Fraudulent 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.
Preferential and undervalued transactions can be reopened for one year, or two where the counterparty is a related party. Fraudulent transactions are different — the Code fixes no look-back at all, and records from more than a decade earlier have been examined.
Vital SA Abhishek Nagori (Liquidator) v. Asian Natural Resources (India) Ltd.
The Code does not restrict a liquidator's power to investigate fraudulent transactions under section 66 to specific look-back periods. The NCLAT and the Supreme Court upheld a decision allowing examination of records dating back to 2008, ruling that fraud has no expiry date for investigation.
The principle stated is that there is no limitation of look-back period under sections 66 and 49 in respect of fraudulent transactions, because once a fraud is always a fraud — resting on the maxim that fraud vitiates every transaction into which it enters as well as contracts.
| Provision | Look-back |
|---|---|
| Preferential / undervalued — related party | 2 years preceding the insolvency commencement date |
| Preferential / undervalued — any other person | 1 year preceding the insolvency commencement date |
| Fraudulent transactions — sections 66 and 49 | No limitation |
The distinction is principled. A preference or an undervalue may be an ordinary commercial act that happens to fall inside a suspect period — the debtor paid one creditor, or sold an asset cheaply, without any wrongdoing. Fixing a window protects settled transactions from being reopened indefinitely.
A fraudulent transaction has no innocent version. There is nothing to protect, so there is no window.
What that means for a transaction audit
The practical consequence for a resolution professional or liquidator is that the audit period is set by the evidence, not by a date. Where the records disclose diversion, the professional is not confined to the one-year or two-year window that governs the avoidance applications under sections 43 to 51.
The corresponding discipline is that the case must actually be one of fraud. Characterising an ordinary old transaction as fraudulent in order to escape the look-back is exactly what the tribunals test.
Rana Sarkar v. Bimal Agarwal — fraudulent trading proved
The NCLAT upheld a ruling against the suspended directors of Dagcon (India) Pvt. Ltd. for fraudulent trading under section 66. Following a transaction audit initiated by the resolution professional, the court found that the directors had diverted company funds through unjustified cash withdrawals and payments to related parties, including family members, to defraud creditors.
The appeal was dismissed and the order requiring the directors to refund approximately Rs. 10.54 crore plus interest to the corporate debtor's account was affirmed.
Two features of that case are typical of a successful section 66 application: the finding rested on a transaction audit rather than on assertion, and the money had gone to related parties, where the commercial justification for the payment is hardest to establish.
Classification is contested — IDBI Bank v. Anuj Jain
The proceedings concerning Jaypee Infratech Limited, where Anuj Jain was the interim resolution professional, turned on whether transactions mortgaging JIL's properties to lenders of its holding company, Jaiprakash Associates Limited, should be classified as preferential, undervalued or fraudulent under the Code.
The classification is not a formality: it determines which look-back applies, what must be proved and what relief follows. A transaction pleaded as preferential fails if it falls outside the one or two year window; the same facts pleaded and proved as fraudulent are not time-limited at all.
A separate point from the same decision
The NCLT also clarified, following Tata Steel Ltd. v. Liberty House Group Pte. Limited, that if any financial creditor remains absent from voting, their voting percentage should not be counted for the purpose of counting the voting shares. Abstention through absence therefore reduces the denominator rather than operating as a vote against.
Common mistakes
- Applying the one-year or two-year look-back to a section 66 application.
- Pleading fraud without a transaction audit to support it.
- Treating related party payments as ordinary business without examining the justification.
- Counting absent financial creditors in the voting share denominator.