Insolvency and Bankruptcy Code, 2016 | Avoidance of transactions

Section 47: Application by Creditor in Cases of Undervalued Transactions

Section 47 allows a creditor, member or partner of a corporate debtor to approach the Adjudicating Authority when an undervalued transaction has not been reported by the resolution professional or liquidator. It also provides for restoration and regulatory consequences where the statutory conditions are established.

Key point: Section 47 is a specific safeguard against failure to report an undervalued transaction. It does not make every low-price sale automatically void: the definition in Section 45, the relevant period in Section 46 and the statutory findings under Section 47 must be considered.

Section 47 - Statutory provision

47. (1) Where an undervalued transaction has taken place and the liquidator or the resolution professional as the case may be, has not reported it to the Adjudicating Authority, a creditor, member or a partner of a corporate debtor, as the case may be, may make an application to the Adjudicating Authority to declare such transactions void and reverse their effect in accordance with this Chapter.

(2) Where the Adjudicating Authority, after examination of the application made under sub-section (1), is satisfied that-

(a) undervalued transactions had occurred; and

(b) liquidator or the resolution professional, as the case may be, after having sufficient information or opportunity to avail information of such transactions did not report such transaction to the Adjudicating Authority, it shall pass an order-

(a) restoring the position as it existed before such transactions and reversing the effects thereof in the manner as laid down in section 45 and section 48;

(b) requiring the Board to initiate disciplinary proceedings against the liquidator or the resolution professional as the case may be.

The provision above follows the uploaded source page. Consult the official consolidated Code and applicable amendments for authoritative text.

Meaning and purpose of Section 47

Under Section 45, the resolution professional or liquidator ordinarily examines whether a corporate debtor has made a gift or transferred assets for significantly inadequate consideration outside its ordinary course of business and applies to the Adjudicating Authority for relief. Section 47 creates a further route where the professional has not reported such a transaction.

An application under Section 47 is not simply a complaint about the commercial wisdom of a transaction. The applicant should identify the relevant transfer, its value, the circumstances suggesting undervaluation, and the professional's failure to report it despite having sufficient information or an opportunity to obtain it.

Important definitions and connected provisions

Undervalued transaction (Section 45(2)): A gift by the corporate debtor, or a transfer of its assets for consideration significantly below the value it provides, where the transaction is outside its ordinary course of business.
Creditor (Section 3(10)): A person to whom a debt is owed, including a financial creditor, operational creditor and other creditors recognised under the Code.
Member or partner: A person holding the relevant membership or partnership interest in the corporate debtor, according to its legal form and applicable law.
Resolution professional: The insolvency professional conducting the corporate insolvency resolution process in accordance with the Code.
Liquidator: The insolvency professional appointed to conduct liquidation under the Code.
Adjudicating Authority: For corporate persons, the National Company Law Tribunal (NCLT), as defined in Section 5(1), read with Section 60.
Board: The Insolvency and Bankruptcy Board of India (IBBI), constituted under Section 188.

Who can apply and what must be established?

Eligible applicant: A creditor, member or partner of the corporate debtor, as applicable.
Qualifying transaction: An undervalued transaction of the kind described in Section 45, considered with the relevant look-back rules in Section 46.
Failure to report: The resolution professional or liquidator has not reported the transaction to the Adjudicating Authority.
Necessary findings for Section 47(2): The NCLT must be satisfied both that undervalued transactions occurred and that the professional did not report them despite sufficient information or opportunity to obtain information.

Relevant period under Section 46

For an application concerning an undervalued transaction, Section 46(1) refers to a transaction with any person within one year before the insolvency commencement date, or with a related party within two years before that date. Section 46(2) permits the Adjudicating Authority to require an independent expert to assess valuation evidence. These are statutory look-back periods, not a general statement of the deadline for filing every application.

Orders and consequences under Section 47(2)

Where both statutory conditions are satisfied, Section 47(2) directs the Adjudicating Authority to order restoration of the prior position and reversal of the effects of the transaction in the manner provided by Sections 45 and 48. It must also require the IBBI to initiate disciplinary proceedings against the resolution professional or liquidator, as applicable.

Section 48 identifies forms of restorative orders in undervalued-transaction cases, including restoration of transferred property, release or discharge of security interests, and payment of appropriate sums, subject to its terms. The direction to initiate disciplinary proceedings does not itself determine professional misconduct or prescribe a final sanction; those questions follow the applicable disciplinary process.

Illustrative example

Suppose a corporate debtor transfers machinery worth approximately Rs. 50 lakh for Rs. 5 lakh outside its ordinary course of business during the applicable look-back period. A creditor discovers the transfer and supplies documents showing that the resolution professional knew about it but did not report it. The creditor may consider an application under Section 47. Whether relief follows depends on proof of undervaluation, the relevant period and the findings required by Section 47(2). This example is illustrative only.

Section 43: Preferential transactions and their relevant time, a distinct avoidance ground.
Section 45: Avoidance and meaning of undervalued transactions.
Section 46: Relevant period and possible independent valuation evidence.
Section 48: Orders in cases of undervalued transactions.
Section 49: Transactions defrauding creditors, subject to its additional requirements.
Section 60: NCLT jurisdiction for corporate insolvency matters.

Official legal sources and further reading

India Code - official legislation database (search for the Insolvency and Bankruptcy Code, 2016).
IBBI - legal framework, regulations and amendments.
IBBI - official website.
National Company Law Tribunal - official website.
The Insolvency and Bankruptcy Code 2016.

This article is general legal information. Verify the consolidated statutory text, applicable regulations and binding judicial decisions before acting on a specific transaction.