Fraudulent transactions: what to keep in mind while ring fencing your assets


In light of the worldwide Covid-19 pandemic and the resulting financial slump in the country many  companies are likely to find modes to ring fence their assets for better security and protection. Some  distressed companies may also look at ring fencing their assets to secure them from any corporate  insolvency resolution process (“CIRP”) that these distressed companies may be at the brink of. While  doing so, the companies have to ensure that such transfers are in their ordinary course of business  and such transfers are not undertaken with an intent for tax evasion or for constituting a fraud or  preferential treatment to the creditors. The Insolvency and Bankruptcy Code, 2016 (“the Code”), the  Companies Act, 2013 and Transfer of Property Act, 1882 provides for provisions for setting aside  any transfers that have been effected with an intent to defraud the creditors of a company. This  article enlists various kinds of fraudulent transactions that can be set aside by the Court under the  above-mentioned enactments. 

I The Code: 

The Report of Bankruptcy Law Reforms Committee 2015 had discussed the possibility of identifying  and recovering from vulnerable/fraudulent transactions. These are transactions that fall within the  category of wrongful or fraudulent trading by the entity, or unauthorized use of capital by the  management. There are two concepts that are recognized in other jurisdictions under this category  of transactions: fraudulent transfers, and fraudulently preferring a certain creditor or class of  creditors. If such transactions are established, then they will be reversed. Assets that were  fraudulently transferred will be included as part of the assets in liquidation. The Committee  recommended that all transactions up to a certain period of time prior to the appointment of the  interim resolution professional (referred to as the “look-back period”) should be scrutinized for any  evidence of such transactions by the relevant Insolvency Resolution Professional (“IRP”).  

Accordingly, under the Code, Sections 43, 45, 49, 50 and 66, deal with transactions that can be  avoided or set aside by the IRP and the Liquidator. These transactions are of five categories: a. Preferential transactions 

  1. Undervalued transactions 
  2. Undervalued transactions defrauding the creditors 
  3. Extortionate credit transactions  
  4. Fraudulent trading or wrongful trading 

The intention of legislature behind enacting such provisions is that fraudulent transactions are  avoided so that such assets would be available either with the IRP or with the liquidator, as the case  may be, to put the corporate debtor back on its wheels or if that is not possible, to ensure that the  creditors of the corporate debtor get a fair deal.  

Relevant Period / Look-back Period under the Code: The relevant time period for these  transactions to be challenged is 2 years preceding the insolvency commencement date in the case of  transaction with a related party and 1 year in case of any other person.

A. Preferential and undervalued transactions – entered into for the benefit of one creditor  at the relevant period (Section 43): 

(i) A transaction shall be considered a preferential transaction if there has been a transfer of  property of an interest in respect of an existing debt or liability and such transfer has the  effect of putting such creditor in a beneficial position than it would have been in the event of  a distribution of assets u/s 53 of the Code. But any transfer which is made in the ordinary  course of business or which creates a security interest in the property acquired by the  corporate debtor shall not be a preferential transaction. The transaction should further fall  within the ‘relevant time period’ for it to be preferential. 

(ii) The Hon’ble Supreme Court has, in the matter of Anuj Jain, Interim Resolution Professional  for Jaypee Infratech Limited Vs Axis Bank Limited Etc., (Civil Appeal Nos. 8512-8527 of  2019), held that the transfers and mortgages created by Jaypee Infratech Limited for the  benefit of the lenders of its holding company Jaiprakash Associates Limited were made to  defraud the creditors of the corporate debtor Jaypee Infratech Limited and were not made in  ordinary course of business or financial affairs of the corporate debtor. Jaypee Infratech  Limited, whose ordinary course of business was of ensuring execution of housing/building  projects, had inflated itself to routinely mortgaging its assets and/or inventories to secure  the debts of its holding company, and that too, at the cost of its own financial well-being

(iii) The Apex Court while setting aside these transactions as being of deemed preference to  related party by the corporate debtor during the look-back period of two years and thereby  covered within the period envisaged by Sub-section (4) of Section 43 of the Code, laid down  that while considering whether a transaction is preferential or not has to answer the  following questions:  

  • As to whether such transfer is for the benefit of a creditor or a surety or a guarantor?  As to whether such transfer is for or on account of an antecedent financial debt or  operational debt or other liabilities owed by the corporate debtor?  
  • As to whether such transfer has the effect of putting such creditor or surety or  guarantor in a beneficial position than it would have been in the event of distribution  of assets being made in accordance with Section 53 of IBC?  
  • If such transfer had been for the benefit of a related party (other than an employee),  as to whether the same was made during the period of two years preceding the  insolvency commencement date; and if such transfer had been for the benefit of an  unrelated party, as to whether the same was made during the period of one year  preceding the insolvency commencement date?  
  • As to whether such transfer is not an excluded transaction in terms of Sub-section  (3) of Section 43? 

