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In this article, you will learn about the practical aspects of undervalued transactions. You will also learn how to draft applications for the avoidance of undervalued transactions and how to contest them effectively before the National Company Law Tribunal. So, if you are an aspiring insolvency professional or a resolution professional or a young lawyer starting out in insolvency and bankruptcy practice, this article will be of great help. 

Introduction

Let’s take an example of a restaurant, Lip Smacking Pvt. Ltd., owned by a parent company, Food King Ltd. is in choppy waters. 

At this point, it is struggling to pay even a penny to its suppliers and staff. 

However, right before going into the corporate insolvency resolution process, the restaurant sells its expensive kitchen equipment (worth ₹25 lakhs) to Food King, which it utilises to gain profits by using it in its other restaurants.

Now, when creditors of Lip Smacking Pvt. Ltd. came to recover their dues, they found that the restaurant had been dispossessed of its valuable assets. This means there is less in Lip Smacking’s kitty to repay to its creditors. And that’s what we call an undervalued transaction. 

Sounds unfair, right? 

In law, this is not allowed as it depletes the assets value of the corporate debtor which in turn harms its creditors. Thus, scrutinizing undervalued transactions under the IBC becomes crucial for maximising the corporate debtor’s asset value and ensuring fair distribution among creditors. 

From a commercial standpoint, undervalued transfers—especially during the twilight period—can harm stakeholders by favouring select creditors or related parties, reducing the overall asset pool and impacting the rights of remaining creditors.

To explain this better, I would like to rely on a landmark case of Anuj Jain v. Axis Bank Ltd ([2020] 8 S.C.R. 91) 

What exactly happened? In the first-of-its-kind case after the Insolvency and Bankruptcy Code 2016 (“the IBC”) was implemented, Jaypee Infratech Limited (JIL), a subsidiary of Jaiprakash Associates Limited, mortgaged its assets to secure loans for its parent company without receiving any direct benefit in lieu of it. Due to such a transaction, JIL’s creditors suffered as the company’s assets were unfairly transferred before insolvency. 

When the Hon’ble Supreme Court identified this fact, it classified the said transaction as an undervalued one.

Why did it become a landmark ruling? 

This judgment tersely defined the concept of undervalued transactions under the IBC, thereby enabling their identification.

As a lawyer why should you know this? 

Lawyers who are keen on building a solid NCLT practice must learn about it as it easily helps you fetch anywhere between 50k to 1.5L per draft (depending on your standing). Attractive enough? 

Now let’s learn some basics of undervalued transactions. 

What is the legal framework for undervalued transactions under the IBC?

What do sections 45 and 47 stipulate? 

I have always believed in the power of asking questions. 

A reader must ask himself a lot of questions the moment he/she starts to read up on a law. Who? For what? When? How? 

With the help of these questions, let us first interpret section 45. 

What qualifies as an undervalued transaction?

If, during the relevant period (as per section 46), the corporate debtor:
(a) Gives a gift to someone, or
(b) Transfers assets to a person for significantly less consideration than what the corporate debtor provides; 

(c) the transaction is not part of the ordinary course of business, 

it is deemed undervalued.

Upon reading the above provision, it is obvious that any transaction done in the ordinary course of business and in good faith shall not be treated as an undervalued transaction. 

For instance, in the Anuj Jain case (supra), the Hon’ble Supreme Court clarified that not all assets transferred at a lesser price qualify as undervalued transactions. If a transaction is done in good faith, for business sustainability and in the ordinary course of business, it would not be set aside. However, as in this case, JIL did not benefit from the mortgage, so this exception did not apply. 

What action can be taken?

The NCLT may:

(a) Declare the transaction void
(b) Reverse its effects

Who can take action?

The liquidator or resolution professional can file such an application. 

This is so because it is a liquidator or resolution professional who is responsible for examining the transactions of the corporate debtor.

Now coming to section 47 of the IBC, unlike preferential transaction which allows only the resolution professional/liquidator to report such a transaction, this provision empowers a creditor, member or partner of the corporate debtor, in certain cases to apply if the resolution professional/liquidator has not reported an undervalued transaction to the NCLT.  

