Avoidance Transactions under IBC: Definitions and Look-back

When a company slides towards insolvency, its assets often slip away first: a loan repaid to a favoured lender, a property sold cheaply to a relative, a mortgage given for a group company's debt. Avoidance provisions allow the resolution professional or liquidator to undo such transactions and restore the assets for the benefit of all creditors. This note sets out the categories of avoidable transactions, the look-back periods and their change in 2026, the procedure, and who receives what is recovered. Preferential transactions are covered in detail in Topic 48.

1. Purpose of Avoidance Provisions

• Equal treatment. Once insolvency approaches, creditors should share according to the Code's priorities; a payment that favours one creditor, or a transfer that strips assets, defeats that order.
• Deterrence. The risk that a transaction will be reversed discourages promoters and favoured creditors from extracting value before the process begins.
• Value for the estate. Recoveries increase the assets available in resolution or liquidation.

2. The Categories

Figure 1: Avoidable transactions under the Code

• Preferential transactions, sections 43 and 44. A transfer of the debtor's property for the benefit of a creditor, surety or guarantor on account of an antecedent debt, putting that person in a better position than in a liquidation under section 53 (Topic 48)
• Undervalued transactions, sections 45 to 48. A gift or transfer of the debtor's assets for consideration significantly less than their value, not in the ordinary course of business (Topic 49)
• Transactions defrauding creditors, section 49. An undervalued transaction entered into deliberately to keep assets out of the reach of creditors or otherwise to prejudice their interests (Topic 49)
• Extortionate credit transactions, section 50. Credit on terms requiring exorbitant payments, or unconscionable under the principles of contract law (Topic 50)
• Fraudulent and wrongful trading, section 66. Business carried on with intent to defraud creditors, or continued by directors who knew or ought to have known that insolvency could not be avoided; this lies in Chapter VI and is distinct from avoidance in the strict sense (Topic 51)

3. Who Acts and When

• Resolution professional. Section 25(2)(j) requires the resolution professional to file applications for avoidance of transactions in accordance with Chapter III, if any; the liquidator has a corresponding power in liquidation.
• Regulation 35A timelines. Under the CIRP Regulations, the resolution professional must form an opinion on whether the debtor has been subjected to such transactions by the 75th day from the insolvency commencement date, make a determination by the 115th day, and apply to the NCLT by the 135th day.
• Creditors. Section 47 originally allowed a creditor, member or partner to apply only in respect of undervalued transactions that the professional had not reported; as substituted in 2026, it allows a creditor, alone or jointly, or a member or partner, to apply in respect of any unreported preferential, undervalued or extortionate credit transaction, or fraudulent or wrongful trading.
• No requirement of intent. For preferential and undervalued transactions, the test is the effect of the transaction, not the intention of the parties; intent matters for transactions defrauding creditors and fraudulent trading.

4. Look-back Periods

Figure 2: Look-back periods by type of transaction

• Relevant time. Preferential and undervalued transactions can be avoided only if made within two years before the reference date where the beneficiary is a related party, and one year otherwise; extortionate credit transactions have a two-year period regardless of relationship.
• Related party. Defined in section 5(24) to include directors, partners, key managerial personnel, holding, subsidiary and associate companies, and persons who control or are accustomed to act on the instructions of the debtor; for preferential transactions, a person who is a related party only because of being an employee is treated as unrelated.
• No period. Section 49 and section 66 have no look-back period; what matters is the intent and the prejudice to creditors.
• Reference date before 2026. The periods were counted back from the insolvency commencement date, the date of admission (section 5(12))
• Reference date after 2026. The IBC (Amendment) Act, 2026 amended sections 43(4), 46(1) and 50(1) so that each period starts two years, or one year, before the initiation date, the date of filing of the application (section 5(11)), and ends on the insolvency commencement date, so transactions made while the application is pending are also covered; where several applications are pending, a new proviso to section 5(11) takes the date of the first.

Figure 3: Reference dates and the timeline for the RP

5. Avoidance after the CIRP Ends

• Section 26. The filing of an avoidance application by the resolution professional does not affect the proceedings of the CIRP, so the process continues while the application is pending.
• Tata Steel BSL v Venus Recruiter, 2023. A Single Judge of the Delhi High Court had held that avoidance applications lapse when the CIRP ends; the Division Bench reversed this, holding that avoidance proceedings are separate from the CIRP and can be decided after approval of the plan, with the benefit going to creditors.
• Regulation 38(2)(d). Since 2022, a resolution plan must provide how avoidance applications will be pursued after approval of the plan and how their proceeds will be distributed.
• The 2026 Amendment. Section 26, as substituted in 2026, provides that filing avoidance, section 66 or section 47 applications does not affect the CIRP or liquidation, and that completion of either process does not affect those proceedings, adopting the Division Bench's view.

6. Who Keeps the Proceeds

• Default position. Recoveries are for the benefit of the creditors, since the purpose is to restore what was taken from the estate before the process.
• Terms of the plan. The plan may allocate recoveries differently, and the allocation is part of the commercial wisdom of the committee.
• Piramal Capital v 63 Moons Technologies, 2025. In the DHFL insolvency, the plan let the successful applicant keep recoveries from section 66 applications; the NCLAT struck down that term, but the Supreme Court set aside the NCLAT's decision, holding that section 66 applications are not avoidance applications under Chapter III, that the two must be dealt with under their own provisions, and that the NCLAT had exceeded its limited appellate jurisdiction.

7. Frequently Asked Questions

Is a payment to a related lender 18 months before admission open to challenge?

Yes, if it was preferential. The look-back period for related parties is two years. After 2026, it is counted from the date of filing of the application, which widens the window further.

Can an avoidance application be heard after the resolution plan is approved?

Yes. The Delhi High Court held so in Tata Steel BSL v Venus Recruiter (2023), and the 2026 Amendment provides that the end of the CIRP or liquidation does not affect pending avoidance proceedings.

Is there a time limit for challenging a transaction defrauding creditors?

Section 49 has no look-back period. What matters is whether the transaction was undervalued and entered into deliberately to defeat creditors.

8. Related Topics

• Topic 48: Preferential Transactions. Sections 43 and 44 in detail.
• Topic 49: Undervalued and Fraudulent Transactions. Sections 45 to 49.
• Topic 51: Fraudulent and Wrongful Trading. Section 66.