(iv) Examples of preferential transactions may include: 

  • payment or set-off of debts not yet due;  
  • performance of acts that the debtor was under no obligation to perform;  granting of a security interest to secure existing unsecured debts;  
  • unusual methods of payment, for example, other than in money, of debts that are due; 
  • payment of a debt of considerable size in comparison to the assets of the debtor; and;
  • in some circumstances, payment of debts in response to extreme pressure from a creditor, such as litigation or attachment, where that pressure has a doubtful basis. 
  • A set-off, while not avoidable as such, may be considered prejudicial when it occurs  within a short period of time before the application for commencement of the  insolvency proceedings and has the effect of altering the balance of the debt between  the parties in such a way as to create a preference or where it involves transfer or  assignment of claims between creditors to build up set- offs. A set-off may also be  subject to avoidance where it occurs in irregular circumstances, such as where there  is no contract between the parties to the set-off.

B. Undervalued transactions at the relevant period (Section 45): 

An undervalued transaction, has to have the following requisites: 

  • The corporate debtor has to make a gift to a person; or 
  • enter into a transaction for transferring a property to a person at a value of  consideration significantly lower than the consideration paid by the corporate debtor  of such property or provided in their books of account. 
  • Such transactions have not been undertaken during the ordinary course of business  of the corporate debtor. The concept of ordinary course of business would be the  same as considered under preferential transactions.  

While deciding whether a transaction is an undervalued transaction, the Tribunal has the  power to seek an independent expert to assess evidence relating to the value of the  undervalued transactions. 

C. Undervalued transactions entered into for defrauding the creditors (Section 49):

(i) The undervalued transactions as defined above entered with mala fide intentions to defraud  the creditors by putting the assets of the corporate debtor beyond the reach of creditors or  otherwise to prejudice the interest of the creditor who would be entitled to make a claim  against the corporate debtor and adversely affect the interests of the said creditor, are  covered under this very provision. The important element required for attracting section 49  is that there should be deliberate act on the part of corporate debtor to enter into an  undervalued transaction.  

Exceptions to the above: 

  • if any interest in property was acquired from a person other than the corporate  debtor; and  
  • was acquired in good faith, for value and without notice of the relevant circumstances 

(ii) In case of an undervalued transaction entered with an intent to defraud a creditor, while  protecting the interests of persons who are victims of such transactions, the Tribunal has the  power to restore the position of the corporate debtor as it existed before such transaction as  if the transaction had not been entered into.

D. Exorbitant credit transaction (Section 50): 

(i) A transaction shall be considered an exorbitant credit transaction if the corporate debtor  obtains any credit facility with exorbitant rate of interest or unfair credit terms such as  incorporating severe default provision or was in a vulnerable position at the time of the  transaction. The relevant period under this provision is 2 years preceding from the  insolvency commencement date.  

(ii) The only exception for section 50 is if the credit facility is extended by any person providing  financial services which is in compliances with any law for the time being in force in relation  to such debt. Then such transaction will not be considered as extortionate credit transaction. 

(iii) While deciding an issue of exorbitant credit facilities, the Tribunal has been provided with  the following powers to:  

  • Restore the position as it existed prior to such transaction 
  • Set aside the whole or part of the transaction of debt 
  • Modify the terms of transaction
  • Require any person who is a party to the transaction to repay any amount received
  • Relinquish the security interest created out the transaction in favour of liquidator or IRP.

E. Fraudulent trading or wrongful trading (Section 66): 

(i) If during the corporate insolvency resolution process or a liquidation process, it is found by  the IRP or liquidator that any business of the corporate debtor was carried on with the intent  to defraud the creditors or for any fraudulent purpose, the adjudicating authority can direct  any person who was knowingly carrying out the business in such fashion, to contribute to the  assets of the corporate debtor.  