Once it is reported, the NCLT shall examine the application and see if:
a) An undervalued transaction has occurred; and
b) The liquidator/RP had enough information but still failed to report it.

If both conditions are met, the NCLT can order:
a) Restoring the position as it was before the undervalued transaction and reversing its effects; and 

b) initiating disciplinary action against the liquidator or RP by reporting to the IBBI for failing to report the transaction.

This provision ensures that assets are not unfairly transferred before insolvency, thereby protecting creditors’ interests.

What is the time limit to file this application?  

So, Regulation 35A  of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations 2016 provides timelines to the resolution professional/liquidator to make an application for relief against an undervalued transaction, which are required to be adhered to. 

As per Regulation – 

• The resolution professional must, on or before the 75th day of the insolvency commencement date, assess whether the corporate debtor has engaged in an undervalued transaction;
• If the RP concludes that the corporate debtor has been involved in any such transaction, they must make a formal determination within 115 days from the date of insolvency commencement; and 
• Following such a determination, the RP must make an application before the NCLT within 130 days from the date of insolvency commencement, seeking appropriate relief. 

To make this simpler, the resolution professional shall apply to the NCLT within 130 days from the date of insolvency commencement. 

How to draft an application for relief? 

I was fortunate to have realised the importance of drafting much early on in my professional journey. 

During my internship, I was asked to stay in a particular courtroom and observe the board movement. A young lawyer, filled with excitement and curiosity, submits his first pleading. The judge reads it, and says, “This is vague.”

“Why have you not mentioned this” “You could have also prayed for this, why is your prayer clause not exhaustive”, and so on and so forth the judge began to point out the errors in drafting. Embarrassing, right? To hear this in a courtroom with your juniors, peers and seniors. But honestly, when you practice in court, it is not. It’s a process of learning and some learn it a hard way. 

Just like that, months of effort were wasted—because the drafting lacked clarity, precision, and structure. I understood that pleadings are not just about writing—they are about strategy.

Let us learn to not just draft but also to strategise. 

Here are the facts of the case in hand- 

As we read above, Lip Smacking Pvt. Ltd., a restaurant, was struggling financially to pay money to multiple creditors, including India Bank Ltd. and its employees. 

Given this, India Bank Ltd. filed an application to initiate CIRP against Lip Smacking Pvt. Ltd. i.e. Corporate Debtor, which was admitted to the NCLT.    

A Resolution Professional was appointed and accounts of the Corporate Debtor were audited. Certain transactions were flagged. Needless to say, such transactions were suspected to be undervalued and hence the Resolution Professional (i.e. the Applicant) filed the interim application seeking necessary relief/s. 

Now, let’s move on to the next part, which is how to draft. The logic and explanation are in red.

The application shall begin with specifying the tribunal where it is being filed and must include the petition number of the CIRP or liquidation in which it is being filed. Further, all the parties are listed. Also, do not miss out on impleading the suspended directors of the corporate debtor as respondents. 

BEFORE THE NATIONAL COMPANY LAW TRIBUNAL,

MUMBAI BENCH

I.A.NO. 101 OF 2025

IN

C.P. (IB) 54/MB/2024

First, mention the parties of the original petition in which this interim application is being filed.   

IN THE MATTER OF

                         V/s                                 

Now, here you can mention the parties to this application. 

AND IN THE MATTER OF

S. Shankaran 

Resolution Professional

V/s

Suspended Directors of Corporate Debtor   

1) Mr. XYZ 

At the outset, you must mention the provisions under which this application is being filed. 

APPLICATION BY RESOLUTION PROFESSIONAL UNDER SECTION 25(2)(J) AND 45 OF THE IBC SEEKING APPROPRIATE ORDERS AGAINST THE RESPONDENTS.

MOST RESPECTFULLY SHOWETH: 

Now we move to the next part- Who is filing this application? Under which provisions is it being filed? For what purpose? Answer these questions briefly in this para. 

1. This Instant Application is filed by Mr. S. Shankaran, Resolution Professional under section 25(2)(j) and 45 of the IBC, inter alia seeking appropriate orders against the Respondents requiring them to make a contribution to the assets of the Corporate Debtor under the provisions of IBC for the interest of the Creditors of the Corporate Debtor.

