IBC Section 47: Application by creditor in cases of undervalued transactions

Section 47 of Insolvency and Bankruptcy Code, 2016: Application by creditor in cases of undervalued transactions

Official Bare Act Text

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

(1) Where an undervalued transaction has taken place and the liquidator or the resolution professional as the case may be, has not reported it to the Adjudicating Authority, a creditor, member or a partner of a corporate debtor, as the case may be, may make an application to the Adjudicating Authority to declare such transactions void and reverse their effect in accordance with this Chapter.

(2) Where the Adjudicating Authority, after examination of the application made under sub-section (1), is satisfied that-

(a) undervalued transactions had occurred; and

(b) liquidator or the resolution professional, as the case may be, after having sufficient information or opportunity to avail information of such transactions did not report such transaction to the Adjudicating Authority, it shall pass an order-

(a) restoring the position as it existed before such transactions and reversing the effects thereof in the manner as laid down in section 45 and section 48;

(b) requiring the Board to initiate disciplinary proceedings against the liquidator or the resolution professional as the case may be.

Legal Commentary & Landmark Judgments: Section 47

Section 47 provides an exceptional statutory remedy empowering any creditor or member of the corporate debtor to apply directly to the Adjudicating Authority to set aside an undervalued transaction where the liquidator or RP failed to report it.

Creditor or Member Standing: Where an undervalued transaction has taken place and the liquidator or resolution professional has not reported it to the Adjudicating Authority, a creditor, member, or partner may make an application.
Prerequisite Notice to RP/Liquidator: The applicant must demonstrate that the transaction was brought to the notice of the RP or liquidator and they failed to act.
Disciplinary Consequence (Section 47(2)): Where the NCLT determines that an undervalued transaction occurred and the RP failed to report it without sufficient cause, the NCLT may direct the IBBI to initiate disciplinary action against the RP.

Key Landmark Precedents:

Anuj Jain v. Axis Bank Ltd. (2020) 8 SCC 401: The Supreme Court noted that Section 47 provides an essential check against potential collusion between the resolution professional and delinquent promoters, ensuring that undervalued asset diversions do not escape judicial scrutiny.
Swiss Ribbons Pvt. Ltd. v. Union of India (2019) 4 SCC 17: Affirmed that the statutory remedy under Section 47 safeguards the collective interest of creditors by allowing independent stakeholders to bring fraudulent diversions to light.

Courtroom Practice & Strategic Litigation Guidance:

If forensic audit reports reveal massive asset sales at undervaluation and the RP refuses to file an avoidance petition before the NCLT, issue a formal demand notice to the RP. If the RP defaults, file an independent IA under Section 47 before the NCLT seeking avoidance of the transaction.