(ii) A director or partner of the corporate debtor can be directed to contribute to the assets of the  corporate debtor: 

  • If before the insolvency commencement date, such director or partner knew or ought  to have known that the there was no reasonable prospect of avoiding the  commencement of a CIRP in respect of such corporate debtor; and 
  • such director or partner did not exercise due diligence in minimizing the potential  loss to the creditors of the corporate debtor.

(iii) The NCLT, Allahabad in IDBI Bank Ltd. versus Jaypee Infratech Limited1 had ruled that a  transaction to secure the debt of a related party and to prevent preservation of value of the  assets of the corporate debtor shall clearly be a fraudulent and wrongful transaction under  Section 66 of the Code if it has been carried on with the intent to defraud the creditors of the  corporate debtor. In the said case, since the corporate debtor itself was in dire need of funds  for completing construction of flats and could have sold, mortgaged, unencumbered land to  raise funds to complete construction of flats in a timely manner and to fulfil its obligation to  its creditors, but, it chose to give away the land to secure the debt of a related party. Further,  the directors were also held to be aware that they were in twilight zone and insolvency was  imminent and that they did not exercise due diligence in minimizing the potential loss to the  Financial Creditors, Operational Creditors, creditors (including home buyers) and other  stakeholders of the Corporate Debtor. The transactions carried out by the Corporate Debtor  were held to be fraudulent under Section 66, 43 and 45 of the Code. The said finding was also  confirmed by the Apex Court.  

(iv) Hence, Section 66 is read in consonance with Section 43, 45 and 49 of the Code.  

Immunity granted to the Corporate Debtor 

Newly introduced Section 32A2 of the Code inter-alia, provides immunity to a corporate debtor and  its assets from any prosecution, action, attachment, seizure, retention or confiscation upon approval  of a resolution plan if the resolution plan results in the change in the management or control of the  corporate debtor. The said Section 32 A to the Code was introduced in the wake of the CIRP of  Bhushan Power & Steel Limited in the JSW Case3 and the issues pertaining to its assets being attached  by the Directorate of Enforcement of Central Government. 

Section 32A provided that the prior liability or the offence committed by the corporate debtor will  be ceased and discharged once the resolution plan is approved by the adjudicating authority if there  is change in the management and control of such corporate debtor and there is a new management in place, then such new management shall not be prosecuted for such earlier offence of the corporate  

1 CA No.26/2018 in Company Petition No.(IB)77/AD/2017 

2 Insolvency and Bankruptcy Code (Amendment) Act, 2020 – 13th March, 2020 

3 JSW Steel Ltd. and Ors. v. Mahender Kumar Khandelwal and Ors. Company Appeal (AT) (Insolvency) No. 957  of 2019, NCLAT decided on 17th February 2020 debtor. It further provides that such an exemption shall be given if the new management is in the  control of a person who was not – 

  • A promoter or in the management and control of the corporate debtor or a related party of  such a person; or 
  • A person with regard to whom the relevant investigating authority has reason to believe that  he has abetted or conspired for the commission of an offense and a report or complaint has  been filed against him. 

The corporate debtor shall cease to be liable for any transaction of assets considered to be fraudulent  if such assets form part of the resolution plan which gets approved by the Adjudicating Authority. 

However, it also mentions that every person who is a designated partner as defined in the Limited  Partnership Act or an officer as defined in Clause 60 of Section 2 of the Companies Act 2013 who is  in charge of the business of the corporate debtor and is directly or indirectly in the commission of  such offence as per report or complaint filed by the investigating authority shall continue to be liable  and prosecuted for such offence committed by the corporate debtor notwithstanding that the liability  of the corporate debtor has ceased.  

It is pertinent to note here that there is a dichotomy of views as regards the criminal proceedings and  proceedings by special authorities like CBI, EOW or Enforcement Directorate and whether Section  32A shall have an overriding effect over such proceedings as well. The decision on the same is  pending before the Supreme Court of India. 