What forms the basis of this application? What is your locus standi? Remember that you are a third party here. Does the law empower you to file such an application? If yes, in what capacity? Give out all such details here. Clarify before it is challenged. 

2. That a Transaction Audit was performed on the chartered accounts of the Corporate Debtor at the instance of the Applicant. The Transaction Auditor in its Report dated 29^th December 2024, has reported transactions which, in the opinion of the Applicant, have cast serious doubts that the said transaction may be undervalued.
   
   Therefore, the Applicant is making this Application in compliance with the statutory requirements as prescribed under section 25(2)(j) and 45 of the IBC read with relevant regulations framed there under to discharge the statutory duties and obligations as a Resolution Professional and to place on record, acts and conducts discovered to have been caused by erstwhile management of Corporate Debtor which has been detrimental to the interest of the Creditors.
   
   The facts and the circumstances leading to the instant application are more fully and particularly below.

PARTICULARS OF THE PETITIONER:

Now in the next 2 sections, give details of the petitioner, the corporate debtor and the applicant, that is its full name and registered address. It is extremely crucial to mention that the petitioner had filed the petition and the date of the order by which the petition was admitted.  

3. India Bank Ltd. a bank registered under the provisions of the Banking Regulation Act, 1949 and having its registered office at 302, Status Towers, Nariman Point, Mumbai-400 020, is the Petitioner of the application for initiation of Corporate Insolvency Resolution Process (“CIRP”) of the Corporate Debtor, as filed before the Hon’ble Tribunal and was allowed on 15^th May 2023.

PARTICULARS OF THE CORPORATE DEBTOR: –

4. Lip Smacking Pvt. Ltd., the Corporate Debtor herein, was incorporated on 25^th October 2018 under the Companies Act, 2013 having its registered corporate office at One BKC, Mumbai- 400 002. 

PARTICULARS OF THE APPLICANT

5. Mr. S. Shankaran, Resolution Professional appointed in the instant matter, having his registered office at Brilliant Insolvency Professionals LLP, 46-B, 5th Floor, 22/28A, Ghatkopar (East), Mumbai.  

JURISDICTION OF THE BENCH

Now make an averment concerning jurisdiction. Such an averment is made because it is crucial to establish the NCLT’s authority to adjudicate upon a case. 

6. The Applicant declares that the subject matter of the application is within the jurisdiction of the Bench.

LIMITATION

We are all aware of the importance of the limitation period. For instance, even if your matter has merits and you are a bona fide application/petitioner, your application/petition can get dismissed if you file it outside the prescribed period of limitation. Thus, averment is to ensure that the application is filed well within the prescribed period of limitation. 

7. The Applicant states that this application is filed well within the prescribed period of limitation.

BRIEF FACTS

Let’s now discuss the crux of the application. Or like litigation lawyers, like to call it, “main application”. 

From now on we shall be conveying every single vital information strategically based on which this application is filed.

But first, you need to mention a brief overview of the company- its legal status, business name and address, nature of business, years of operation, etc. 

8. Lip Smacking Pvt. Ltd., the Corporate Debtor herein, was incorporated on 25^th October 2018 under the Companies Act, 2013 and has its registered office in Maharashtra. It is engaged in the business of operating a restaurant under the name and style of ‘Lazy Diner’ at 8th Road, Santacruz (West), Mumbai- 400 100.
   
   The restaurant specializes in serving multi-cuisine food and beverages to customers and has been in operation since 2018. 

Now give a background of your case. Under what circumstances was this application filed? State it below.  

9. India Bank Ltd. has filed an application for initiating the Corporate Insolvency Resolution Process of the Corporate Debtor under section 7 of the IBC, which was allowed by the Hon’ble Tribunal by the order dated 15^th May 2023. Hereto annexed and marked as “Annexure 1” is the copy of the order dated 15^th May 2023.

Here, you need to add the necessary details of the audit report such as inter alia state that an audit was conducted on the Corporate Debtor’s books and that certain discrepancies were found in the payments made. Most importantly, you must also mention the entries that are suspected to be undervalued.  

The following paragraphs will mention the fact that an auditor was duly appointed to conduct the audit of the corporate debtor and that the auditor, after completion of the review, submitted a final report to the Applicant, which should also have identified undervalued transactions. 

