Section 164: Undervalued Transactions in Bankruptcy
Section 164 empowers a bankruptcy trustee to seek relief against certain undervalued dealings of a bankrupt individual. It sets a two-year review period, special treatment for dealings with associates and powers to restore property to the bankruptcy estate.
What is an undervalued transaction?
Under Section 164(6), an undervalued transaction includes a gift, a transaction where no consideration has been received by the other person from the bankrupt, a transaction in consideration of marriage, or a transaction for consideration significantly lower in monetary value than what the bankrupt provides. The statutory wording and context govern the assessment.
Section 164: Explanation of each subsection
Section 164(1): Application by bankruptcy trustee
The bankruptcy trustee may apply to the Adjudicating Authority for an order relating to an undervalued transaction between the bankrupt and another person.
Section 164(2): Two-year period and bankruptcy trigger
The transaction must have been entered into during the two years ending on the filing of the bankruptcy application and must have caused the bankruptcy process to be triggered.
Section 164(3): Transactions with associates
A transaction between the bankrupt and an associate during the two years preceding the bankruptcy application is deemed an undervalued transaction under this section. Whether a person is an associate is assessed using the Code's applicable definition.
Section 164(4): Orders available
On the trustee's application, the Adjudicating Authority may:
- declare an undervalued transaction void;
- require property transferred under it to vest in the bankruptcy trustee as part of the bankrupt's estate; and
- make another appropriate order to restore the position that would have existed without the transaction.
Section 164(5): Ordinary-course defence
An order declaring the transaction void under Section 164(4)(a) must not be made if the bankrupt proves the transaction was undertaken in the ordinary course of the bankrupt's business. This protection does not apply to associate transactions covered by Section 164(3). The limitation is specifically on the voiding order under clause (a).
Section 164(6): Transactions covered
The statutory categories are: (a) a gift to another person; (b) no consideration received by that person from the bankrupt; (c) consideration of marriage; or (d) consideration significantly below the monetary value of what the bankrupt provided.
Practical illustration
Suppose a bankrupt transfers valuable property to an associate shortly before applying for bankruptcy for a nominal price. The trustee may examine the transfer under Section 164, including the two-year period and associate rule, and seek an appropriate order. This is an illustration only; actual relief depends on the statutory requirements, evidence and applicable commencement provisions.
Related legal provisions
Section 165 addresses preference transactions; Section 166 concerns the effect of orders; and Section 167 deals with extortionate credit transactions. Sections 45 and 46 address undervalued transactions in the distinct corporate insolvency framework.
Frequently asked questions
Who can challenge an undervalued transaction under Section 164?
The bankruptcy trustee may apply to the Adjudicating Authority under this provision.
What is the look-back period?
Section 164 refers to the two years ending on the filing of the bankruptcy application. Associate dealings receive specific treatment under subsection (3).
Does every low-price sale automatically become void?
No. The statutory conditions and exceptions must be assessed, and the Adjudicating Authority decides what order, if any, is appropriate.
Official legal sources
- India Code: Insolvency and Bankruptcy Code, 2016
- IBBI: Text of the Insolvency and Bankruptcy Code (PDF)
- IBBI: Current legal framework, amendments and notifications
Read the Insolvency and Bankruptcy Code, 2016 overview.
Legal information only. Consult the current Act, commencement notifications and professional advice for a specific matter.