In line with the United Nations Commission on International Trade Law - Legislative Guide on Insolvency Law, India enacted the Insolvency and Bankruptcy Code, 2016 (IBC) as a comprehensive and time-bound framework for resolving insolvency in India. IBC sought to balance creditor interests and improve credit discipline by replacing a fragmented and debtor-friendly regime with a unified insolvency process. In this article, we examine the effectiveness of the avoidance transaction mechanism under IBC, which has become one of the weakest aspects of the system, characterised by delays, conflicting judgements and regulatory inertia.
The numbers are stark. By September 2025, creditors had recovered about ₹3.99 lakh crore under the IBC, roughly 32% of admitted claims. Yet avoidance transactions pending before the national company law tribunal (NCLT) stood at ₹3.97 lakh crore—almost equal to total recoveries. Instead of strengthening creditor recoveries through avoidance transactions under IBC, the mechanism has delivered little real benefit. This mismatch underscores how the avoidance framework, despite its promise, has failed to deliver meaningful outcomes.
What Are Avoidance Transactions?
Insolvency law provides for priority of payment amongst the creditors. The promoters, fearing insolvency, might transfer valuable assets to friendly parties at throwaway prices, repay select creditors while ignoring others, or enter into extortionate credit arrangements. These moves drain value from the company and disadvantage the broader pool of creditors. The IBC empowers insolvency professionals (IPs) to identify such transactions and file applications before NCLT to reverse them by avoidance transaction examination.
Sections 43 to 51 of the IBC define preferential, undervalued and extortionate transactions. Sections 66 and 67 deal with fraudulent and wrongful trading. Together, these provisions form the backbone of the avoidance mechanism under IBC. The idea is simple: claw back value lost to unfair or fraudulent deals, and redistribute it among creditors as per the priority prescribed in the IBC.
The Role of Insolvency Professionals
IPs are the linchpins of this process of the avoidance mechanism under IBC. Appointed by NCLT, they act as resolution professionals during the corporate insolvency resolution process (CIRP) and as liquidators during the liquidation process. Their duties include avoiding transactions, examining and filing applications to reverse them. But their independence has steadily eroded, which directly affects the avoidance mechanism under IBC.
Originally, IPs were meant to function as independent officers under the supervision of NCLT. Over time, however, regulations made by the regulator, Insolvency & Bankruptcy Board of India (IBBI), subordinated IPs to the committee of creditors (CoC) during CIRP and the stakeholders’ consultation committee (SCC) during the liquidation process. Every expense must be approved by these committees, creating a conflict of interest because creditors may be reluctant to fund investigations that could expose their own lapses or complicity. Even the RBI framework on fraud mandates the examination of the accountability of bank officers. This structural flaw in the IBC has left IPs in a precarious position, unsure of payment for not only the cost of carrying out such duties of avoidance examination but also their own professional fees. Consequently, IPs are unable to act decisively more often than not. Pertinently, IBBI has not made any regulation for funding CIRP costs and often applications are filed by IPs against the CoC for funding such costs.
Funding constraints under IBC compound the problem. Many avoidance applications are either inadequately pursued or rely on substandard transaction audits. Promoters often refuse to cooperate, withholding documents and information. Although Section 19 of the IBC mandates cooperation, enforcement is weak because the IBBI fails to act even after the NCLT order under Section 19 of the IBC. As a result, IPs are left hamstrung, unable to fulfil their statutory duties effectively.
Judicial Complications
Supreme Court rulings have further muddied the waters. In Piramal Capital and Housing Finance Ltd vs 63 Moons Technologies Ltd., the Supreme Court clarified that recoveries from avoidance transactions must accrue to creditors, not third parties. While this reinforced creditor primacy, it also undermined IBBI regulations that allowed third parties to pursue avoidance proceedings after the CIRP or the liquidation process. This attempt by IBBI to show better performance of IBC by closing CIRP/ liquidation cases under IBC by assigning the avoidance transactions to third parties has caused more harm to the creditors and rendered the avoidance mechanism a mere sham because no prudent person will pursue such avoidance applications unless adequately remunerated.
In another ruling, Glukrich Capital Pvt Ltd vs State of West Bengal, the Supreme Court excluded third parties from liability under Section 66 of IBC, even when transactions were allegedly structured to siphon off value. The IBC has not independently defined 'fraud'. By virtue of Section 3(37), the definition under Section 447 of the Companies Act, 2013 (Companies Act) applies to the IBC too. Notably, this definition is broad and extends liability even to third parties who are complicit in fraudulent conduct.
The consequences of the Glukrich Capital judgement are profound. This has left a significant gap in enforcement, with many avoidance applications against third parties under Section 66 of IBC often being dismissed outright by NCLT, whereas it has concurrent jurisdiction under Section 66 of IBC and Section 447 of the Companies Act and in many cases, the provisions of Section 447 of the Companies Act are invoked. More importantly, NCLT has the power to exercise such jurisdiction, as clarified by the Supreme Court in the Piramal Capital judgement. The Insolvency and Bankruptcy Code (Amendment) Bill, 2025, does not address the problem that has arisen due to the Glukrich Capital judgement.
Clash with RBI Fraud Guidelines
The inconsistencies extend beyond IBC itself. Reserve Bank of India’s (RBI’s) fraud guidelines, updated in July 2024, require banks to classify and close fraud cases through independent committees. These committees, headed by independent directors, are supposed to ensure fairness and adherence to natural justice. The RBI framework requires the closure of fraud cases once judicial proceedings and internal accountability of bank officers are concluded.