10. The Applicant engaged M/s. Singhania & Associates as the Transaction Auditor to conduct a Transaction Audit of the Corporate Debtor for a review period from 1^st April 2022 to 5^th May 2023 and to determine the transactions of the nature mentioned under section 25 (2)(j) and 45 of IBC vide letter dated 7^th July 2023.

11. That on 7^th July 2023, the Transaction Auditor was appointed to conduct the Transaction Audit and submitted its Final report to the Applicant on 29^th April 2024, having considered the Transaction report as determined and specified transactions that were Preferential, Undervalued, Fraudulent, or Extortionist in nature. Hereto annexed and marked as “Annexure 2” is the copy of the Transaction Report dated 29^th April 2024, along with its Annexures.
    
    Hereto annexed and marked as “Annexure 3” is the copy of the Financial Statement for the Financial year 2022-2023, and “Annexure 4” is the copy of the Financial Statement for the Financial year 2023-2024.

Here we need to stipulate reasons as to why we need the NCLT intervention and thereafter, in the following paragraphs, we shall state why it is significant to make such an application in light of the object of the IBC. 

12. That in view of the determination of transactions by the Resolution Professional, this instant Application is being filed to bring to the notice of the Hon’ble Tribunal, those transactions which are undervalued in nature, so that appropriate orders may be passed for the avoidance of such transactions, to declare such transaction void and reverse its effect and to direct such contributors to contribute to the assets of the Corporate Debtor.

13. The Applicant submits that the object of the IBC and this present application inter alia is to ensure that the value of assets of the Corporate Debtor is maximized and all the creditors get their dues in an equitable manner which otherwise has been wrongfully dissipated on account of fraudulent and wrongful transactions.

You must have noticed that so far, we have not mentioned any figures. Until now, we have just been stating our side of the story. So now is the time to stipulate the amount and thus let us state the amount that is siphoned off by the suspended directors.

14. The Applicant submits that monies siphoned off under avoidable unvalued transactions are Rs. 34,81,868/- (Rupees Thirty-four lakhs eighty-one thousand eight hundred sixty-eight only) which is being prayed to be returned/ contributed to the Corporate Debtor together with interest.

In the next few paragraphs, you need to explain the provisions of the IBC. This acts as a reference and gives a flow to the application. 

15. Under section 45 of the IBC, “(1) If the liquidator or the resolution professional, as the case may be, on an examination of the transactions of the corporate debtor referred to in sub-section (2) determines that certain transactions were made during the relevant period under section 46, which were undervalued, he shall make an application to the Adjudicating Authority to declare such transactions as void and reverse the effect of such transaction in accordance with this Chapter.

(2) A transaction shall be considered undervalued where the corporate debtor—

(a) makes a gift to a person; or

(b) enters into a transaction with a person which involves the transfer of one or more assets by the corporate debtor for a consideration the value of which is significantly less than the value of the consideration provided by the corporate debtor, and such transaction has not taken place in the ordinary course of business of the corporate Debtor.”

16. The Applicant humbly submits that the relevant period as mentioned in section 46 of IBC, 2016 is two years in case of undervalued transactions with related parties.

In the upcoming paragraphs, we shall substantiate our case by reproducing certain relevant extracts from the audit report that are names of the related party transactions, the value of the transactions entered into with the related parties, the period during which such transactions were entered into, etc. 

17. The Applicant submits that transactions of the Corporate Debtor pertaining to undervalued transactions are at internal page no. 45 of the Audit Report and are summarized as follows:

Sr. No.	Particulars	Amount
1.	Investment in Nom Nom Pvt. Ltd.	Rs. 4,81,868/-
2.	Sale of Vehicles (Light) to HIJ	Rs. 3,00,000/-
3.	Sales to Food King Pvt. Ltd. (Related Party)	Rs. 2,00,000/-
	TOTAL	Rs. 9,81,868/-

18. The details pertaining to the Investment in Nom Nom is on page no. 37 of the Audit Report. During the FY 2019-20, the Company has shown investments in Giant Grace Corporation Limited, Hongkong, amounting to Rs. 4,81,868/-. The amount of Rs. 4,81,868/- has been adjusted against the governmental dues.
    
