PUFE Transactions Under IBC

Metalegal Advocates


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The Insolvency and Bankruptcy Code of 2016 marks a pivotal shift in India's approach to insolvency, prioritizing creditor rights and dispelling the leniency previously afforded to debtors.
India Insolvency/Bankruptcy/Re-Structuring
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The Insolvency and Bankruptcy Code of 2016 ('IBC') marks a pivotal shift in India's approach to insolvency, prioritizing creditor rights and dispelling the leniency previously afforded to debtors. This analysis delves into transactions termed Preferential, Undervalued, Fraudulent, and Extortionate ('PUFE') that occur during the critical 'look-back period' before insolvency. It examines the relevant sections of the IBC that empower resolution professionals to identify and reverse these transactions to safeguard creditor interests. Through a review of significant case laws and regulatory requirements, this paper discusses the challenges and necessity of stringent enforcement, emphasizing the importance of accountability to maintain the integrity of the insolvency process.


The IBC hailed as landmark legislation, marks a significant departure from previous insolvency regimes by abolishing the concept of a defaulter's paradise and restoring the creditor's position in the economy. However, challenges have emerged from vulnerable transactions entered into by corporate debtors ('CDs') during the pre-insolvency twilight period also known as the 'look-back period.' These transactions are defined as provisions of the insolvency law that permit transactions for the transfer of assets or the undertaking of obligations prior to insolvency proceedings to be cancelled or otherwise rendered ineffective and any assets transferred, or their value, to be recovered in the collective interest of creditors, are encapsulated under four types:


PUFE transactions, falling within the ambit of ss. 43 to 51, and s. 66 of the IBC. The resolution professional ('RP') or liquidator must identify such transactions and file an application before the National Company Law Tribunal ('NCLT') to ensure creditors receive their claims. The IBC mandates the RP to form an opinion on such transactions within 75 days, decide by 115 days, and file the application within 135 days.

Related Party Transactions

The IBC lays out a detailed list of those who qualify as 'related parties.' These could be individuals like directors or key managerial personnel of the CD, or other entities such as associate companies, subsidiaries, or corporate holdings. In Phoenix Arc v. Spade Financial Services Limited 1, the Hon'ble Supreme Court ('SC') extensively discussed the contours of a related party under the IBC and held that the definition of the expression 'related party' can be found in s. 5(24) of the IBC.

Preferential Transactions

Preferential transactions, as defined under s. 43 of the IBC, carry significant implications for both CD and creditors involved in distressed situations. These transactions occur when a CD extends favouritism to specific creditors, sureties, or guarantors by transferring assets or benefits, thus elevating their position above others. Such transactions must occur within a defined 'relevant period' preceding the commencement of insolvency proceedings. The relevant period has been defined under section 43(4) of the IBC in two terms-

  1. Preference is given to a related party (other than by reason only of being an employee) during the period of two yearspreceding the insolvency commencement date; or
  2. a preference is given to a person other than a related party during the period of one yearpreceding the insolvency commencement date.

Notably, s. 44 empowers the NCLT to overturn such transactions and mandate the recovery of benefits accrued from them.

Key Provisions: The criteria for assessing preference include determining whether the transfer places the recipient in a more advantageous position compared to what they would have received under the standard asset distribution process outlined in s. 53 of the IBC. Exclusions apply to transfers made in the ordinary course of business or those creating security interests in property acquired by the CD.

Case Laws: Several case precedents offer insights into the application and interpretation of preferential transaction provisions under the IBC:

  • Venus Recruiters (P) Ltd. v. Union of India 2: An application to avoid preferential transactions after the conclusion of the corporate insolvency resolution process ('CIRP') may not be adjudicated as the purpose is primarily for the benefit of creditors.
  • S.V. Ramkumar v. Orchid Pharma Ltd. 3: Payments made under the corporate debt restructuring mechanism ('CDR') were considered ordinary course transactions.
  • Chitra Sharma v. Union of India 4: The mortgage of land in favour of lenders was considered preferential treatment, as it put certain creditors in a more beneficial position.
  • Mrs. Dipti Mehta v. Shivani Amit Dahanukar 5: Transactions made in the ordinary course of business and outside the look-back period may not be considered preferential.
  • Ram Ratan Kanoongo v. Sunil Kathuria 6: Directors were ordered to return sums received from the CD, highlighting the remedial actions available for preferential transactions.