The intent and purpose of the insertion of Section 32A is to provide certainty to the ‘Resolution  Applicant’ that the assets of the ‘Corporate Debtor’ as represented to him and for which he proposes  to pay value/consideration in terms of the ‘Resolution Plan’, would be available to him in the same  manner as at the time of submissions of the ‘Resolution Plan’.4

II. Fraudulent transactions under the Companies Act 2013 

Section 328 and 329 of the Companies Act, 2013 are similar to the provisions of preferential  transaction under the Code which are not done in the ordinary course of business, with two things to  be kept in mind5

  • First, the dominant motive in the mind of the company (as represented by its directors  or general body of shareholders) should be to prefer a particular creditor.  
  • Second, the said act must be undertaken during the period of six months preceding the  filing of the winding up petition of the company. 

While the first requirement ensures that the dominant intention to defraud creditors is detected, the  second ensures that there is a level of commercial certainty and finality of transactions for those  interacting with the company. 

Section 329 of the Companies Act, 2013 further lays down that if the transfer of property by a  company not done in the ordinary course of business or not being an encumbrance in good faith and  for valuable consideration shall be void if such transfer is made within a period of one year before  filing for winding up or the passing of a resolution for voluntary winding up of the company. For both  the sections fraudulent intent to defraud the creditors have to be present. 

III. Fraudulent transactions under the Transfer of Property Act, 1882

Section 53 of the Transfer of Property Act, 1882 (“TOPA”) recognizes the need to protect the  interest of the creditors of the transferor. The rule of equity, justice, and good conscience has been  incorporated in this section. It prevents a person from defeating the legitimate claims of his creditors.  Section 53 of TOPA puts a restriction on any such transaction that is not made with a bonafide  intention. For the purpose of this section, a transfer is made with a fraudulent intention when it  intends to defeat the interest of creditor or interest of any subsequent transferee. Where the transfer  is made with a fraudulent intention, the object of the transfer would be bad in the eyes of equity and  justice, even though it would be valid in law. 

Under Section 53 of TOPA there must be a transfer of an immovable property. The transfer must be  a real one which creates a vested title in favour of the third party and the transferor is no more the  real owner of the property. The basic objective behind this section is to protect the creditors from  being delayed or defeated by removing the possible security. Any transaction shall be hit by Section  53 of TOPA, if such transaction has been done with the fraudulent intention to make the property  unavailable for the purpose of security to be given to a creditor. Hence, like under the Code and the  Companies Act, 2013, the intention behind the transfer must be to defeat or delay the creditors.


The key take-aways from this article shall be that for the transactions to not come under the ambit of  fraudulent or preferential transactions, such impugned transactions must not fall within the ‘look back period’, such transactions must be in the ordinary course of the business. It is pertinent to note  here that the intention behind any transaction with respect to transferring of assets of the company  must not be of defrauding its creditors but instead for the benefit of the company and its financial  health. The provisions under the Code, the Companies Act, 2013 and TOPA empowers the IRPs to set  aside such transactions with the help of the powers vested with the Courts to reverse the effect of  such transactions and put the company back in the position as if such transaction had not taken place. 

– Saumya Brajmohan, Senior Associate & Sharda Srivastava, Associate, 

Solomon & Co. 

About Solomon & Co. 

Solomon & Co., (Advocates & Solicitors) was founded in 1909 and is amongst India’s oldest law-firms.  The Firm is a full-service firm that provides legal service to Indian and international companies and  high net-worth individuals on all aspects of Indian law.  


The information contained on this article is intended solely to provide general guidance on matters  of interest for the personal use of the reader, who accepts full responsibility for its use. The  application and impact of laws can vary widely based on the specific facts involved. As such, it should  not be used as a substitute for consultation with a competent adviser. Before making any decision or  taking any action, the reader should always consult a professional adviser relating to the relevant  article posting.


[1] CA No.26/2018 in Company Petition No.(IB)77/AD/2017

[2] Insolvency and Bankruptcy Code (Amendment) Act, 2020 – 13th March, 2020

[3] JSW Steel Ltd. and Ors. v. Mahender Kumar Khandelwal and Ors. Company Appeal (AT) (Insolvency) No. 957

of 2019, NCLAT decided on 17th February 2020

[4] Ibid.

[5] IDBI Bank Limited Through DGM v. The Official Liquidator, Office of the Official Liquidator of Companies & Anr., SLP (CIVIL) NO. 33825 OF 2009, Supreme Court decided on 17th October, 2019