    However, the directors of Corporate Debtor have not provided the RP with any statutory approvals, records, and/or filings with various authorities and agencies under applicable laws to substantiate the investment, including Agreements and other correspondence, Valuation reports, etc.

Also, the loss (if any) of this Investment is not considered and disclosed.

19. The details of the sale of Vehicles (Light) to HIJ are on page no. 36 to 37 of the Audit Report which happened during the financial year 2023-24 for Rs. 3,00,000/- (Rupees Three Lakhs Only).
    
    However, in the absence of party-wise, item-wise details of fixed assets purchased and sold, bills/ tax invoices/ supporting evidence of purchase and sales were not provided and the same cannot be verified due to lack of documents from the Respondent. Hereto annexed and marked as Annexure “5” is the copy of the Journal Voucher entry.

20. The details about the sale of kitchen equipment to Food King Pvt. Ltd. (Related Party) are on page no. 48 of the Audit Report. From the verification of tally data made available for our verification, we observed that the Corporate Debtor has a list of customers/ suppliers with whom certain transactions had taken place.
    
    However, the highest value of the transaction has taken place with the holding company wherein the kitchen equipment worth 25,00,000 was sold to its holding company i.e. Food King Pvt. Ltd. 

The Applicant is unable to verify whether such transactions have been approved by the Board of Directors of the Company. Also, it is unexplained, that in the absence of inventory/purchase during the period, how any sale transaction was possible.

Till now, I believe we have made a strong case to undo undervalued transactions. Based on our submissions and upon perusal of the annexed documents, the court shall determine on what grounds such a transaction was entered into and pass necessary orders.  Section 49 of the IBC gives you two such criteria and enumerates orders that can be passed. 

21. Under section 49 of the IBC, “Where the corporate debtor has entered into an undervalued transaction as referred to in sub-section (2) of section 45 and the Adjudicating Authority is satisfied that such transaction was deliberately entered into by such corporate debtor—

(a) for keeping assets of the corporate debtor beyond the reach of any person who is entitled to make a claim against the corporate debtor; or

(b) in order to adversely affect the interests of such a person in relation to the claim,

the Adjudicating Authority shall make an order—

(i) restoring the position as it existed before such transaction as if the transaction had not been entered into; and

(ii) protecting the interests of persons who are victims of such transactions.

Provided that an order under this section- 

(a) shall not affect any interest in property which was acquired from a person other than the corporate debtor and was acquired in good faith, for value and without notice of the relevant circumstances, or affect any interest deriving from such an interest, and

(b) shall not require a person who received a benefit from the transaction in good faith, for value and without notice of the relevant circumstances to pay any sum unless he was a party to the transaction.

After notifying all the transactions of the corporate debtor which are classified as undervalued by the resolution professional, you also need to clarify and declare that there are no such similar transactions besides the ones disclosed in the foregoing paragraphs.  

22. The Applicant submits that there are no other transactions on the lines of section 45 of IBC as observed by the Financial Auditor while going through the Books of Accounts of the Corporate Debtor. The same has been recorded by the Financial Auditor in the Audit Report.

General averments which are needed to prove your bona fide shall also be added. 

23. The Applicant craves the leave of the Hon’ble Tribunal to consider the facts of the said transactions as discussed for the purpose of passing appropriate orders as the amounts disbursed form a part of ‘Undervalued transactions’ which as per section 45 of IBC, 2016, can and should have been avoided.
    
24. It is a fit and proper case where the necessary direction is issued, and action is taken in accordance with the law.
    
25. This Application is made bonafide and for the ends of justice. 
    
26. The balance of convenience and the prima facie case is in favour of the order as prayed for herein.

Prayer clause

In this application, we seek a declaration to the effect that this transaction be held undervalued and direct the suspended directors to make good the loss incurred due to them. Accordingly, our prayer clause shall reflect these two requests. 

The Applicant, therefore, humbly prays before this Hon’ble Tribunal as follows:

1. That this Hon’ble Tribunal may be pleased to adjudicate the facts and circumstances of this case and be pleased to declare the various transactions carried out by the Corporate Debtor within the look-back period of one year preceding the date of insolvency commencement with any person and within two years with related parties of the Corporate Debtor above be termed as an undervalued transaction; 

2. That this Hon’ble Tribunal may be pleased to make necessary adjudication in the facts and circumstances of this case and necessary directions be passed in terms of section 49 of the IBC particularly.

