Undervalued and Fraudulent Transactions: Sections 45 to 49

A preference favours one creditor; an undervalued transaction simply drains value from the estate. When a company gives away an asset, or sells it for far less than it is worth, every creditor loses. Sections 45 to 48 allow such transactions to be reversed if they occurred shortly before insolvency, and section 49 goes further, reaching back without any time limit where the transfer was a deliberate attempt to defeat creditors. This note explains both remedies, the orders the NCLT may pass and the protection given to innocent buyers.

1. Undervalued Transactions, Section 45

• Application. If the liquidator or the resolution professional, on examining the transactions of the corporate debtor, determines that certain transactions were made during the relevant period under section 46 and were undervalued, he shall apply to the NCLT to declare them void and reverse their effect.
• Definition, section 45(2). A transaction is undervalued where the corporate debtor (a) makes a gift to a person, or (b) enters into a transaction involving the transfer of one or more assets for a consideration the value of which is significantly less than the value of the consideration provided by the corporate debtor, and the transaction has not taken place in the ordinary course of business of the corporate debtor.
• Significantly less. A small difference in price is not enough; the shortfall must be substantial, judged on reliable valuation evidence at the time of the transaction.
• Ordinary course. Regular sales of stock, and other dealings consistent with the debtor's usual business, are outside the provision even if they turn out to be at a loss.

Figure 1: Elements of an undervalued transaction

2. Relevant Period and Valuation, Section 46

• Related party. A transaction with a related party is covered if entered into within two years before the reference date.
• Any other person. A transaction with any other person is covered if entered into within one year before the reference date.
• Reference date. The insolvency commencement date under the original text; after the 2026 Amendment to section 46(1), the period starts before the initiation date and ends on the insolvency commencement date (Topic 47)
• Independent expert. Under section 46(2), the NCLT may require an independent expert to assess evidence relating to the value of the transaction.

3. Applications by Creditors, Section 47

• Original provision. Where an undervalued transaction has occurred and the liquidator or resolution professional has not reported it to the NCLT, a creditor, member or partner of the corporate debtor may apply to have it declared void; if satisfied that the transaction occurred and was not reported, the NCLT restores the position and requires the IBBI to begin disciplinary proceedings against the professional.
• 2026 change. As substituted by the 2026 Amendment, the section allows a creditor, alone or jointly with others, or a member or partner, to apply in respect of any preferential, undervalued or extortionate credit transaction, or fraudulent or wrongful trading, that the professional has not reported; the NCLT may pass orders as if the professional had applied, and must direct the IBBI to begin disciplinary proceedings if the professional had sufficient information and opportunity but did not report it.

4. Orders, Section 48

Figure 2: Orders under sections 48 and 49

On an application under section 45 or 47, the NCLT may require any property transferred as part of the transaction to be vested in the corporate debtor; release or discharge, in whole or in part, any security interest granted by the corporate debtor; require any person to pay such sums in respect of benefits received as it may direct to the liquidator or resolution professional; or require payment of such consideration for the transaction as may be determined by an independent expert.

5. Transactions Defrauding Creditors, Section 49

Figure 3: Undervalued transactions and frauds on creditors

• The provision. Where the corporate debtor has entered into an undervalued transaction and the NCLT is satisfied that it was deliberately entered into (a) for keeping assets of the corporate debtor beyond the reach of any person entitled to make a claim against it, or (b) in order to adversely affect the interests of such a person in relation to the claim, the NCLT shall make an order restoring the position as if the transaction had not been entered into, and protecting the interests of the victims.
• No look-back. Unlike sections 43 and 45, section 49 has no relevant period, so an older transaction can be challenged if the deliberate intent is shown.
• Intent required. The additional element is the debtor's deliberate purpose of defeating creditors; it is usually inferred from circumstances such as transfers to relatives or group entities, secrecy, inadequate price and timing close to financial distress.
• Mandatory order. Once the conditions are satisfied, the NCLT must restore the position; the word used is shall.
• 2026 change. The 2026 Amendment narrowed the first proviso, so that the protection for good faith acquirers no longer covers property acquired from a related party of the corporate debtor; assets routed through related parties can therefore be recovered.

6. Protection of Innocent Third Parties

An order under section 49 does not affect any interest in property acquired from a person other than the corporate debtor in good faith, for value and without notice of the relevant circumstances, nor require a person who received a benefit from the transaction in good faith, for value and without notice to pay any sum unless he was a party to the transaction. A similar protection applies to orders for preferential transactions under section 44.

7. Connected Provisions

• Section 69. Makes it an offence for an officer of the corporate debtor, or the corporate debtor, to make or cause a gift or transfer of, or a charge on, its property, or to conceal or remove property, with intent to defraud creditors; there is a defence where the act was more than five years before the insolvency commencement date or the accused proves no intent to defraud.
• Section 53 of the Transfer of Property Act. The general law also makes a transfer with intent to defeat or delay creditors voidable at their option; section 49 provides a specific and faster remedy within the insolvency process.
• Section 66. Where the business as a whole was carried on to defraud creditors, those responsible may be made to contribute to the estate (Topic 51)

8. Frequently Asked Questions

A company sells its factory to the promoter's son at half its value 20 months before admission. What can the resolution professional do?

Apply under section 45. The son is a related party, so the two-year period applies, and a sale at half the value is significantly undervalued and not in the ordinary course of business. If deliberate intent to defeat creditors is also shown, section 49 applies as well.

Can a transaction five years before insolvency be reversed?

Not under section 45, whose look-back period is at most two years. It can be reversed under section 49 if it was undervalued and deliberately entered into to defeat creditors, since section 49 has no time limit.

What if the resolution professional ignores an undervalued transaction?

A creditor may apply to the NCLT under section 47. If the NCLT finds that the transaction occurred and was not reported, it reverses the transaction and the professional may face disciplinary proceedings.

Is a buyer who later purchased the asset from the transferee affected?

Not if he acquired it in good faith, for value and without notice of the relevant circumstances. The provisos protect such purchasers.

9. Related Topics

• Topic 47: Avoidance Transactions. Definitions and look-back.
• Topic 48: Preferential Transactions. Sections 43 and 44.
• Topic 51: Fraudulent and Wrongful Trading. Section 66.