Undervalued Transactions

Undervalued transactions, as defined under s. 45 of the IBC, involve asset transfers at values significantly lower than their actual worth.

Key Provisions: A transaction is considered undervalued under s. 45(2) of the IBC if it involves a CD gifting or transferring assets for a consideration significantly less than the value of the consideration that the CD would have provided (i.e., the cost of acquisition of such assets), and provided that such transactions are not in the ordinary course of business. The relevant period for challenging such transactions as mentioned above varies based on whether the party involved is related or unrelated to the CD.

Case Laws: Several case precedents shed light on the implications of undervalued transactions in insolvency proceedings:

  • Cethar Ltd., In re 7: Delayed applications under s. 45(1) of the IBC, may risk dismissal due to indolence and negligence, highlighting the importance of diligence in legal pursuit.
  • Adriatic Sea Foods (P.) Ltd. v. Suresh Kumar Jain 8: Transactions involving meagre payments for valuable assets may be deemed preferential and undervalued, warranting cancellation to uphold fair distribution principles.

Fraudulent Transactions

Fraudulent transactions within insolvency proceedings, as provided for under s. 66(1) of the IBC, involves actions conducted with the intent to defraud creditors or for any fraudulent purpose. This provision casts a wide net, covering various deceptive practices aimed at undermining stakeholder interests without any specific look-back period. However, s. 66(2) of the IBC provides reasonable grounds for defense, emphasizing the importance of due diligence and rationality in assessing transactions.

Key Provisions: S. 66 of the IBC provides for fraudulent and wrongful trading under which if an application is filed by the RP during the CIRP or liquidation process to act against persons who knowingly engaged in business with the intent to defraud creditors or for any fraudulent purpose. It allows the NCLT to impose such liabilities, including making them personally liable without any limitation of liability, requiring them to contribute to the CD's assets, or restraining them from managing the CD's affairs.

It is notable that in case undervalued transactions are entered into with the intent to defraud creditors, s. 49 of the IBC comes into play. S. 49 of the IBC pertains to transactions defrauding creditors and applies once the CD has entered into a preferential and/or undervalued transaction 'deliberately' on the pretext of (a) keeping the assets of CD beyond the reach of any person entitled to make a claim against the CD or (b) to adversely affect the interests of such person apropos the claim. Herein, the unique aspect is that there is no look-back period as fraud acts as a nullity. Also, s. 69 of the IBC imposes stringent penalties, including imprisonment and fines, on officers found guilty of fraudulent conduct, underscoring the gravity of such offenses.

Case Laws: Several case precedents illuminate the implications of fraudulent transactions in insolvency proceedings:

  • Shiv Kant v. Union of India 9: In this case, many properties of a company were transferred to subsidiaries. To protect the interest of workers, a stay order was granted restraining subsidiaries from transferring or creating third-party rights in such properties.
  • Rakesh Kumar Jain v. Jagdish Singh Nain 10: It was held that s. 14 is not a bar to pass appropriate order in pending proceedings against RP or suspended directors and related parties before NCLT during the CIRP or liquidation process. Thus, during the currency of moratorium under s. 14, the order passed by NCLT under s. 66 against RP who indulged in fraudulent trade or business to defeat the rights of creditors of CD was in accordance with law.
  • Jayesh Shanghrajka v. Divine Investments 11: This case clarified that the transfer of assets among group companies, without fraudulent intent, does not constitute fraudulent trading, offering insight into the nuances of related-party transactions.
  • Edelweiss Asset Reconstruction Company Ltd. v. Net 4 India Ltd 12: Here, undervalued, and fraudulent transactions aimed at keeping assets beyond the reach of creditors were declared null and void.
  • Axis Bank Ltd. v. Anuj Jain 13: In this case, it was held that mortgages were made by CD (JIL) in favour of banks and financial institutions in respect of loans given by appellant banks and financial institutions to holding companies (JAL). were executed in the ordinary course of its business as a guarantor. These mortgages were not made to defraud creditors of CDs or for any fraudulent purpose. Therefore, mortgage deeds could not be said to be made by way of preferential transactions or undervalued transactions.

Extortionate Transactions

Extortionate transactions, as outlined in s. 50 of the IBC, are characterized by scenarios where a CD receives financial or operational debt under terms that demand exorbitant payments. The relevant period for scrutinizing extortionate transactions is within two years preceding the insolvency commencement date. This timeframe facilitates a retrospective examination of transactions that may have contributed to the financial distress of the CD by way of excessive payments of interest or similar financial costs.