3. That this Hon’ble Tribunal may be pleased to direct the Respondents to contribute the amount of Rs. 34,81,868/- (Rupees Thirty-four lakhs eighty-one thousand eight hundred sixty-eight only) towards the Undervalued Transactions carried out as per section 49 of the IBC.

4. Report the transactions to the IBBI for making a complaint to the Special Court under section 236 of the IBC.

5. Such further or other order or orders as this Hon’ble Tribunal may deem fit and proper in accordance with the Civil Procedure Code and the Code of Criminal Procedure.

6. Any other such directions which this Hon’ble Tribunal may deem fit.

Lastly, it is important to convey to the NCLT that the prescribed court fee is paid by the applicant. Hence, an averment to this effect is mandatory. 

Particulars of the Bank draft evidencing payment of the fee for the petition or application made: 

Branch of the Bank on which drawn: 

Name of the issuing branch: 

Demand Draft No. [insert DD No.] Date [insert the date on which DD was drawn] 

(Note: If payment has been made via Bharatkosh, you need to mention the transaction ID and date of such a transaction)

Amount Rs. 1000/- ……

Mr. S. Shankaran

Resolution Professional

                                                                                                                                                    Lip Smacking Pvt. Ltd. 

Mumbai, dated this 5th day of April 2024

     VERIFICATION

I, Mr. S. Shankaran, age 45, Indian Inhabitant, the Resolution Professional of Lip Smacking Pvt. Ltd. having his registered office at Brilliant Insolvency Professionals LLP, 46-B, 5th Floor, Ghatkopar (east), Mumbai do hereby state and declare that whatever has been stated in the foregoing paragraphs are true to the best of my knowledge and belief and I believe the same to be true.

Solemnly declared at Mumbai                            

On this _____ day of June 2024                    

                Sd/-

                                                                                       Deponent

              Sd/- 

Advocate for Deponent

How to contest an application for an undervalued transaction? 

When it comes to avoidable transactions, I have thought and thought and thought over how to justify it. How do I justify the price paid? How do I establish that it was a strategic business decision? How can convey to the adjudicating authority that the transaction is in good faith and with no intention to defraud the creditors? 

If similar questions arise in your mind, you should definitely read the contents below. 

• When such an application is filed, it is first served on the respondents, calling upon them to remain present on the given date. 
• On the first date, the Tribunal grants time to file a reply either denying the claim or justifying the transaction.  

Such a reply is on the lines of how the transaction does not meet the legal criteria of an undervalued transaction under the relevant insolvency or bankruptcy laws.

• The Applicant may file a rejoinder if it deems it necessary. 
• Before the Tribunal, the applicant opens his argument based on the application and produces exhibits in his favour. 
• Thereafter, it is time for the respondent to commence his arguments on the grounds such as:  

1. The Transaction Was in the Ordinary Course of Business
2. If the transaction was a routine commercial decision taken in good faith, it does not qualify as undervalued.
   (Example: Selling obsolete machinery at a lower price for business efficiency)
3. If fair value was received, it is not an undervalued transaction.
   (Example: A company sells land at a lower price, but in exchange, receives equity or long-term benefits)
4. Establish that there was no intention to defraud creditors
5. The transaction did not adversely impact creditors
6. If creditors did not suffer any actual loss, the claim of undervaluation may not stand.
   (Example: The transaction helped in debt restructuring and did not reduce asset value unfairly)

• You may also produce relevant documentary evidence such as agreements, valuation reports, audit records, board resolutions, and expert opinions to prove that the transaction was justified
•  You may also challenge the basis of valuation used to declare the transaction undervalued and demand an independent valuation if the RP’s assessment is incorrect.
•  Use precedents wherein the courts have categorically held that commercial decisions cannot be questioned if mala fide intent is not proven. 
• After hearing both parties and examining the evidence placed before it, the court may:  

1. Dismiss the petition – If the court finds the transaction was legitimate and does not qualify as an undervalued transaction.  
2. Set aside the transaction– If proven undervalued, the court may reverse the transaction, requiring the creditor to return the payment to the debtor’s estate.  

