Written By: Apoorv Agarwal, Vaishnavi
Introduction
Under the Insolvency and Bankruptcy Code, 2016 (“Code”), the of concept of avoidance transaction has been introduced to safeguard the interests of creditors. An avoidance transaction refers to any transaction undertaken by a Corporate Debtor that is executed with the intent or effect of conferring an undue advantage upon a particular creditor or group of creditors, thereby prejudicing the interests of all the other creditors. The primary objective of identifying and avoiding such transactions is to maximise the value of assets of the Corporate Debtor and ensure an equitable distribution among all the creditors. While the Code has always recognised avoidance transactions as an essential mechanism for preserving the value of the Corporate Debtor, practical implementation revealed several legislative and procedural shortcomings. The Insolvency and Bankruptcy Code (Amendment) Act, 2026 (“2026 Amendment”) seeks to address many of these concerns. This article analyses the evolution of the concept of fraudulent and preferential transaction by comparing the pre-amendment regime with the legislative reforms introduced by 2026 Amendment.
Fraudulent Transaction
Fraudulent Transaction as prescribed under Section 66 of the Code[1], provides that if during the Corporate Insolvency Resolution Process (“CIRP”) it is found that any business of the Corporate Debtor has been carried on with the intent to defraud creditors of the Corporate Debtor or for any fraudulent purpose. Such transactions can be identified through forensic audits and investigative reviews that can reveal misconduct detrimental to creditors and the corporate entity. When such transactions come to light, the Resolution Professional, acting in accordance with insolvency regulations, may file Applications.
Section 66 of the Code particularly addresses fraudulent business conduct, ensuring that those who engage in fraudulent transactions can be required to contribute to restoring the Corporate Debtor’s assets. Upon identification of such transactions, the Resolution Professional is empowered under Section 66 of the Code to approach the Adjudicating Authority by filing an appropriate Application seeking relief against the persons responsible for the fraudulent conduct. If the Adjudicating Authority is satisfied that the business of the Corporate Debtor has been carried on fraudulently or with an intent to defraud creditors, it may pass appropriate orders directing such persons to make contributions to the assets of the Corporate Debtor, thereby restoring value to the insolvency estate for the benefit of creditors. However, while Section 66 of the Code empowered the Adjudicating Authority to direct persons guilty of fraudulent or wrongful trading to make contributions to the assets of the Corporate Debtor, the Code did not expressly prescribe the treatment of recoveries arising from such proceedings following the approval of a Resolution Plan. The issue was ultimately settled by the Hon’ble Supreme Court in the judgment of Piramal Capital & Housing Finance Ltd. v. 63 Moons Technologies[2] held that Prospective Resolution Applicants (“PRA”) may be allowed to retain the proceeds from Applications filed under Section 66 of the Code, even after the Resolution Plan has been approved. This stands despite the seemingly contrary language in Regulation 44A under the Insolvency Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. It is important to note, however, that the PRA will be permitted to appropriate only the proceeds from Section 66 applications. The net proceeds from other avoidance applications will be distributed among the financial creditors, with the committee of creditors retaining the discretion to determine an alternative method of distribution.
Preferential Transaction (S. 43)
The Code seeks to ensure that the assets of a Corporate Debtor are distributed in an equitable and transparent manner amongst all stakeholders. One of the mechanisms employed to achieve this objective is the avoidance of Preferential Transactions under Section 43 of the Code[3]. The provision is designed to prevent a Corporate Debtor, during the period immediately preceding the commencement of insolvency, from favoring one creditor over others by transferring its property or creating interests that place such creditor in a more advantageous position than it would otherwise have occupied in the under Section 53 of the Code[4].
Section 43 of the Code has been comprehensively explained by the Hon’ble Supreme Court in Jaypee Infratech Ltd. Interim Resolution Professional v. Axis Bank Ltd.[5] wherein the Court observed that the doctrine of preference has its origins in the fundamental principle that an insolvent debtor should not be permitted to selectively discharge or secure the claims of certain creditors to the detriment of the remaining creditor body. The object of the provision is not to invalidate every transaction entered into before the commencement of insolvency proceedings, but to identify those transfers which have the effect of disturbing the statutory scheme of equitable distribution by conferring an undue advantage upon a particular creditor. The Hon’ble Supreme Court further clarified that the enquiry under Section 43 of the Code is primarily effect-based rather than intent-based. In other words, what is relevant is whether the transaction has the consequence of placing a creditor, surety or guarantor in a more beneficial position than it would have occupied had the assets of the corporate debtor been distributed in accordance with Section 53 of the Code. Thus, unlike certain other avoidance provisions which require proof of fraudulent intent or mala fides, Section 43 focuses on the legal effect of the transaction on the insolvency estate and the collective interests of creditors.
