Preferential, undervalued, fraudulent and extortionate transactions under Sections 43-51 and 65-66.
6 Cases · Global Nos. 13–87 of 89Jaypee Infratech Limited (JIL) mortgaged its own immovable properties as security for loans taken not by itself, but by its parent/group company, Jaiprakash Associates Limited (JAL). JIL received no direct consideration for creating these mortgages — the benefit flowed entirely to JAL. When JIL entered CIRP, its Resolution Professional sought to avoid these mortgage transactions as preferential and/or undervalued under Sections 43 and 45 of the Code, arguing they depleted JIL's asset pool without any corresponding benefit to JIL itself.
The NCLT initially held these were preferential transactions liable to be avoided. The NCLAT partly reversed this. The matter reached the Supreme Court on cross-appeals, which had to work through the mechanics of Sections 43–51 in detail for essentially the first time at the apex level.
The Supreme Court laid down a structured test for a "preferential transaction" under Section 43: (i) the transfer must be of property/an interest for the benefit of a creditor, surety, or guarantor; (ii) it must be on account of an antecedent financial or operational debt; (iii) it must have the effect of putting that creditor/guarantor in a beneficial position compared to what it would receive in a Section 53 liquidation waterfall; and (iv) it must fall within the relevant "relevant time" look-back period (two years for related-party transactions, one year for others). Applying this, the Court held the mortgages benefited JAL — a related party — without any corresponding benefit to JIL, and were therefore preferential and avoidable, subject to correctly determining each transaction's date against the applicable look-back period.
This is the leading case on avoidance transactions — a subject area with its own weightage in the syllabus (Case Study on Business and General Laws) and a natural fit for case-study comprehension questions.
This case arose from the insolvency of DHFL (Dewan Housing Finance Corporation Limited), where the RBI superseded the Board of Directors in November 2019 amid massive fraud allegations and initiated CIRP. An audit uncovered preferential, undervalued, fraudulent, and extortionate (PUFE) transactions worth approximately Rs. 45,050 crore, and the Administrator filed eight applications under Sections 43–51 and 66 of the IBC seeking their reversal and recovery. While these applications remained pending, the request for resolution plans was issued; Piramal Capital emerged as the Successful Resolution Applicant, with its plan granting Piramal the right to pursue and appropriate any future recoveries from the Section 66 (fraudulent/wrongful trading) applications for itself, ascribing them a notional value of Re. 1 for plan valuation purposes. The CoC approved the plan with 93.65% votes, including support from the debenture-holder class represented by an authorised representative. 63 Moons Technologies, a fixed-deposit/NCD holder of DHFL, objected to this treatment of Section 66 recoveries.
The NCLT approved the resolution plan. On appeal, the NCLAT set aside the specific clause permitting Piramal to appropriate Section 66 recoveries and remanded that aspect of the plan to the CoC for reconsideration. Piramal, the Union of India, and 63 Moons all filed cross-appeals to the Supreme Court, challenging different aspects of the NCLAT's intervention.
The Supreme Court held that applications concerning "fraudulent and wrongful trading" under Section 66 are conceptually distinct from ordinary "avoidance applications" under Sections 43–51 — Section 66 concerns the personal liability of persons who conducted the corporate debtor's business with intent to defraud, rather than the avoidance of specific transactions. On the central dispute, the Court held that the NCLAT committed a serious jurisdictional error under Section 61 of the IBC by interfering with a term of the resolution plan — the Section 66 recoveries clause — that was the product of genuine commercial negotiation and collective CoC decision-making, overwhelmingly approved (93.65%) including by the very creditor class (debenture holders) whose interests were said to be affected. The Court restored the resolution plan as originally approved by the CoC and NCLT, rejecting 63 Moons' argument that allowing the resolution applicant to retain Section 66 recoveries amounted to unjust enrichment at depositors' expense.
Addresses a genuinely novel, practically significant question — what happens to money that might be recovered in the future from fraud litigation the RP has filed but not yet won — that older cases don't directly answer.
