Under IBC ecosystem, significant value erosion happens before the insolvency commencement date (ICD). Resolution Professionals (RPs) and creditors need to claw back such transactions through the framework of PUFE
- Preferential (Sections 43–44)
- Undervalued & Fraudulent (Sections 45–49 & 66)
- Fraudulent / Wrongful Trading (Section 66)
- Extortionate Credit (Sections 50–51)
These provisions ensure that stakeholders do not suffer because of last-minute siphoning, value transfers, or unfair treatment of select creditors. Enormity of such transactions can be evaluated from the amount of INR 3.89 Lakh Crores till June 2025 from the applications filed. In this article, let us explore the legal meaning of PUFE, triggers for RPs (Resolution Professionals) to be alert and judicial trends as below:
Identifying PUFE Transactions –
PUFE identification is largely a forensic exercise supported by statutory criteria. Some common red flags include:
1. Preferential Transactions (Sec. 43)
A transaction is potentially preferential if it:
- Transfers property or issues security for an antecedent debt,
- Improves the position of a creditor compared to Section 53 waterfall,
- Occurred within the look-back period (1 year for unrelated parties, 2 years for related parties).
Typical indicators:
- Repayment of old loans shortly before default.
- Release of guarantees or additional security to related lenders.
- Selective payments to connected operational creditors.
- Last-minute debits to related parties.
2. Undervalued Transactions (Sec. 45–48)
These involve a transfer of assets for little or no consideration.
Red flags:
- Sale of land or machinery at below-market prices.
- Transfer of trademarks, licenses, or IP to group companies without adequate compensation.
- Gifts or write-offs to related entities.
3. Fraudulent / Wrongful Trading (Sec. 49 & 66)
These provisions target malicious intent or conduct carried out to defraud creditors.
Indicators:
- Creation of sham transactions or fake creditors.
- Backdating agreements.
- Disposal or diversion of assets during financial distress.
- Continuing business despite knowledge of imminent insolvency, without due diligence.
4. Extortionate Credit Transactions (Sec. 50–51)
These relate to loans taken at exorbitant terms, especially during financial strain.
Red flags:
- Interest rates far above market norms.
- Aggressive lender rights or unfair collateralisation.
- Receivables discounted at unreasonable rates.
Legal Recourse Available Under the IBC
Each PUFE category provides a clear remedy pathway:
(A) Section 43–44: Preference
RPs may seek:
- Setting aside of the preferential transaction,
- Restoration of property or security to the CD,
- Refund of money or benefits to the insolvency estate.
(B) Section 45–48: Undervalued Transactions
NCLT may order:
- Reversal of undervalued transfers,
- Payment of consideration,
- Vesting of assets back into the CD.
(C) Section 49 & 66: Fraudulent and Wrongful Trading
RPs can seek:
- Personal liability of directors/management,
- Contribution orders payable by persons knowingly involved,
- Punitive consequences in cases of intent to defraud creditors.
(D) Section 50–51: Extortionate Credit: The tribunal may:
- Set aside or vary loan terms,
- Require repayment of excessive amounts,
- Restore security or benefits to the CD.
Practical Step-by-Step Approach for Resolution Professionals
RPs are statutorily obligated under Sections 25 and 35 to preserve value and detect PUFE transactions. The following practical checklist helps in meeting this obligation effectively:
Step 1: Early Financial & Transactional Mapping
- Collect financial statements, ledgers, bank statements, GST records, MCA filings, and agreements for the look-back period.
- Identify related parties using Section 5(24) and cross-verify via MCA, shareholding records, and group structure.
Step 2: Commission a PUFE-Focused Forensic / Transaction Audit
- Scope the audit specifically to statutory tests under Sections 43, 45, 49, 50, and 66 — not just generic “forensic irregularities”.
- Prioritise transactions involving:
- Related parties,
- Significant asset transfers,
- Last-minute payments,
- Security creation close to the insolvency petition.
Step 3: Internal Assessment & Documentation
- Evaluate forensic findings against statutory criteria.
- Maintain a clear record of analysis, even for decisions not to pursue certain PUFE matters.
- Brief the CoC with quantified potential recoveries and litigation pathways.
Step 4: Prepare Targeted PUFE Applications
- Draft applications backed by:
- Bank statements and trails,
- Valuation reports,
- Board minutes,
- Emails or other documentary evidence.
- Prioritise high-value and high-likelihood cases to optimise time and cost during CIRP.
Step 5: Follow Through on Litigation
- Decide strategy: NCLT, NCLAT appeal, or filing Section 66 actions post-approval of the resolution plan (as avoidance proceedings continue independently).
- Ensure that PUFE recoveries, once realised, are distributed as directed by the Adjudicating Authority.
Judicial Trends Moulding PUFE Jurisprudence
1. Anuj Jain, IRP for Jaypee Infratech Ltd v Axis Bank Ltd (Supreme Court)
A landmark decision that:
- Clarified that intent is irrelevant in Section 43 — only the effect matters.
- Reclassified mortgages created for related lenders as preferential.
- Emphasised strict statutory interpretation.
2. NCLAT in Venus Recruiters Pvt Ltd v Union of India
Held that:
- Avoidance applications survive resolution and can continue even after plan approval.
- PUFE recoveries belong to the creditors as a class, not to the resolution applicant.
3. IDBI Bank v Jaypee Infratech (NCLT/NCLAT series)
Reiterated the importance of evaluating ordinary course of business and analysing commercial rationale.
4. Tenny Jose Limited (NCLT): Extortionate Credit
Found interest rates and lender rights excessive; loan terms were modified under Section 50–51.
5. Shailesh Sangani v Joel Cardoso (NCLAT)
Held that undervalued transactions with intent to defraud can trigger both Section 49 and Section 66, enabling personal contribution orders.
6. Kailashdev and Others v RP of KLSR Motors (NCLAT)
Clarified burden of proof and the evidentiary standard required in undervaluation and fraudulent transactions.
Conclusion: PUFE as a Value Protector in the IBC Framework
Transactions disguised as routine business often conceal value erosion. PUFE provisions serve as a critical corrective mechanism — safeguarding the interests of creditors and ensuring fairness in the insolvency ecosystem.
With maturing jurisprudence and increasing regulatory scrutiny, PUFE actions are expected to play an even more significant role in future insolvency resolutions.
In case you have CIRP/PUFE cases, need any clarity and support, you may like to connect with us.
*****
Abhinarayan Mishra FCA, FCS, LL.B, IP, RV; Partner, SAM Law Associates LLP; KPAM & Associates, Chartered Accountants, New Delhi; +91 9910744992; ca.abhimishra@gmail.com; samlawassociates18@gmail.com
Author Bio
