Avoidance Transactions explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Until 2026 the Code described five categories of avoidable transaction across five sections without ever defining the class. The Amendment inserts a single definition in Section 5 and closes the gap that allowed dissolution to end proceedings mid-way.
The umbrella definition
The 2026 Amendment inserts a statutory definition of "Avoidance Transaction" in Section 5 of the Code for the first time. It is an umbrella term covering transactions avoidable under:
| Section | Category |
|---|---|
| 43 | Preferential transactions |
| 45 | Undervalued transactions |
| 49 | Undervalued transactions defrauding creditors |
| 50 | Extortionate credit transactions |
| 66 | Fraudulent and wrongful trading |
Previously these were described in separate sections without a consolidated definition, and practitioners had to identify each type independently. The new definition provides a single reference point and facilitates clearer application in resolution plans, liquidation reports, CP-4 CIRP forms and avoidance applications.
What avoidance is for
The objective, as the UNCITRAL framing has it, is to maximise the value of the corporate debtor's assets and ensure that all creditors receive fair treatment. That is done by cancelling or rendering ineffective certain transactions made before the initiation of insolvency proceedings, thereby recovering assets or their value for the collective benefit of creditors.
- Inclusions are transactions challengeable under sections 43, 45, 50 and 66.
- Exclusions are transactions that do not meet the criteria, or those conducted in good faith without intent to defraud creditors.
- Disgorgement is the recovery of assets or their value improperly transferred before the proceedings began; the proceeds are distributed among creditors, enhancing overall recovery.
This is the point that most often surprises those approaching avoidance transactions from ordinary contract or tort reasoning. The UNCITRAL Guide specifies that no proof of prejudice is required — the focus is on restoring assets for creditor benefit.
The resolution professional does not have to show that a particular creditor was worse off by a quantified amount. The question is whether the transaction falls within the statutory description and, for a preference, whether it put the counterparty in a better position than the section 53 waterfall would have. The remedy is restitutionary, not compensatory.
The dissolution gap, closed
The Code prescribes no specific timelines for avoidance proceedings, which has led to concerns about delay, and the Insolvency Law Committee has recommended integrating avoidance transactions into resolution plans to streamline the process and protect creditor interests.
The 2026 Amendment addresses the sharpest version of that problem:
- Avoidance proceedings, fraudulent and wrongful trading proceedings, and section 47 proceedings may continue after dissolution of the corporate debtor under new sections 54(1A) and (1B).
- The committee of creditors must determine the manner of pursuing these proceedings post-dissolution and the distribution of any proceeds, under Regulation 44A as amended.
- Any proceeds recovered post-dissolution are distributed by the liquidator or a person appointed by the CoC for that purpose.
This closes the major gap where corporate dissolution was being used to frustrate avoidance proceedings mid-way. An application that outlived the company it was brought for previously died with it, which handed a defendant an obvious incentive to run the clock. Now the proceedings survive and the proceeds benefit the estate's creditors.
Failing to pursue avoidance is now an enforceable default
The 2026 Amendment introduces disciplinary consequences for insolvency professionals who deliberately fail to report or pursue avoidance transactions despite having sufficient information. The IBBI Disciplinary Committee can initiate proceedings and impose penalties under the revised section 235A framework.
The significance is stated plainly in the Background Material: this converts what was previously only a professional obligation into an enforceable regulatory requirement with specific penalty consequences. A professional who identifies avoidable transactions and quietly does nothing about them is no longer merely failing a duty to stakeholders.
The process in outline
- Identification of potentially avoidable transactions by the resolution professional.
- Filing an application with the Adjudicating Authority where grounds for avoidance are established.
- Adjudication by the Adjudicating Authority on whether to allow avoidance, on the evidence presented.
Common mistakes
- Treating avoidance transactions as five unrelated enquiries rather than one class with a common purpose.
- Pleading quantified prejudice to a named creditor as though it were an ingredient.
- Assuming dissolution ends a pending avoidance application.
- Leaving identified transactions unpursued on the footing that no plan value depends on them.