Gluckrich Capital Private Limited (GCPL) sought to invoke Section 66 of the IBC — which empowers the Adjudicating Authority to direct contribution to the corporate debtor's assets from persons who knowingly carried on the corporate debtor's business with intent to defraud creditors — against a third party that had merely had business dealings with the corporate debtor, rather than against someone who was actually responsible for conducting the corporate debtor's affairs. This ran contrary to a Tripura High Court ruling in Smt. Sudipa Nath Vs. Union of India, which had held that Section 66 could only be invoked against persons responsible for conducting the corporate debtor's business (such as directors or key managerial personnel) — not against any outside party that had simply transacted with it.
The Supreme Court first dismissed GCPL's Special Leave Petition on 24 February 2023, on the ground that GCPL lacked locus standi in the matter. GCPL then filed a Miscellaneous Application seeking "clarification" of that dismissal, in substance attempting to reopen and reverse the Sudipa Nath position through the back door.
The Supreme Court (Justices Krishna Murari and Sanjay Kumar) rejected GCPL's clarification application as an impermissible attempt to circumvent the earlier dismissal. In doing so, the Court affirmed that Section 66 of the IBC is not available as a remedy against third parties who are not themselves responsible for conducting the corporate debtor's business — it is targeted specifically at insiders (directors, key managerial personnel, and similar persons) who fraudulently ran the company's affairs. Where recovery is sought from an outside third party who merely transacted with the corporate debtor, the Resolution Professional or successful resolution applicant must pursue ordinary civil remedies available under law; such remedies are separate and independent of, and cannot be substituted by, Section 66.
A precise, frequently-cited clarification of Section 66's outer limit — tests whether candidates understand that "fraud" provisions under the Code are not interchangeable with a general civil recovery tool against anyone who dealt with the corporate debtor.
SBI's Section 7 petition led the NCLT to admit Bhushan Steel Limited into CIRP on 26 July 2017, with Mr. Vijay Kumar appointed RP. The CoC approved a resolution plan submitted by Tata Steel BSL Ltd. During the pendency of plan approval, the RP discovered several suspect related-party transactions — including a preferential transaction with Venus Recruiters Private Limited — and, before the plan's final approval, filed an "Avoidance Application" before the NCLT under Sections 25(2)(j), 43–51, and 66 of the IBC. The resolution plan was approved by the NCLT on 15 May 2018 (upheld by NCLAT on 10 August 2018) and implemented on 18 May 2018, with Tata Steel BSL assuming control of the corporate debtor. The Avoidance Application against Venus Recruiters, however, remained pending and continued to be heard after this implementation.
Venus Recruiters, aggrieved by a notice issued in the still-pending Avoidance Application, filed a writ petition before a Single Judge of the Delhi High Court, arguing the proceedings were void since CIRP had concluded and new management had taken over. The Single Judge agreed (judgment dated 26 November 2022), holding that a Section 43 avoidance application cannot survive beyond CIRP's conclusion, and that any order on such transactions must be passed before the resolution plan's approval. Tata Steel BSL and the Union of India appealed this ruling to a Division Bench via Letters Patent Appeal.
The Division Bench set aside the Single Judge's ruling, holding that avoidance applications under Sections 43–51/66 can continue to be heard and adjudicated by the NCLT even after CIRP's conclusion and the resolution plan's implementation, in cases where the relevant transactions were not accounted for in the approved plan. The Court held that timelines under CIRP Regulation 35A (for filing avoidance applications) are directory, not mandatory, and there is no prescribed time limit for the NCLT itself to adjudicate such applications once filed. The provisions on avoidable transactions exist primarily to benefit creditors — where a resolution plan is silent on pending avoidance applications (often because the necessary information wasn't available to the resolution applicant), creditors can still benefit from any sum or property recovered through the application's adjudication; the benefit does not go to the corporate debtor in its "new avatar" under new management, since that new entity did not exist at the time of the original preferential transaction. The RP becomes functus officio only with respect to the CIRP itself, not with respect to already-initiated avoidance applications, and may continue to pursue them to conclusion. Section 60(5) of the IBC, as NCLT's residuary jurisdictional provision, supports this continuing jurisdiction.
