IBC Section 45: Avoidance of undervalued transactions

Section 45 of Insolvency and Bankruptcy Code, 2016: Avoidance of undervalued transactions

Official Bare Act Text

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

(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) 1determines 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.

Legal Commentary & Landmark Judgments: Section 45

Section 45 empowers the Adjudicating Authority to declare transactions entered into by the corporate debtor as void where assets were gifted or transferred for significantly inadequate consideration.

Core Legal Standard: An undervalued transaction occurs where the corporate debtor makes a gift or enters into a transaction for consideration the value of which is significantly less than the value of the consideration provided by the debtor.
Statutory Commencement & Effective Date: The statutory look-back period is 1 year for unrelated parties and 2 years for transactions with related parties preceding the insolvency commencement date.

Where the RP fails to file an application, creditors may apply directly under Section 47.

Key Landmark Precedents:

Anuj Jain v. Axis Bank Ltd. (2020) 8 SCC 401: Reaffirmed the strict analytical boundaries between preferential transactions under Section 43 and undervalued transactions under Section 45, emphasizing that inadequate consideration must be objectively demonstrated.

Legal Commentary:

Section 45 operates as an anti-siphoning mechanism, preventing promoters from stripping corporate assets on the eve of insolvency through undervalued asset sales or uncompensated transfers.