Prior to the amendment, a transaction could be classified as a Preferential transaction, three requirements must be fulfilled, which are as follows:
- Firstly the twin requirements of S. 43(2): The transaction would be deemed to be of preference, if (i) it is made for the benefit of a creditor, surety, or guarantor in respect of an antecedent financial or operational debt or other liability owed by the corporate debtor; and (ii) the effect of such transaction is to place the creditor, surety, or guarantor in a more advantageous position than they would have been in the event of a distribution of assets under Section 53 which discusses the waterfall mechanism;
- Secondly the relevant time requirement of S.43 (4): For a preference to become an offending one, such event of giving preference ought to have happened within and during the look-back period, mentioned as per S. 43(4).
- Thirdly the non-satisfaction of being outside the ambit of exclusions carved out in S. 43(3): The transaction must not fall within any of the exceptions outlined in Section 43(3), which would otherwise exclude it from being treated as preferential.
However, this Section does not render every transfer made during the look-back period susceptible to avoidance. Section 43(3) specifically excludes transactions entered into in the ordinary course of business or financial affairs of the corporate debtor or the transferee, as well as transfers creating security interests securing new value, subject to the fulfilment of the statutory requirements. These exceptions recognize that ordinary commercial dealings essential for the continued functioning of a business ought not to be disturbed merely because they occurred before the commencement of the Corporate Insolvency Resolution Process.
Legislative Reforms under the Insolvency and Bankruptcy Code (Amendment) Act, 2026
The Insolvency and Bankruptcy Code (Amendment) Act, 2026 marks a substantial shift in the legislative handling of avoidance transactions by addressing many procedural and substantive uncertainties that had evolved via judicial interpretation. The Code did not have a comprehensive law covering the conduct, continuation, and repercussions of preferential, undervalued, extortionate, and fraudulent transactions prior to the change. Consequently, a number of matters were left to judicial decision-making, such as the continuing of avoidance petitions following the conclusion of the CIRP, the division of recovery, and the relative duties of the Resolution Professional and creditors. The 2026 Amendment aim to improve the efficacy of the avoidance transaction regime and formalize many of these ideas.
The Insolvency and Bankruptcy Code (Amendment) Act, 2026 introduces several significant reforms to the framework governing avoidance transactions, including the following:
- Independent continuation of avoidance proceedings: The Amendment expands the scope of Section 26 of the Code by expressly recognizing that proceedings relating to avoidance transactions, including fraudulent and wrongful trading, are independent of the CIRP. It further clarifies that the conclusion of the CIRP or commencement of liquidation shall not affect the continuation or adjudication of such proceedings.
- Enhanced role of stakeholders: The amendment strengthens the Code by expanding the role of creditor. Amendments to Section 47 of the Code enables eligible creditor to pursue avoidance Applications where the Resolution Professional fails to act, while simultaneously reinforcing the statutory obligation of the Resolution Professional to investigate and initiate proceedings relating to avoidable transactions.
- Recoveries: The Amendment addresses the long-standing uncertainty surrounding the treatment of recoveries arising from avoidance proceedings by providing legislative clarity regarding the continuation of such proceedings and the manner in which recoveries are to be dealt with. These reforms complement the principles subsequently recognised by the Hon’ble Supreme Court in Piramal Capital & Housing Finance Ltd. v. 63 Moons Technologies Ltd., thereby promoting greater certainty for creditors, Resolution Applicants and insolvency professionals.
- Timely resolution and value maximisation: By expressly delinking avoidance proceedings from the CIRP, the Amendment ensures that pending avoidance litigation does not impede the completion of the insolvency resolution process. At the same time, it preserves the ability to pursue value-destructive transactions independently, thereby advancing the twin objectives of timely resolution and value maximisation.
Conclusion
The Insolvency and Bankruptcy Code (Amendment) Act, 2026 represents a significant step towards strengthening India’s avoidance transaction by addressing several long-standing procedural and substantive uncertainties that had previously been resolved largely through judicial intervention. By expressly recognising the independent nature of avoidance proceedings, broadening stakeholder participation, and providing greater clarity on the continuation of such proceedings and the treatment of recoveries, the Amendment Act brings much-needed certainty to an area of law that has witnessed considerable litigation since the enactment of the Code.
While the legislative framework is now considerably more comprehensive, its effectiveness will ultimately depend on how these provisions are interpreted and applied in practice. As the amended regime begins to take shape through decisions of the Adjudicating Authorities and appellate courts, it is expected that the evolving jurisprudence will further refine the contours of avoidance proceedings.
[1]Section 66: Fraudulent trading or wrongful trading of the Insolvency Bankruptcy Code, 2016
[2] Civil Appeal nos. 1632-1634 of 2022
[3] Section 43: Preferential transactions and relevant time
[4] Section 53: Distribution of assets.
[5] (2020) 8 SCC 401