In the ongoing case of ‘Nitin S Kasliwal vs IDBI Bank Ltd (Writ Petition (L) No. 38699 of 2025)’ before the Bombay High Court, bank actions under the RBI fraud framework have been stayed because NCLT had previously declined to treat certain transactions as fraudulent under IBC.
This raises the alarming possibility that rejected avoidance applications under IBC could serve as a shield for promoters, giving them a de facto clean chit, as IPs act under IBC in a representative capacity for creditors and are subject to the control or supervision of the CoC/SCC. If courts uphold this interpretation, the fallout could be severe. Banks would find themselves unable to act against promoters once NCLT has rejected an avoidance application under IBC. The common law principles of res judicata and estoppel, which prevent the same issue from being litigated twice, could lock creditors into unfavourable outcomes because of deficient actions/processes under the IBC.
Institutional Deficiencies
Institutional weaknesses compound the crisis. IBBI has been criticised for regulatory overreach against IPs while showing reluctance to act against promoters, even when an order of the NCLT under Section 19 of the IBC is not complied with. Section 70 of the IBC empowers the IBBI to prosecute promoters who fail to cooperate, yet this provision has rarely been invoked. No regulations or guidelines have been prescribed for making applications to IBBI under various penal provisions of the IBC. Instead, the regulator has focused on tightening control over IPs, often at the expense of their independence and autonomy. This imbalance has created a perverse incentive: promoters can stonewall investigations with little fear of penalty, while IPs are left to navigate bureaucratic hurdles and financial uncertainty.
The lack of enforcement is striking. Section 19 applications, which compel promoters to cooperate, often remain pending even after the statutory CIRP period of 270 days expires. Even when NCLT orders compliance, IBBI fails to act. This inertia emboldens promoters, who exploit delays to regain control of companies at lower valuations. Creditors, meanwhile, suffer value destruction as assets are undervalued or siphoned away.
The Human Element
Behind the legal jargon and institutional failures lies a human story of frustrations. IPs, once envisioned as independent watchdogs, now find themselves constrained by the CoC/ SCC and regulatory micromanagement. Banks, tasked with safeguarding public money, struggle to reconcile conflicting rulings and guidelines. Promoters, accused of siphoning funds, exploit loopholes and delays to regain control of companies at lower valuations. And creditors, employees and investors watch as recoveries stagnate and fraud goes unpunished.
The erosion of trust is palpable. What was meant to be a robust framework for insolvency resolution has, in many cases, become a theatre of procedural skirmishes. Avoidance applications drag on for years, forensic audits are conducted by transaction auditors not empanelled with the Indian Banks Association, and the NCLT benches are overwhelmed by the sheer volume of cases. Each rejection, each delay, chips away at public confidence in the system.
Conclusion & Way Forward
The avoidance transaction mechanism under the IBC, conceived as a powerful tool to protect creditor interests and deter misconduct, has largely failed in practice. Regulatory overreach by IBBI, erosion of IP independence, chronic underfunding, judicial limitations on third-party liability, and lack of criminal enforcement by IBBI have collectively rendered the avoidance mechanism ineffective.
The stakes are high as the amount involved in pending avoidance transactions nearly equals total recoveries, the credibility of IBC itself is at risk. If creditors cannot rely on the system to protect them from fraud, they may lose faith in the insolvency process altogether. This would not only undermine financial stability but also embolden promoters to engage in misconduct, knowing that the chances of accountability are slim.
The fraud framework under IBC must be harmonised with the RBI framework and the Prevention of Money Laundering Act, 2002 (PMLA), especially when an offence of fraud under Section 447 of the Companies Act is a scheduled offence under the PMLA.
More alarmingly, defective and rejected avoidance applications under IBC risk becoming a shield for fraudulent promoters, enabling them to claim a de facto clean chit from NCLT and frustrate independent bank action under RBI fraud norms. The strategic non-cooperation of promoters (enabled by IBBI’s reluctance to invoke penal provisions even after the order of NCLT) has further hollowed out the process.
This requires urgent reforms, including the following:
- Statutory timelines and strict enforcement for disclosure of information by promoters to IPs.
- Priority and time-bound disposal of Section 19 applications by NCLT as sometimes these applications remain pending even after the statutory CIRP period of 270 days expires.
- Active invocation of Section 70(1) of the IBC by IBBI in appropriate cases if the order of the NCLT under Section 19 of the IBC is not complied with.
- Restoration of IP's independence through assured funding mechanisms for the performance of their duties.
- Harmonisation of the IBC fraud framework with RBI regulations and the PMLA to save independent actions of the banks under the RBI circular.
Without such measures, the avoidance mechanism under IBC risks doing more harm than good, leaving creditors exposed and fraudulent promoters further emboldened. Alternatively, IPs can be relieved of the duty of examining avoidance transactions under IBC to prevent situations like the ‘Nitin Kasliwal’ case that may have severe consequences for the entire banking industry.
(Jitender Kumar Jain is a Mumbai-based advocate with over two decades of practice in corporate and commercial laws, including insolvency law.)
The IPs and Liquidators are teeth less tigers and IBBI is mere a spectator.
The ground reality is very harsh and saddening if an IRP or IP do not act as per wishes of the COC he is immediately removed and payment of his professional fees is always at risk and in most of the cases remain unpaid even for the cost incurred by the IP towards CIRP.
Unless IBBI and other stakeholders ensure the fairness of this process, independence of IRP, RPs and timely payment of fair remuneration for the services of the RP or any Professional involved in the process, this problem will only grow with time.
Moreover IBBI, RBI, SEBI and law ministry should come together to resolve any legal issues which may cause unwarranted situations while dealing with issues at different levels.