Section 45: Avoidance of Undervalued Transactions under the IBC
Section 45 of the Insolvency and Bankruptcy Code, 2016 (IBC) empowers the resolution professional or liquidator to seek reversal of certain transactions in which a corporate debtor gives away assets or transfers them for substantially inadequate consideration outside the ordinary course of business. The provision must be read with Sections 46 to 49, which address the relevant period, applications, remedies and transactions intended to defraud creditors.
Section 45: Statutory provision
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) of section 43 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.
Meaning and elements of an undervalued transaction
Undervalued transaction: For Section 45, this includes a gift by the corporate debtor or an asset transfer for consideration significantly below the value given up by the corporate debtor, subject to the statutory ordinary-course qualification. An unfavourable bargain alone does not automatically establish the statutory test; the surrounding facts, valuation evidence, nature of consideration and business context matter.
Corporate debtor: A corporate person that owes a debt to any person, as defined in Section 3(8) of the IBC. Resolution professional: An insolvency professional appointed to conduct the corporate insolvency resolution process, as contemplated by Section 5(27). Liquidator: An insolvency professional appointed for liquidation under Section 34. Adjudicating Authority: For corporate persons, the National Company Law Tribunal (NCLT) under Section 5(1).
Two statutory categories
- Gifts: The corporate debtor gives property or assets without consideration, potentially reducing the estate available to creditors.
- Transfers at a significant undervalue: The corporate debtor transfers one or more assets for consideration significantly lower than the value of what it transfers, where the transaction is outside its ordinary course of business.
Relevant time under Section 46
Section 46 provides the look-back test for an undervalued transaction. The transaction must have been entered into within two years preceding the insolvency commencement date with a related party, or within one year preceding that date with a person other than a related party. Section 46 also permits the Adjudicating Authority to require an independent expert to assess evidence relating to the value of transactions.
The relevant period is calculated by reference to the insolvency commencement date, not simply the date of liquidation or the date on which the application is filed. The related-party definition in Section 5(24), and the facts of the relationship, may be material.
How an avoidance application works
- Review transactions: The resolution professional or liquidator examines records, asset transfers, contracts and consideration, including transactions identified in the course of reviewing the corporate debtor's affairs.
- Assess undervalue and timing: The applicant examines whether the transaction meets Section 45(2) and falls within the Section 46 relevant period.
- Apply to the NCLT: Under Section 45(1), the professional seeks an order declaring the transaction void and reversing its effects in accordance with the Code.
- Consider relief: Section 48 permits orders such as vesting transferred property in the corporate debtor, releasing security interests, requiring payment of sums and directing payment of consideration as specified by the Tribunal.
Where the professional does not report an undervalued transaction: Section 47 provides a route for a creditor, member or partner of the corporate debtor to apply to the Adjudicating Authority in the circumstances specified by that section.
Related avoidance provisions
| Provision | Purpose |
|---|---|
| Section 43 | Preferential transactions: certain transfers that improve a creditor's, surety's or guarantor's position compared with the Section 53 distribution waterfall. |
| Section 45 | Undervalued transactions: gifts or transfers at a significant undervalue, subject to statutory conditions. |
| Section 46 | Relevant period for undervalued transactions and independent expert valuation. |
| Section 47 | Applications by creditors, members or partners where the professional has not reported an undervalued transaction. |
| Section 48 | Orders available in cases of undervalued transactions. |
| Section 49 | Transactions defrauding creditors, including additional statutory requirements and consequences. |
Illustrative examples
Example 1: A corporate debtor gifts valuable machinery to another person shortly before insolvency. The transfer may warrant review as a gift under Section 45(2)(a), with the relevant period examined under Section 46.
Example 2: A corporate debtor transfers commercial property worth substantially more than the price paid, outside its ordinary course of business. The professional may assess whether Section 45(2)(b) applies. The example does not determine liability without evidence and a Tribunal order.
Official legal references
- India Code: Central legislation and the Insolvency and Bankruptcy Code, 2016
- Insolvency and Bankruptcy Board of India: Legal framework and regulations
- Insolvency and Bankruptcy Board of India (official website)
- National Company Law Tribunal (official website)
This article explains the statutory framework and does not replace the current text of the Code, regulations, binding judicial decisions or professional legal advice. Check the official consolidated legislation and applicable notifications before relying on a provision in a proceeding.
Read the Insolvency and Bankruptcy Code
For the broader legislative framework, see The Insolvency and Bankruptcy Code 2016.