IBC Widens Avoidance Transaction Scope, Strengthens Stakeholder Remedies

IBC Amendment 2026- Redefining Avoidance Transactions and Enhancing Stakeholder Remedies

Before the amendment, the Insolvency and Bankruptcy Code, 2016 did not provide an explicit definition of “avoidance transaction” under Section 5. The amendment introduces a formal definition under Section 5(2A), whereby “avoidance transaction” now includes transactions covered under Sections 43 (preferential transactions), 45 (undervalued transactions), 49 (transactions defrauding creditors), and 50 (extortionate credit transactions).

Prior to the amendment, the concept of fraudulent or wrongful trading was addressed under Section 66 of the Code. However, there was no corresponding definition in Section 5, leading to a lack of definitional clarity within the general framework of the Code. The amendment inserts a new definition under Section 5(9A), which defines “fraudulent or wrongful trading” by directly referring to the provisions of Section 66.

Before amendment Professionals had to directly rely on individual sections (43–50, 66). Defined terms now used across provisions (e.g., Sections 25, 26, 35, 36, 47 amended).

Section 25(2)(j) has been substituted to explicitly provide that the Resolution Professional shall file an application before the Adjudicating Authority in respect of avoidance transactions or fraudulent or wrongful trading, if any. Before the amendment, the Resolution Professional had the power to file applications relating to avoidance transactions. However, the provision did not expressly and clearly mandate filing of applications in respect of both avoidance transactions and fraudulent or wrongful trading in a consolidated manner.

Earlier, Section 26 provided that the filing of an application for avoidance transactions would not affect the Corporate Insolvency Resolution Process (CIRP). However, its scope was limited and did not expressly cover fraudulent or wrongful trading or continuation after completion of the process. Uncertainty existed whether such proceedings survive CIRP/liquidation closure. Now Section 26 clarified that such applications do not affect CIRP and continue even after completion.

 “26. The filing of an application in respect of an avoidance transaction or fraudulent or wrongful trading or under section 47, shall not affect the proceedings of the corporate insolvency resolution process or the liquidation process, as the case may be.

 Explanation.––For the removal of doubts, it is hereby clarified that the completion of the corporate insolvency resolution process or the liquidation process shall not affect the continuation of proceedings in respect of an avoidance transaction or fraudulent or wrongful trading or under section 47, as the case may be.”.

The new Section 26 provides that:

• Filing of applications relating to avoidance transactions, fraudulent or wrongful trading, or under Section 47 shall not affect the CIRP or liquidation process, and
• Such proceedings shall continue even after the completion of CIRP or liquidation.

Section 35 lays down the powers and duties of the liquidator during the liquidation process, including management of assets, claims, and legal proceedings on behalf of the corporate debtor.

Before the amendment, the liquidator had the power to initiate proceedings for avoidance of certain transactions. However, the provision did not expressly and comprehensively cover fraudulent or wrongful trading, nor did it clearly emphasise the continuation of such proceedings.

The amended clause (l) now expressly provides that the liquidator may “continue or institute proceedings in respect of an avoidance transaction or fraudulent or wrongful trading.” This expands the scope of the liquidator’s authority and ensures continuity of such actions during liquidation.

Section 36 governs the liquidation estate, which consists of all assets of the corporate debtor available for distribution during liquidation, subject to certain exclusions specified under the Code. Before the amendment, Section 36(3)(f) referred only to “proceedings for avoidance of transactions in accordance with this Chapter.” The provision was limited in scope and did not expressly include proceedings relating to fraudulent or wrongful trading or applications under Section 47.

The amendment substitutes the earlier wording with: “proceedings in respect of an avoidance transaction or fraudulent or wrongful trading or under section 47.” This broadens the scope of proceedings covered under the provision.

Section 47 provides a mechanism for creditors, members, or partners to approach the Adjudicating Authority in cases where certain suspect transactions or wrongful conduct have occurred but have not been reported by the Resolution Professional (RP) or Liquidator.

Earlier, Section 47 allowed stakeholders to file applications in limited circumstances relating mainly to undervalued transactions. The scope was narrow and did not expressly cover all categories of avoidance transactions or fraudulent/wrongful trading.

The substituted Section 47 significantly expands the scope by allowing applications in respect of:

• Preferential transactions (Section 43)
• Undervalued transactions (Section 45)
• Extortionate credit transactions (Section 50)
• Fraudulent or wrongful trading (Section 66)

This creates a comprehensive remedy covering all major suspect transactions.

An application can be filed by:

• A creditor (individually or jointly),
• A member, or
• A partner of the corporate debtor.

This broadens stakeholder participation in insolvency proceedings. An application can be filed when:

• Any of the specified transactions or wrongful trading has occurred, and
• The Resolution Professional or Liquidator has failed to report such transaction to the Adjudicating Authority.

Upon satisfaction, the Adjudicating Authority may pass appropriate orders for avoidance of such transactions or trading, treat the application as if it were filed by the Resolution Professional or Liquidator, and grant relief in accordance with the relevant provisions of the Code.

Further, Section 47 introduces an important accountability mechanism. Under sub-section (3), where the Adjudicating Authority finds that the Resolution Professional or Liquidator had sufficient information or opportunity but failed to report such transactions, it may direct the Insolvency and Bankruptcy Board of India (IBBI) to initiate disciplinary proceedings against them.

Thus, Section 47 operates in alignment with Sections 25, 26, and 35, creating a robust and integrated framework for identification, reporting, and adjudication of avoidance transactions and fraudulent or wrongful trading.

Substituted Section 47 read as follows-

“47. (1) Where—

(a) a preferential transaction under section 43;

(b) an undervalued transaction under section 45;

(c) an extortionate credit transaction under section 50; or

(d) fraudulent or wrongful trading under section 66,

has occurred and the liquidator or the resolution professional, as the case may be, has not reported it to the Adjudicating Authority, a creditor, either by itself or jointly with other creditors, a member, or a partner of the corporate debtor, as the case may be, may make an application to the Adjudicating Authority to pass orders in accordance with the respective provisions of this Chapter or Chapter VI, as the case may be.

 (2) Where the Adjudicating Authority, after examination of the application made under sub-section (1), is satisfied that the relevant transaction or trading under clause (a) or (b) or (c) or (d) of sub-section (1) has occurred, it shall pass an order, for the avoidance of such transaction or trading, as the case may be, as if such an application had been filed by a liquidator or a resolution professional in accordance with the relevant provisions of this Chapter or Chapter VI.

 (3) After passing an order under sub-section (2), where Adjudicating Authority is satisfied that the liquidator or the resolution professional, as the case may be, after having sufficient information or opportunity to avail information of such transaction or trading, did not report such transaction or trading to the Adjudicating Authority, it shall pass an order requiring the Board to initiate disciplinary proceedings

Comparison: Old Section 47 vs. Substituted Section 47

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