Section 167: Extortionate Credit Transactions - Meaning, Time Limit and Remedies
Section 167 empowers the Adjudicating Authority, on an application by the bankruptcy trustee, to address oppressive credit arrangements involving a bankrupt. It specifies a two-year look-back period, available orders and an exception for lawfully regulated financial-service credit.
Section 167 - Statutory provisions
167. Extortionate credit transactions.
(1) Subject to sub-section (6), on an application by the bankruptcy trustee, the Adjudicating Authority may make an order under this section in respect of extortionate credit transactions to which the bankrupt is or has been a party.
(2) The transactions under sub-section (1) should have been entered into by the bankrupt during the period of two years ending on the bankruptcy commencement date.
(3) An order of the Adjudicating Authority may-
- set aside the whole or part of any debt created by the transaction;
- vary the terms of the transaction or vary the terms on which any security for the purposes of the transaction is held;
- require any person who has been paid by the bankrupt under any transaction, to pay a sum to the bankruptcy trustee;
- require any person to surrender to the bankruptcy trustee any property of the bankrupt held as security for the purposes of the transaction.
(4) Any sum paid or any property surrendered to the bankruptcy trustee shall be included in the estate of the bankrupt.
(5) For the purposes of this section, an extortionate credit transaction is a transaction for or involving the provision of credit to the bankrupt by any person-
- on terms requiring the bankrupt to make exorbitant payments in respect of the credit provided; or
- which is unconscionable under the principles of law relating to contracts.
(6) Any debt extended by a person regulated for the provision of financial services in compliance with the law in force in relation to such debt, shall not be considered as an extortionate credit transaction under this section.
Statutory text reproduced for reference. Consult the current consolidated Code and applicable commencement notifications before relying on a provision in a particular proceeding.
What is an extortionate credit transaction?
Under Section 167(5), a transaction involving credit to the bankrupt is extortionate when its repayment terms require exorbitant payments, or when the arrangement is unconscionable under the principles of contract law. The two alternatives are distinct; a transaction need not satisfy both.
An unusually high charge alone does not automatically decide the issue. The contractual terms, surrounding circumstances, legal compliance and statutory exception are relevant to the assessment.
Two-year look-back period
Section 167(2) refers to transactions entered into during the two years ending on the bankruptcy commencement date. This is not necessarily the date when an application for bankruptcy was filed. The applicable statutory definition and the facts of the case determine the relevant commencement date.
What orders can the Adjudicating Authority make?
On an application by the bankruptcy trustee, the Adjudicating Authority may cancel all or part of the debt, change credit or security terms, direct repayment of money to the trustee, or order surrender of property held as security. Section 167(4) brings sums and property recovered into the bankruptcy estate for administration under the Code.
Exception for regulated financial-service providers
Section 167(6) excludes a debt extended by a person regulated for providing financial services when the debt complies with the law applicable to it. Merely describing a lender as regulated is not a substitute for examining the statutory compliance requirement.
Illustrative example
Suppose an individual receives a short-term loan with repayment obligations that are grossly disproportionate to the credit advanced. If bankruptcy follows and the transaction falls within the statutory period, the bankruptcy trustee may seek relief under Section 167. Whether the arrangement qualifies depends on the evidence, the applicable law and the Section 167(6) exception.
Related legal provisions
Sections 164 (undervalued transactions), 165 (preference transactions) and 166 (effect of order) address other transactions in the bankruptcy context. Section 168 concerns obligations under contracts. These provisions have separate legal tests and should not be treated as interchangeable.
Frequently asked questions
Who may apply under Section 167?
The bankruptcy trustee may apply to the Adjudicating Authority for an order under this section.
What is the relevant period?
Two years ending on the bankruptcy commencement date, as specified in Section 167(2).
Are all high-interest loans automatically extortionate?
No. The statutory definition and the exclusion for lawfully compliant regulated credit must be assessed in the circumstances.
What happens to money recovered?
Under Section 167(4), sums paid and property surrendered to the trustee become part of the bankrupt's estate.
Official legal sources
India Code - Insolvency and Bankruptcy Code, 2016; IBBI - Legal framework, amendments and notifications; IBBI - Consolidated Code (reference PDF).
This article is general legal information, not case-specific advice. Applicability of individual bankruptcy provisions may depend on commencement notifications and the category of debtor.