Case Laws:

  • In the landmark case of M/s Embassy Property Developments v. State of Karnataka & Ors. 14, the Supreme Court affirmed the jurisdiction of the NCLT and National Company Law Appellate Tribunal ('NCLAT') to inquire into fraudulent transactions under s. 66 of the IBC. While this case specifically addresses fraudulent transactions, its principles can be extrapolated to extortionate transactions, underscoring the broader scrutiny over financial improprieties within insolvency proceedings.
  • In Shinhan Bank v. Sungil India (P.) Ltd 15., the NCLT ruled that charging unreasonably high rates of interest constitutes an extortionate credit transaction. This ruling underscores the imperative of identifying and addressing predatory lending practices, thereby highlighting the legal recourse available under s. 50 to rectify imbalances created by extortionate transactions.


The primary goal of transaction avoidance under the IBC is to restore the assets to the CD, making them available to creditors who have agreed to receive less than the full amount owed. Timely recovery is crucial for providing creditors with better returns and minimized losses. However, there is a substantial backlog of claims, totalling approximately Rs. 2.8 lakh crores 16 across various categories including PUFE transactions and combinations thereof, pending at NCLTs nationwide. Despite judgments on claims worth approximately Rs.42,000 crores 17, of which only claims worth around Rs. 5,200 crores 18 have been successfully recovered. This backlog creates delays in the CIRP and increases litigation burdens.

The Insolvency and Bankruptcy Board of India ('IBBI') can address these issues by establishing clear frameworks that define the roles of RPs and Liquidators in these transactions, and by standardizing procedures for reviewing applications before they are filed with the NCLT. Although the IBBI issued guidance on these matters on 08.05.2020 19 and 16.01.2023 20, these were not mandatory. The IBBI and Insolvency Professional Agencies ('IPAs') should also create a database to track the performance of RPs and Liquidators, especially regarding the recovery of lost value through PUFE transactions. This measure would reduce frivolous applications.

Additionally, focusing on the success rate of PUFE transaction applications is essential to prevent the process from being used to unjustly harass erstwhile management. Such transparency and accountability will promote effective actions and prevent abuse, thereby upholding the fairness and integrity of the insolvency resolution process.


1 Phoenix Arc v. Spade Financial Services Limited & Ors. (2021) 3 SCC 475: (2021) 2 SCC (Civ) 1: 2021 SCC Online SC 51

2 Venus Recruiters (P) Ltd. v. Union of India (2020) 2020 SCC Online Del 1479

3 S.V. Ramkumar v. Orchid Pharma Limited, 2019 SCC OnLine NCLT 23912

4 Chitra Sharma v. Union of India, (2018) 18 SCC 623

5 Dipti Mehta v. Shivani Amit Dahanukar, 2019 SCC OnLine NCLT 5754

6 Ram Ratan Kanoongo v. Sunil Kathuria (2019) 105 taxmann.com 328 (NCLT-Mum.)

7 Cethar Ltd. In re 2021 127 taxmann.com 331 (NCLT- Chennai)

8 Adriatic Sea Foods (P.) Ltd. v. Suresh Kumar Jain 2022 SCC OnLine NCLAT 2288

9 Shiv Kant v. Union of India, 2018 SCC OnLine Del 12301

10 Rakesh Kumar Jain v. Jagdish Singh Nain, 2022 SCC OnLine NCLAT 4843

11 Jayesh Shanghrajka v. Divine Investments 2021 127 taxmann.com 494 (NCLT- Mum.)

12 Edelweiss Asset Reconstruction Company Ltd. v. Net 4 India Limited, 2021 SCC OnLine NCLT 435

13 Axis Bank Ltd. v. Anuj Jain, 2019 SCC OnLine NCLAT 242

14 Embassy Property Developments (P) Ltd. v. State of Karnataka, (2020) 13 SCC 308

15 Shinhan Bank v. Sungil India (P) Ltd., 2019 SCC OnLine NCLT 27094

16 IBBI Quarterly Newsletter, January-March 2023, Vol. 26

17 ibid

18 ibid

19 https://ibbi.gov.in/uploads/whatsnew/3d9849d4c72be198d901ba78006005cf.pdf.

20 https://ibbi.gov.in//uploads/legalframwork/b9b7d1e976d46ff8a982b6178303a1ff.pdf

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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