Insolvency regulator amends rules to enhance disclosure on avoidance transactions

In a significant move aimed at to bring greater scrutiny to past financial dealings of distressed companies, particularly those termed avoidance transactions, the Insolvency and Bankruptcy Board of India (IBBI) has notified key amendments to the Insolvency and Bankruptcy rules. These changes are effective immediately.

The Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Fifth Amendment) Regulations, 2025, underscore a proactive approach to unearthing and addressing financial irregularities that might have diminished a corporate debtor’s assets before insolvency proceedings began.

A central pillar of the new amendments is the mandate for enhanced disclosure in the Information Memorandum (IM). Resolution Professionals (RPs) will now be required to compulsorily include comprehensive details of all identified avoidance transactions, as well as any instances of fraudulent or wrongful trading, within the IM. This document, crucial for prospective resolution applicants, must also be periodically updated and provided to the Committee of Creditors (CoC). This ensures that all potential bidders and creditors have a clear and current picture of any financial discrepancies.

Furthermore, the amendments introduce stringent rules for the treatment of disclosed transactions in Resolution Plans. A resolution plan will now be prohibited from providing for the assignment of any avoidance transactions or fraudulent/wrongful trading unless two critical conditions are met — the transaction must have been explicitly disclosed in the Information Memorandum, and all prospective resolution applicants must have been duly intimated about it before the final date for submitting their plans. This measure is designed to prevent the siphoning off of assets or the offloading of liabilities through the insolvency process without proper transparency and due diligence.

These amendments collectively aim to facilitate more informed decision-making by both the CoC and resolution applicants, thereby fostering better price discovery for the corporate debtor’s assets and ultimately maximizing value for all stakeholders.

Understanding Avoidance Transactions

At its core, an avoidance transaction is a financial maneuver undertaken by a company prior to its insolvency, often designed to unfairly benefit specific creditors or parties, thereby harming the interests of other creditors. The Insolvency and Bankruptcy Code (IBC) empowers the Resolution Professional or Liquidator to identify and seek to ‘undo’ such transactions. By avoiding these transactions, the Code strives to claw back assets into the corporate debtor’s estate, maximizing the overall recovery for creditors.

According to legal experts, the IBC identifies four main types of avoidance transactions, collectively known as PUFE transactions:

• Preferential Transactions (Section 43): These involve a corporate debtor giving preferential treatment to a particular creditor, surety, or guarantor by transferring property or an interest thereof for an antecedent debt, placing them in a more beneficial position than other creditors would be in a liquidation scenario.
• Undervalued Transactions (Section 45): This refers to instances where a corporate debtor makes a gift to someone or transfers assets for a consideration significantly less than their true market value, outside the ordinary course of business.
• Fraudulent Transactions (Section 66): These cover transactions undertaken with the intent to defraud creditors or for any fraudulent purpose.
• Extortionate Credit Transactions (Section 50): These are transactions where the corporate debtor is required to pay an exorbitant rate of interest or other charges for a loan, which is unconscionable.

The IBBI’s latest amendments underscore India’s commitment to creating a robust and equitable insolvency regime, ensuring that all financial dealings are transparent and contribute to the fair distribution of assets among creditors.

Also See: Avoidance transaction proceedings can go on even after CIRP is over: Supreme Court