to a relative, funds routed out through sham trades. The IBC arms the Resolution Professional with four weapons against this, known collectively as PUFE: Preferential, Undervalued, Fraudulent and Extortionate transactions.
Why avoidance provisions exist
The CIRP is a collective process: all creditors stand in a queue ordered by law. A transaction that lets one party jump that queue — or shrinks the pool everyone shares — undermines the entire scheme. So the Code lets the RP or Liquidator look backwards, examine pre-insolvency dealings, and apply to the NCLT to reverse those that cross the line.
The four PUFE categories
1. Preferential transactions — Section 43
A transfer that puts a creditor, surety or guarantor in a better position than they would occupy in the Section 53 waterfall — typically repaying an unsecured (often related-party) loan on the eve of insolvency. The look-back period is two years for related parties, one year for others. Intent is irrelevant: Section 43 is a deeming provision — if the ingredients exist, the preference is deemed given. Transfers in the ordinary course of business and new-value security are protected exceptions.
2. Undervalued transactions — Sections 45–48
A gift, or a transaction where the company received consideration significantly less than it gave — an asset sold to a connected buyer below market, for instance. Look-back periods mirror Section 43 (two years related / one year others). Where the undervaluation was done deliberately to defraud creditors (Section 49), the NCLT's restorative powers are wider and no look-back limit applies to the fraud element.
3. Extortionate credit transactions — Section 50
Credit taken by the company on unconscionable terms — usurious interest, oppressive security — within two years before insolvency commencement. The NCLT can restore positions, modify the terms, or order repayment of excess amounts.
4. Fraudulent and wrongful trading — Section 66
The widest and sharpest provision. Where the business was carried on with intent to defraud creditors, the NCLT can make any person knowingly party to it personally liable to contribute to the company's assets — with no look-back limit. Section 66(2) adds wrongful trading: directors who knew (or ought to have known) there was no reasonable prospect of avoiding insolvency, and failed to exercise due diligence in minimising loss, can be made personally liable.
In Anuj Jain v. Axis Bank (2020) (the Jaypee case), the Supreme Court insisted that preferential, undervalued and fraudulent transactions are distinct legal claims with distinct ingredients — an application cannot bundle them loosely. A well-drafted avoidance application pleads each category separately, with the transaction audit evidence mapped to the specific section's ingredients. Sloppy composite applications fail.
How avoidance work actually happens in a CIRP
- The RP must form an opinion on avoidance transactions and file applications within regulatory timelines — typically flowing from a transaction audit by a forensic professional;
- The findings feed the Information Memorandum and are disclosed to the CoC and resolution applicants;
- Avoidance applications survive the CIRP — they can be prosecuted even after a resolution plan is approved, with recoveries flowing as the plan or the NCLT directs;
- For promoters and directors, Section 66 exposure is personal — it does not dissolve with the corporate debt.
What each stakeholder should take from this
- Creditors: a rigorous transaction audit can materially grow the recovery pool — ask what the RP found, and when the applications were filed;
- Directors: once insolvency is reasonably foreseeable, every decision should be documented against the "minimising loss to creditors" standard;
- Resolution applicants: understand which avoidance recoveries the plan captures and which remain with the creditors;
- Counterparties: ordinary-course dealings, documented at arm's length, are the best defence.
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Chartered Accountant, CFA L1 & IBBI-registered Insolvency Professional (IRP/RP/Liquidator). Founding Partner, Vista Solvency LLP — 100+ CIRP, liquidation, personal-guarantor & bankruptcy matters across NCLT benches. Surat · Ahmedabad · Mumbai.
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