When a company enters insolvency, promoters often assume that the biggest consequence is losing control of the business. Under the Insolvency and Bankruptcy Code, 2016 (IBC), that is only part of the story.
Once the resolution process begins, the company’s past transactions can come under a fresh, much more detailed review. Payments to group entities, asset transfers, unusual security arrangements, loans on favourable terms, or transactions entered into shortly before insolvency may be examined to see whether creditors were put at a disadvantage.
This is where avoidance proceedings matter. They can bring former promoters, directors, related parties and other individuals back into the picture even after management has moved to the resolution professional.
What are avoidance transactions under the IBC?
The IBC provides specific mechanisms to question transactions that reduce the pool of assets available to creditors or unfairly benefit selected parties. Broadly, these cover:
- Preferential transactions under Sections 43 and 44
- Undervalued transactions under Sections 45 to 48
- Transactions defrauding creditors under Section 49
- Extortionate credit transactions under Sections 50 and 51
- Fraudulent or wrongful trading under Section 66
These categories have different tests and remedies. The basic idea is simple: insolvency should not become an opportunity to move value away from creditors.
For example, Section 43 can apply where a corporate debtor transfers property or an interest in property for the benefit of a creditor, surety or guarantor, and the transaction places that person in a better position than they would have occupied under the normal distribution waterfall. The period is generally two years for related parties and one year for others.
The scope is not limited to an outright sale. In Anuj Jain, Interim Resolution Professional for Jaypee Infratech Ltd. v. Axis Bank Ltd., the Supreme Court upheld findings that certain mortgages of the corporate debtor’s land in favour of lenders to its holding company were preferential transactions.
When does a transaction become undervalued?
Section 45 targets transactions where the company gives a gift or transfers assets for consideration that is significantly lower than the value provided by the corporate debtor, outside the ordinary course of business.
The look-back period is important. Section 46 generally covers one year before the insolvency commencement date for transactions with any person and two years for related parties. The Adjudicating Authority can also require independent expert evidence on valuation.
A transaction that appeared commercially acceptable when completed may therefore look very different once the company’s financial position, asset values and relationship between the parties are examined together.
Fraud adds another layer
Not every undervalued transaction is automatically fraudulent. Section 49 goes further where an undervalued transaction was deliberately entered into to keep assets beyond the reach of creditors or adversely affect their interests. The Code allows the Adjudicating Authority to restore the position that existed before the transaction.
A poor business decision is not, by itself, proof of fraud. But a transfer to an associated entity at a questionable price, shortly before insolvency, can create a very different evidentiary picture.
Why can promoters face personal liability?
Section 66 focuses on the conduct of the people involved and can result in a personal contribution order. Where the business of the corporate debtor has been carried on with intent to defraud creditors or for a fraudulent purpose, persons who were knowingly parties to that conduct may be directed to contribute to the assets of the corporate debtor.
That distinction is important. Section 66 is not simply another mechanism for cancelling a transaction. It can create personal exposure for individuals whose role in the company’s conduct is established.
The 2026 IBC amendments reinforce this point by recognising “fraudulent or wrongful trading” as a defined concept and allowing a liquidator, in addition to a resolution professional, to make a Section 66 application.
Losing control of the company does not erase the promoter’s connection with earlier conduct. The relevant question is who was knowingly involved when the conduct occurred.
What evidence is likely to matter?
Transaction auditors and insolvency professionals may examine bank statements, ledgers, board minutes, related-party disclosures, valuation reports, loan agreements, security documents, invoices, emails and group-company transfers.
Patterns can matter as much as individual transactions. Repeated payments to a promoter-linked entity, followed by asset transfers and new security shortly before insolvency, may be examined together rather than as unrelated events.
That is why documentation becomes critical. A transaction with a connected party is not automatically prohibited. But the parties should be able to explain the commercial purpose, pricing, consideration paid, approvals and why the transaction was in the company’s ordinary course of business.
The promoter’s position after losing control
Once insolvency starts, the suspended management remains relevant to the process. The IBC requires persons connected with the corporate debtor, including promoters and former personnel, to provide assistance and cooperation to the insolvency professional. The 2026 amendments broadened Section 19 to expressly cover persons who are or have been personnel, promoters, or otherwise associated with management.
Historical information may sit with the former management. Refusing cooperation does not make the underlying transactions disappear.
A resolution plan does not necessarily wipe out avoidance claims
Another common misunderstanding is that once a resolution plan is approved, all questions about past transactions automatically end. That is not necessarily so.
The Supreme Court has recently considered avoidance proceedings in the context of approved resolution plans and confirmed that such claims can remain relevant independently of the amounts distributed under the plan.
The continuing importance of these claims is also visible in current insolvency practice. Even after liquidation begins, avoidance applications relating to Sections 43, 45, 50 and 66 may remain pending and form part of the value attached to the proceedings.
What promoters should take away
For promoters, the practical lesson is straightforward: insolvency does not create a clean break with the past.
Related-party transactions, asset transfers, guarantees, last-minute repayments and unusual financing terms should be reviewed well before financial distress becomes a formal insolvency process.
The key questions are straightforward: Was the transaction commercially justified? Was fair value exchanged? Was it properly approved and recorded? Was the company under serious financial stress? Did someone connected to the promoter receive a benefit? Could creditors be worse off?
If the answers are unclear, the risk does not necessarily end when the promoter leaves the boardroom. Under the IBC, past conduct can continue to attract personal scrutiny because the law is designed not only to resolve an insolvent company, but also to identify and recover value lost through problematic transactions.
Disclaimer: This article is for informational purposes only and does not constitute legal advice. The content may not reflect the most current legal developments and is not guaranteed to be accurate, complete, or up-to-date. Readers should consult a qualified legal professional before taking any action based on the information provided. The authors and publishers disclaim any liability for any loss or damage incurred as a result of reliance on this article. This article does not create an attorney-client relationship.