Explainer · Insolvency · IBC
Avoidance (Preferential and Undervalued) Transactions under the IBC (2026)
In the months before a company goes into insolvency, its value sometimes quietly leaks out. A friendly creditor is paid ahead of the rest, an asset is sold cheap to a connected party, or money is moved to defeat creditors. The IBC calls these avoidance transactions, and it lets them be challenged and reversed, so the value comes back to the pool for all the creditors. This explainer covers the four kinds of avoidance transaction, the look-back periods that decide how far back you can go, who can challenge them, and what the NCLT can order. Last verified October 2026.
- What they are: past company dealings that can be reversed in insolvency so value returns to the creditors.
- The four kinds: preferential (Section 43), undervalued (Section 45), extortionate credit (Section 50), and fraudulent or wrongful trading (Section 66).
- Look-back: two years before the insolvency commencement date for a related party, one year for anyone else, for preferential and undervalued deals.
- Who acts: the resolution professional or liquidator applies to the NCLT, which can reverse the deal or order money paid back.
01The short answer
Avoidance transactions are past dealings of a company that can be undone during insolvency so that value is returned to the creditors. The IBC lists four kinds: preferential transactions (Section 43), where one creditor is favoured over the rest; undervalued transactions (Section 45), where assets go out for far less than they are worth; extortionate credit (Section 50); and fraudulent or wrongful trading (Section 66). The resolution professional or liquidator identifies them and applies to the NCLT, which can reverse the deal or order money to be paid back. For preferential and undervalued deals, the look-back is two years for a related party and one year for anyone else.
02Why the law reverses past deals
Insolvency is a collective process. Once a company cannot pay everyone, the law treats the creditors as a group to be dealt with fairly, rather than letting whoever acts first or has the best connections walk away with the value. If that value was moved out in the run-up to insolvency, the pool left for the honest creditors shrinks.
Avoidance provisions fix this by looking back at suspicious dealings and clawing the value back. The idea is simple: a transaction that unfairly preferred someone, gave away assets cheaply, or was designed to defeat creditors should not stand just because it happened before the process began.
03The four kinds
Each kind targets a different sort of leak.
| Kind | Section | What it catches |
|---|---|---|
| Preferential | Section 43 | Paying or securing one creditor ahead of others, putting it in a better position than it would be in liquidation |
| Undervalued | Section 45 | Gifting an asset, or selling it for much less than its worth |
| Extortionate credit | Section 50 | Credit taken on grossly exploitative terms |
| Fraudulent or wrongful trading | Section 66 | Carrying on business to defraud creditors, or trading on when insolvency was unavoidable |
Preferential and undervalued transactions are the ones seen most often. A related provision, Section 49, deals with undervalued transactions done deliberately to defraud creditors.
04The look-back periods
You cannot reopen every old deal. For preferential and undervalued transactions, the Code sets a look-back window, measured backwards from the insolvency commencement date, and it depends on who the other party was:
- A related party: two years before the insolvency commencement date.
- Anyone else: one year before the insolvency commencement date.
Related parties get a longer look-back for a reason
Deals with promoters, group companies and connected persons are treated with more suspicion, so the law reaches back two years for them against one year for an unrelated party. On who counts as connected and the bar it brings, see the resolution-applicant eligibility rules.
Fraudulent or wrongful trading under Section 66 is different: it does not run on a fixed look-back period, because it targets conduct rather than a single dated transaction. Where a related-party deal falls just outside the Section 43 window, the facts can still be pursued under Section 66.
05Who challenges and what the NCLT can do
The resolution professional, during the CIRP, or the liquidator, in liquidation, has the job of examining the company past dealings and spotting avoidance transactions. They then apply to the NCLT for relief.
The NCLT has wide powers. It can order that a preferential transaction be reversed and the property or benefit restored, that an undervalued transaction be set aside, and, in a fraudulent or wrongful trading case, that the persons responsible, often the directors or promoters, contribute to the company assets. An avoidance application does not hold up the main insolvency; it runs alongside, and importantly, the outcome of an avoidance application generally belongs to the creditors, not to a resolution applicant who takes over the company. To see who runs the CIRP, see the stages of the CIRP.
06Why it matters to creditors
For creditors, avoidance transactions are about recovery. Every rupee clawed back into the company is a rupee that can be shared among the creditors in a resolution plan or the liquidation waterfall. A thorough review of past dealings can materially improve what honest creditors eventually recover.
It also matters to anyone who dealt with a company shortly before it failed. If you received a payment, an asset or security in the look-back window, that transaction can be reopened in the company insolvency, so understanding the rules helps you judge your own exposure.
07Where Claw fits
Claw is an all-in-one legaltech platform for Indian advocates, law firms, and corporate legal teams, combining AI-based case search, an AI legal assistant (Legal GPT), case management, and compliance automation across all Indian courts and tribunals.
Avoidance applications are filed and decided at the NCLT and NCLAT, and the reasoning develops case by case, so following them means following orders across those forums. Claw finds and then tracks a company insolvency across the NCLT and NCLAT, alongside its wider litigation across 9,102 courts, benches and forums, with constant monitoring that reports New filings, Changed movement and Closed disposals and sends alerts. Judgment and order search spans 30 crore+ judgments and orders, including Supreme Court decisions from 1950 and High Court decisions from 1990, returning results in under 5 seconds, which lets you read how tribunals and courts have treated preferential, undervalued and fraudulent-trading claims. Claw does not use your searched names or documents to train its AI models, and "nothing on record" means nothing was found in these registries on the date searched under the names searched.
To read how avoidance applications have been decided and to follow an insolvency, run a case search across Indian courts.
08Sources and further reading
- India Code (Insolvency and Bankruptcy Code, 2016, Sections 43 to 51 and 66): indiacode.nic.in
- Insolvency and Bankruptcy Board of India: ibbi.gov.in
- National Company Law Tribunal: nclt.gov.in
- Claw: clawlaw.in
This explainer is general information, not legal advice. The provisions and their reading by the courts can change, so check the current text and recent rulings before you rely on it.
09Frequently asked questions
What are avoidance transactions under the IBC?
They are past dealings of a company that can be challenged and reversed during insolvency so that value is returned to the creditors. The Code lists four kinds: preferential transactions under Section 43, undervalued transactions under Section 45, extortionate credit under Section 50, and fraudulent or wrongful trading under Section 66.
What is the look-back period for avoidance transactions?
For preferential and undervalued transactions, the look-back runs backwards from the insolvency commencement date and depends on the other party: two years for a related party such as a promoter or group company, and one year for an unrelated party. Fraudulent or wrongful trading under Section 66 has no fixed look-back because it targets conduct rather than a single dated deal.
Who can challenge an avoidance transaction?
The resolution professional during the corporate insolvency resolution process, or the liquidator in liquidation, examines the company past dealings, identifies avoidance transactions, and applies to the NCLT for relief. Creditors generally raise their concerns through the resolution professional or the committee of creditors.
What can the NCLT do about an avoidance transaction?
It can order a preferential transaction reversed and the property or benefit restored, set aside an undervalued transaction, and, in a fraudulent or wrongful trading case, order the responsible persons, often directors or promoters, to contribute to the company assets. The recovery generally goes to the creditors.
What is the difference between a preferential and an undervalued transaction?
A preferential transaction favours one creditor over the others by paying or securing it ahead of the rest, putting it in a better position than it would have in liquidation. An undervalued transaction gives an asset away or sells it for much less than its worth. Both can be reopened within the look-back period.