IBC Section 164: Undervalued transactions

Section 164 of Insolvency and Bankruptcy Code, 2016: Undervalued transactions

Official Bare Act Text

Override / Mandate Mens Rea (Intent) Actus Reus (Conduct) Punishment Limitation Monetary

(1) The bankruptcy trustee may apply to the Adjudicating Authority for an order under this section in respect of an undervalued transaction between a bankrupt and any person.

(2) The undervalued transaction referred to in sub-section (1) should have-

(a) been entered into during the period of two years ending on the filing of the application for bankruptcy; and

(b) caused bankruptcy process to be triggered.

(3) A transaction between a bankrupt and his associate entered into during the period of two years preceding the date of making of the application for bankruptcy shall be deemed to be an undervalued transaction under this section.

(4) On the application of the bankruptcy trustee under sub-section (1), the Adjudicating Authority may-

(a) pass an order declaring an undervalued transaction void;

(b) pass an order requiring any property transferred as a part of an undervalued transaction to be vested with the bankruptcy trustee as a part of the estate of the bankrupt; and (c) pass any other order it thinks fit for restoring the position to what it would have been if the bankrupt had not entered into the undervalued transaction.

(5) The order under clause (a) of sub-section (4) shall not be passed if it is proved by the bankrupt that the transaction was undertaken in the ordinary course of business of the bankrupt:

Provided that the provisions of this sub-section shall not be applicable to undervalued transaction entered into between a bankrupt and his associate under sub-section (3) of this section.

(6) For the purposes of this section, a bankrupt enters into an undervalued transaction with any person if-

(a) he makes a gift to that person;

(b) no consideration has been received by that person from the bankrupt;

(c) it is in consideration of marriage; or

(d) it is for a consideration, the value of which in money or money's worth is significantly less than the value in money or money's worth of the consideration provided by the bankrupt.

Legal Commentary & Landmark Judgments: Section 164

Section 164 empowers the Bankruptcy Trustee to apply to the Adjudicating Authority for the avoidance of Undervalued Transactions entered into by the bankrupt during the statutory look-back period.

Definition of Undervalued Transaction: Occurs where the bankrupt made a gift to a person or entered into a transaction for a consideration significantly less than the market value of the property.
Two-Year Look-Back Period: Covers any transaction entered into within two years ending with the date of filing of the bankruptcy application.
Order of Reversal: The Adjudicating Authority may declare the transaction void and order the restoration of the property or its market value to the bankruptcy estate.

Key Landmark Precedents:

Anuj Jain v. Axis Bank Ltd. (2020) 8 SCC 401: The Supreme Court delivered a landmark ruling establishing that undervalued transactions require objective mathematical assessment of consideration versus fair market value, irrespective of fraudulent intent.
Phoenix ARC Pvt. Ltd. v. Spade Financial Services Ltd. (2021) 3 SCC 475: Reaffirmed that avoidance provisions under the Code operate to claw back diverted assets and maintain the integrity of the collective estate.

Courtroom Practice & Strategic Litigation Guidance:

Trustees filing Section 164 clawback applications must place on record independent government-approved valuer reports establishing the prevailing circle rate or fair market value at the date of transfer to prove significant undervaluation.