Section 164 of The Insolvency and Bankruptcy Code, 2016.
- (1)The bankruptcy trustee may apply to the Adjudicating Authority for an order under this section in respect of an undervalued transaction between a bankrupt and any person.
- (2)The undervalued transaction referred to in sub-section (1) should have—
- (a)been entered into during the period of two years ending on the filing of the application for bankruptcy; and
- (b)caused bankruptcy process to be triggered.
- (3)A transaction between a bankrupt and his associate entered into during the period of two years preceding the date of making of the application for bankruptcy shall be deemed to be an undervalued transaction under this section.
- (4)On the application of the bankruptcy trustee under sub-section (1), the Adjudicating Authority may—
- (a)pass an order declaring an undervalued transaction void;
- (b)pass an order requiring any property transferred as a part of an undervalued transaction to be vested with the bankruptcy trustee as a part of the estate of the bankrupt; and
- (c)pass any other order it thinks fit for restoring the position to what it would have been if the bankrupt had not entered into the undervalued transaction.
- (5)The order under clause (a) of sub-section (4) shall not be passed if it is proved by the bankrupt that the transaction was undertaken in the ordinary course of business of the bankrupt: Provided that the provisions of this sub-section shall not be applicable to undervalued transaction entered into between a bankrupt and his associate under sub-section (3) of this section.
- (6)For the purposes of this section, a bankrupt enters into an undervalued transaction with any person if—
- (a)he makes a gift to that person;
- (b)no consideration has been received by that person from the bankrupt;
- (c)it is in consideration of marriage; or
- (d)it is for a consideration, the value of which in money or money's worth is significantly less than the value in money or money's worth of the consideration provided by the bankrupt.
Summary
- It empowers the bankruptcy trustee to apply to the Adjudicating Authority to challenge undervalued transactions.
- Undervalued transactions include gifts, transactions for no consideration, transactions in consideration of marriage, or those where the value received is significantly less than what the bankrupt provided.
- To be challenged, the transaction must have been entered into during the two years ending with the filing of the bankruptcy application and must have caused the bankruptcy process to be triggered.
- Transactions with associates within those same two years are automatically deemed undervalued and do not need to cause the bankruptcy trigger.
- The Adjudicating Authority can declare the transaction void, vest the transferred property back with the trustee, or restore the original position.
- An undervalued transaction will not be declared void if the bankrupt proves it was done in the ordinary course of business, though this defense does not apply to transactions with associates.
Practical examples
FAQ
1. What is the time limit for challenging undervalued transactions under Section 164 of the Insolvency and Bankruptcy Code, 2016?
Under Section 164 of the Insolvency and Bankruptcy Code, 2016, the transaction must have occurred during the period of two years ending on the date of filing the bankruptcy application.
2. Can a transaction in consideration of marriage be challenged under Section 164 of the Indian Insolvency and Bankruptcy Code?
Yes, under Section 164 of the Insolvency and Bankruptcy Code, 2016, a transaction entered into in consideration of marriage is explicitly defined as an undervalued transaction and can be challenged by the bankruptcy trustee.
3. Is there any ordinary course of business defense under Section 164 of the Insolvency and Bankruptcy Code, 2016?
Yes, under Section 164 of the Insolvency and Bankruptcy Code, 2016, a transaction will not be declared void if the bankrupt proves it was done in the ordinary course of business, but this defense is not available for transactions made with associates.
Test yourself
Q1.Under Section 164 of the Insolvency and Bankruptcy Code, 2016, what is the default look-back period for challenging an undervalued transaction with an ordinary person?
Q2.Under Section 164 of the Insolvency and Bankruptcy Code, 2016, a transaction with which of the following parties is automatically deemed to be an undervalued transaction if entered into within the look-back period?
Q3.Which of the following is NOT defined as an undervalued transaction under Section 164 of the Insolvency and Bankruptcy Code, 2016?
Q4.Under Section 164 of the Insolvency and Bankruptcy Code, 2016, what action can the Adjudicating Authority take if it finds a transaction was undervalued?