Undervalued Transactions and Section 49 Fraud: Case Studies

Where a preference favours a creditor, an undervalued transaction strips value from the company by giving assets away or selling them cheaply. Section 45 works on effect within a fixed period; section 49 reaches further back but requires a deliberate intent to defeat creditors. Questions test the price gap, the period, the ordinary course exception, the intent needed for section 49, and what creditors can do if the professional stays silent.

1. The Law in Brief

Figure 1: Sections 45 and 49 compared

• Section 45. A gift, or a transfer for consideration significantly less than the value given by the debtor, not in the ordinary course of business, made within two years (related parties) or one year (others) before the initiation date, up to commencement (section 46(1) as amended in 2026), may be declared void.
• Section 49. Where an undervalued transaction was deliberately entered into to keep assets beyond the reach of claimants or to prejudice their interests, the NCLT shall restore the position; there is no look-back period. After 2026, protection for good faith acquirers does not cover property acquired from a related party of the debtor.
• Section 47, 2026. A creditor, alone or jointly, or a member or partner, may apply for any unreported avoidance transaction or section 66 matter, and the NCLT must direct the IBBI to start disciplinary proceedings against the professional.

2. When Is a Sale an Undervalued Transaction?

• Issue. Whether the sale is an undervalued transaction within the relevant period.
• Law. Under section 45(2)(b), a transfer is undervalued if the consideration received is significantly less than the value of what the debtor gave, and it is not in the ordinary course of business. For an unrelated party, the period is one year before the initiation date up to commencement. Section 46(2) lets the NCLT appoint an independent expert to assess value.
• Application. June 2025 is within one year before 1 February 2026. The price was 40 per cent of a recent valuation, which is significantly less. AB Ltd did not deal in land, so the sale was outside its ordinary business. CD Ltd's willingness to pay no more does not change the value.
• Conclusion. Subject to the NCLT's view of value, if necessary with an independent expert, the sale may be declared void and the land restored to AB Ltd, with CD Ltd's ₹20 crore dealt with as the NCLT directs under section 48.

3. Can an Old Gift Be Avoided under Section 49?

• Issue. Whether a transfer outside the two-year period can be avoided, and against whom.
• Law. Section 45 applies only within the relevant period. Section 49 has no look-back: where an undervalued transaction, including a gift, was deliberately made to keep assets beyond the reach of creditors or to prejudice them, the NCLT shall restore the position. The 2026 proviso to section 49 removes protection for property acquired from a related party of the corporate debtor.
• Application. The gift was three years before filing, outside even the two-year period for related parties. But it was made without consideration, to the promoter's wife's company, while the banks were recalling loans, which supports an inference of deliberate intent. LM Ltd acquired the building from GH Ltd, a related party. JK Ltd holds only a lease taken in good faith.
• Conclusion. The resolution professional should apply under section 49. The NCLT may restore the building to EF Ltd, and LM Ltd cannot claim protection because it acquired from a related party. JK Ltd's lease may be protected if it was taken in good faith and for value. The promoter may also face prosecution under section 69.

Figure 2: Indicators of a deliberate intent to defeat creditors

4. Is a Clearance Sale an Undervalued Transaction?

• Issue. Whether a sale at a loss in the ordinary course of business is an undervalued transaction.
• Law. Section 45(2) covers only transactions not made in the ordinary course of business of the corporate debtor. Selling at a loss is not by itself undervaluation where it reflects the market value and regular commercial practice.
• Application. End-of-season clearance through regular distributors is NO Ltd's ordinary practice, and seasonal stock is worth less after the season.
• Conclusion. The sales are not undervalued transactions and cannot be avoided under section 45.

5. Can a Creditor Apply When the RP Stays Silent?

• Issue. Whether a creditor may apply for avoidance of an unreported transaction, and whether the application survives approval of the plan.
• Law. Section 47, as substituted in 2026, allows a creditor, alone or jointly, to apply where the professional has not reported an undervalued or other avoidance transaction; the NCLT may pass orders as if the professional had applied, and must direct the IBBI to start disciplinary proceedings against him. Section 26, as substituted in 2026, provides that completion of the CIRP does not affect such proceedings. Regulation 38(2)(d) requires plans to say how avoidance applications will be pursued and their proceeds distributed.
• Application. The sale to a related company eighteen months before filing, for a nominal sum, is within the two-year period. The professional failed to report it. Approval of the plan does not end the proceeding.
• Conclusion. The creditor's application is maintainable. If the NCLT finds an undervalued transaction, it may restore the trademarks, with the proceeds going as the plan provides. It must direct the IBBI to take disciplinary action against the professional.

6. Frequently Asked Questions

Is intent relevant under section 45?

No. Section 45 looks at effect. Intent is needed only for section 49 and for fraudulent trading under section 66.

Can a creditor rely on section 53 of the Transfer of Property Act instead?

The general law also makes transfers to defeat creditors voidable, but section 49 provides a specific and faster remedy within the insolvency process.

Who bears the burden of proving intent under section 49?

The applicant, though intent is usually inferred from circumstances such as related recipients, inadequate price, secrecy and timing.

7. Related Topics

• Topic 49: Undervalued and Fraudulent Transactions. Sections 45 to 49.
• Topic 121: Preferential Transactions. Sections 43 and 44.
• Topic 123: Extortionate Credit under IBC. Sections 50 and 51.