Resolves a genuinely important procedural ambiguity — whether "the CIRP is over" ends an avoidance application — with direct practical consequences for how RPs should handle discovered suspect transactions late in the process.
Nandakini Contractors Pvt. Ltd., claiming to be a financial creditor, filed a Section 7 application against Hirakud Industrial Works Limited (HIWL) on 6 March 2019, asserting a "financial debt" of roughly Rs. 24 lakh based on a purported 2016 loan agreement — though the application itself, in Part IV, showed a principal amount of only around Rs. 14.5 lakh. Crucially, no loan agreement and no proof of disbursement were actually filed alongside the application. Despite this, the Adjudicating Authority admitted the application and initiated CIRP on 4 June 2019, apparently based solely on the corporate debtor's own admission of the debt, without examining supporting documentation. The RP then constituted a Committee of Creditors composed of parties related to the corporate debtor itself. Hindalco Industries Ltd. (HIL), lessee and sole user of a private railway siding owned by HIWL, had separately been declared the highest bidder in an auction for the land beneath that siding — an auction halted by the intervening CIRP.
HIL and the H.I.W. Workers' Union appealed to the NCLAT, alleging the entire CIRP had been fraudulently and maliciously engineered by a common group of interrelated companies to seize control of the corporate debtor's valuable assets — including the railway siding land Hindalco had legitimately won at auction — while sidelining genuine stakeholders.
The NCLAT (Bench including Justice Ashok Bhushan) found that a common group of companies constituted the "controlling mind" behind all the entities involved in the CIRP, which had "gamed" the IBC with ulterior motives rather than pursued a genuine insolvency resolution. The Tribunal held that where related parties constitute the Committee of Creditors, the Committee — and every decision it takes — becomes ipso facto illegal, since the CoC's very composition is fundamentally tainted. Finding the CIRP had been fraudulently and maliciously initiated, the NCLAT imposed a penalty of Rs. 50 lakh each on the corporate debtor and on the financial creditor (Nandakini) under Section 65 of the IBC, quashed the approval of the Successful Resolution Applicant's resolution plan, and directed an investigation against the Resolution Professional for material irregularities in the conduct of the CIRP.
One of the most vivid illustrations in the entire syllabus of what happens when the IBC's process is deliberately gamed — essential for understanding Section 65's real teeth and the practical stakes behind CoC composition rules.
Rain Automotive India Pvt. Ltd. entered CIRP in June 2019 and moved into liquidation in January 2020, with Ms. Maya Gupta appointed Liquidator. During liquidation, the Liquidator held certain pending avoidance applications (relating to preferential, undervalued, fraudulent, or extortionate transactions) — assets whose value depended on uncertain future litigation outcomes, making them difficult to realise through ordinary asset sale. Regulation 37A of the IBBI (Liquidation Process) Regulations, 2017 provides a mechanism for a Liquidator to assign such "Not Readily Realisable Assets" (NRRA), including the right to pursue pending avoidance applications, to a third party.
Inquest Fintech Pvt. Ltd. brought an application before the NCLT concerning the treatment of NRRA in this liquidation.
Available sources confirm this ruling addressed several distinct questions concerning NRRA and PUFE (preferential, undervalued, fraudulent, extortionate) assets under Regulation 37A — including their valuation methodology, who is entitled to pursue avoidance applications after an NRRA has been assigned to a third party, whether NCLT's jurisdiction over such applications continues after assignment, and the circumstances under which Regulation 37A permits an NRRA transfer in the first place. I was not able to confirm the precise substantive holding on each of these points from the sources available — the general subject matter is well-established, but the specific answers the NCLT gave should be verified against the full judgment before being relied upon for exam purposes.
Flags an important, practically relevant topic — how a Liquidator can monetise uncertain, litigation-dependent assets like pending avoidance claims — even though the precise holding requires further verification before an exam-ready summary can be fully relied upon.