Orders that may be passed by the NCLT in case of an undervalued transaction 

What powers does the NCLT when it determines a transaction is undervalued? Can it return the property? Compensate a party? Etc. 

It is empowered to do all of the above. How? Pursuant to section 49 of IBC which empowers the NCLT to pass orders as it deems just and necessary. 

The said section states that- If the Adjudicating Authority (NCLT) finds an undervalued transaction, it can pass an order with the following directions:

1. Return of Property – Any property transferred under the transaction must be restored to the corporate debtor.
2. Release of Security Interest – Any security interest (mortgage, charge, lien, etc.) created by the corporate debtor may be cancelled or reduced.
3. Repayment of Benefits – Any person who gained benefits from the transaction may be required to repay the amount to the liquidator or resolution professional.
4. Fair Compensation – The party involved in the transaction may be asked to pay fair consideration for it, as determined by an independent expert. 

Conclusion

The avoidance of undervalued transactions under the IBC is essential to prevent inequitable transfer of assets at significantly lower values, protecting the interests of creditors and maintaining stability. This ensures that the value of the assets of the corporate debtor is not depleted. 

The role of the NCLT is crucial in restoring the rightful position of the corporate debtor and upholding the principles of commercial equity. From identifying questionable transactions to contesting them before the NCLT, every step demands a meticulous review of financial records, valuation reports, and corporate decisions. 

As insolvency laws continue to evolve, transparency, due diligence, and accountability will remain fundamental in corporate restructuring and liquidation. To prevent such transactions, companies must adopt robust corporate governance mechanisms, ensure accurate financial documentation, conduct independent valuations, maintain compliance oversight, and seek legal and financial expertise before executing significant transactions.

By implementing these best practices, businesses can mitigate legal risks, enhance creditor confidence and uphold financial discipline, ensuring resilience and sustainability even in times of financial distress.

FAQs

1. Are any ancillary documents required to be filed along with the application? 

The NCLT Rules, 2016 prescribed that only an affidavit in support of such an application is needed to be filed. This being a part of an ongoing proceeding, one need not file any other documents. 

It is to be noted that a memo of parties shall be filed along with this application to effect service on parties. 

2. Is this application listed any differently from the main petition?

No. Rules for listing this application are the same as that of the main petition. You may refer to my article “The Ultimate Guide on Initiating CIRP” for more information. 

3. What is the court fee payable on such an application?

Court fee payable is Rs. 1000/-. 

Demand draft is to be drawn in favour of Pay and Accounts Officer, Ministry of Corporate Affairs. 

4. What is the “relevant time/twilight period” for determining an undervalued transaction?

A transaction is deemed undervalued if it was made:

• Within 2 years before the insolvency commencement date if the recipient is a related party (excluding employees).
• Within 1 year before the insolvency commencement date for unrelated parties.

5. Can this interim application be withdrawn? 

Yes with the leave of the court. However, it can so happen only before the hearing has commenced. 

You may also note that the tribunal is empowered to impose costs if it deems fit. 

6. Are all transactions made before insolvency considered undervalued?

No. Transactions made in the ordinary course of business or as part of standard financial affairs are not considered undervalued.

7. Who can challenge an undervalued transaction?

The resolution professional (RP) or liquidator or creditor can apply to the National Company Law Tribunal (NCLT) to have an undervalued transaction set aside and the assets restored to the corporate debtor.

8. How is an undervalued transaction different from a preferential transaction?

• Undervalued transactions involve selling/transferring assets for significantly less value.
• Preferential transactions involve giving undue advantage to specific creditors over others before insolvency. 

9. Can an undervalued transaction be challenged after the insolvency process has started?

Yes, during the prescribed period, if the liquidator or RP fails to report an undervalued transaction, a creditor, member, or partner of the corporate debtor can directly approach NCLT to declare the transaction void. 

10. Can directors escape the liability of approving or enabling undervalued transactions? 

A director, if he has knowingly participated in or allowed an undervalued transaction to take place is held liable. However, if they can prove that the transaction was a well-thought and genuine business decision, conducted in the ordinary course, and not intended to defraud creditors, they may not be held accountable.