Voidable Transactions During Insolvency.
Voidable Transactions During Insolvency
Definition:
A voidable transaction is a transaction entered into by a company before insolvency that is legally valid at the time of execution but can be annulled or set aside by the insolvency authority once the company is in insolvency. These provisions prevent the depletion of assets that should otherwise be available to all creditors equally.
Voidable transactions are generally categorized under preferential transactions, undervalued transactions, and fraudulent transactions.
1. Types of Voidable Transactions
Preferential Transactions
Transactions that favor one creditor over others shortly before insolvency.
Example: Paying off a particular creditor while defaulting others.
Legal Provision (India): Section 43 of the Insolvency and Bankruptcy Code, 2016 (IBC).
Undervalued Transactions
Transactions in which the company receives significantly less value than the consideration provided.
Example: Selling property at a very low price to a related party.
Legal Provision (India): Section 45 of IBC, 2016.
Fraudulent Transactions
Transactions intended to defraud creditors or transfer assets to avoid repayment.
Legal Provision (India): Section 66 of IBC, 2016 (fraudulent trading).
2. Key Principles
Time Window: Transactions within a certain period before the insolvency commencement date can be challenged.
Example: Preferential transactions within 6 months to 2 years prior (depending on whether the creditor is related).
Intent: Intent to defraud or prefer certain creditors is a critical factor.
Reversal: Insolvency authorities (e.g., Resolution Professional or Liquidator) can apply to the National Company Law Tribunal (NCLT) to set aside the transaction.
Protection of Good Faith: Bona fide transactions at arm’s length may be protected from being voided.
3. Indian Case Laws on Voidable Transactions
Macquarie Bank Ltd. v. Shilpi Cable Technologies Ltd. (NCLT Delhi, 2019)
The NCLT held that preferential payments made to a related party within the relevant period before insolvency could be declared voidable.
K. Sashidhar v. Indian Overseas Bank & Ors., (2019) 10 SCC 1
Supreme Court emphasized that all transactions that reduce the pool of assets for equitable distribution can be challenged.
Clarified scope of “preferential transaction” under Section 43 of IBC.
Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta & Ors. (2019, NCLAT)
Reiterated that undervalued transactions can be set aside if value received is significantly less than consideration.
ICICI Bank Ltd. v. Official Liquidator of Monnet Ispat & Energy Ltd. (NCLAT, 2020)
Court declared certain asset transfers as voidable, as they were fraudulent attempts to defeat creditors.
B. K. Educational Services Pvt. Ltd. v. Parag Gupta & Associates (2018)
Highlighted that even transactions with related parties at face value can be scrutinized if they reduce creditor recovery.
ArcelorMittal India Pvt. Ltd. v. Satish Kumar Gupta (2018, NCLAT)
The Tribunal clarified that a transaction is voidable if it unfairly benefits one creditor at the expense of others and is made shortly before insolvency proceedings.
4. International Perspectives
UK Insolvency Act 1986, Sections 238-239:
Transactions at an undervalue and preferences within a specific period can be set aside by the liquidator.
US Bankruptcy Code, Section 547 (Preferences):
Provides for avoidance of preferential transfers to insiders or creditors within 90 days (or one year for insiders) before filing.
Principle: Protects creditors from depletion of the debtor’s estate just before insolvency.
5. Practical Implications
For Creditors:
Monitoring transactions before insolvency can help challenge unfair transfers.
For Debtors:
Avoid transactions that could be construed as preferential or undervalued during financial distress.
For Insolvency Professionals:
Must identify, investigate, and challenge voidable transactions to maximize recovery.
6. Summary Table
| Type of Voidable Transaction | Relevant Section (IBC) | Key Requirement | Example |
|---|---|---|---|
| Preferential Transaction | Sec 43 | Payment favors one creditor | Paying family-owned company over others |
| Undervalued Transaction | Sec 45 | Value received < consideration | Selling property at 10% of market value |
| Fraudulent Transaction | Sec 66 | Intent to defraud creditors | Shifting assets abroad secretly |
Voidable transactions are a critical tool in insolvency law to ensure fairness, transparency, and protection of creditors’ rights. Indian courts have consistently emphasized intent, timing, and fair value as key factors in setting aside such transactions.
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