IBC Section 167: Extortionate credit transactions

Section 167 of Insolvency and Bankruptcy Code, 2016: Extortionate credit transactions

Official Bare Act Text

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

(1) Subject to sub-section (6), on an application by the bankruptcy trustee, the Adjudicating Authority may make an order under this section in respect of extortionate credit transactions to which the bankrupt is or has been a party.

(2) The transactions under sub-section (1) should have been entered into by the bankrupt during the period of two years ending on the bankruptcy commencement date.

(3) An order of the Adjudicating Authority may-

(a) set aside the whole or part of any debt created by the transaction;

(b) vary the terms of the transaction or vary the terms on which any security for the purposes of the transaction is held;

(c) require any person who has been paid by the bankrupt under any transaction, to pay a sum to the bankruptcy trustee;

(d) require any person to surrender to the bankruptcy trustee any property of the bankrupt held as security for the purposes of the transaction.

(4) Any sum paid or any property surrendered to the bankruptcy trustee shall be included in the estate of the bankrupt.

(5) For the purposes of this section, an extortionate credit transaction is a transaction for or involving the provision of credit to the bankrupt by any person-

(a) on terms requiring the bankrupt to make exorbitant payments in respect of the credit provided; or

(b) which is unconscionable under the principles of law relating to contracts.

(6) Any debt extended by a person regulated for the provision of financial services in compliance with the law in force in relation to such debt, shall not be considered as an extortionate credit transaction under this section.

Legal Commentary & Landmark Judgments: Section 167

Section 167 enables the Bankruptcy Trustee to challenge Extortionate Credit Transactions involving unconscionable or usurious loan terms forced upon the bankrupt.

Extortionate Terms: Covers credit transactions requiring grossly exorbitant payments or terms that grossly contravened ordinary principles of fair dealing.
Two-Year Statutory Window: Applies to credit transactions entered into within two years ending with the date of the bankruptcy application.
Reliefs Granted: The Adjudicating Authority may set aside the transaction in whole or part, vary the terms, or direct the lender to refund amounts paid by the bankrupt.

Key Landmark Precedents:

Swiss Ribbons Pvt. Ltd. v. Union of India (2019) 4 SCC 17: The Supreme Court emphasized that the Code protects distressed individuals from predatory, extortionate credit practices that precipitate insolvency.
Dilip B. Jiwrajka v. Union of India (2024) 5 SCC 436: Affirmed that the Adjudicating Authority exercises specialized regulatory power under Section 167 to nullify usurious and unconscionable borrowing contracts.

Courtroom Practice & Strategic Litigation Guidance:

Trustees challenging credit transactions under Section 167 should demonstrate effective annual percentage rates (APR) grossly exceeding prevailing RBI benchmark lending rates, evidencing financial coercion and unfair bargaining power.