The government is planning to have a more foolproof mechanism to curb instances of company promoters diverting funds fraudulently before filing for personal insolvency.
According to a new provision — Section 164A — introduced in the Insolvency and Bankruptcy Code (Amendments) Bill, 2025, resolution professionals (RPs) can approach the National Company Law Tribunal (NCLT) to bring all kinds of “avoidance transactions” carried out by the promoters in the past into the pool. There will be no limit on the look-back period whatsoever. The Bill, tabled in the Lok Sabha towards the end of the monsoon session, was referred to a Select Committee.
If found under-valued, preferential, involving extortionate credit or plain fraudulent, the RP can urge the tribunal to undo such deals, in order to protect the interests of the creditors, and maximise the value of the assets.
Scrutiny of transactions only up to 2 years
Currently, the IBC allows scrutiny of transactions only up to 2 years prior to the start of the personal bankruptcy process. This has been found to be inadequate as it is a rampant practice among promoters in India to transfer funds to their family or trust before initiating personal insolvency.
“The proposed Section 164A empowers the adjudicating authority to claw back undervalued transactions in cases of personal or partnership insolvency. Mirroring corporate insolvency provisions, it safeguards creditor interests by preventing debtors from shielding assets through manipulative transfers, thereby preserving estate value and ensuring fairer recoveries,” said Hardeep Sachdeva, senior partner at AZB & Partners.
Thanks to the new section, all undervalued or fraudulent transactions will come under the purview of the RP, said another IBC lawyer. The purpose is to discourage personal guarantors from hiving off assets before filing for bankruptcy under the IBC.
Pre-insolvency activities
Avoidance transactions are typically pre-insolvency activities by corporate debtor that could undermine creditors’ interests. These include preferential, undervalued, extortionate credit, or fraudulent transactions. The NCLT, upon the request of RP, could reverse them to maximise the asset value for stakeholders.
The proposed Section 164A plugs a key loophole by clearly stating that “where the debtor has entered into an undervalued transaction… and the adjudicating authority is satisfied that such transaction was deliberately entered into by such debtor for keeping its assets beyond the reach of any person who is entitled to make a claim against the debtor, the adjudicating authority shall make an order restoring the position as it existed before such transaction, as if the transaction had not been entered into.”
Some experts said that the efficacy of this new norm will be tested only over time, as several subjective aspects will be clarified through evolving jurisprudence.
The Bill also includes provisions related to group insolvency, cross-border cases, and a creditor-led process to expedite resolution of bankrupt companies.