Section 166 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.
Section 166 limits what an order under section 164 (undervalued transactions) or section 165 (preference transactions) can do to people who later dealt with the property or received a benefit. A person who acquired an interest or received a benefit in good faith, for value, without notice and who was not an associate of the bankrupt is shielded from the order. Sums that must be paid to the trustee go into the estate.
The article follows the IBBI consolidated text of the Code amended up to 12 August 2021 (the "consolidated text").
An order under section 164 or 165 shall not give a right against a person interested in the property acquired in the transaction, and shall not require him to pay the trustee for the benefit received, only if the interest was acquired or the benefit received in good faith, for value, without notice of the undervalue or preference, without notice of the bankruptcy application or order, and not as an associate. Any sum paid to the trustee under the order is included in the estate.
The structure of the section
Section 166 is short but its parts are tied together by "subject to" and "shall apply only if", so it helps to read it in the order (1), (2), (3) and then back to (1).
Sub-section (1): what an order cannot do
"Subject to the provision of sub-section (2), an order passed by the Adjudicating Authority under section 164 or section 165 shall not," do two things:
| Clause | An order shall not |
|---|---|
| (a) | Give rise to a right against a person interested in the property which was acquired in an undervalued transaction or a transaction giving preference, whether or not he is the person with whom the bankrupt entered into such transaction |
| (b) | Require any person to pay a sum to the bankruptcy trustee in respect of the benefit received from the undervalued transaction or a transaction giving preference, whether or not he is the person with whom the bankrupt entered into such transaction |
The phrase "whether or not he is the person with whom the bankrupt entered into such transaction" matters. The shield is not limited to remote buyers. By its words it can cover the other party to the transaction as well, as long as sub-section (2) is satisfied. If you are a buyer or lender who holds property that came from a bankrupt, a financial and legal due diligence review of how and when you acquired it is the sensible first step.
Sub-section (2): the five conditions
"The provision of sub-section (1) shall apply only if the interest was acquired or the benefit was received –" and then five conditions, each of which must be present:
| Clause | Condition |
|---|---|
| (a) | In good faith |
| (b) | For value |
| (c) | Without notice that the bankrupt entered into the transaction at an under-value or for giving preference |
| (d) | Without notice that the bankrupt has filed an application for bankruptcy or a bankruptcy order has been passed |
| (e) | By any person who at the time of acquiring the interest or receiving the benefit was not an associate of the bankrupt |
The conditions are joined by "and": the list does not read as alternatives. The word "associate" takes its meaning from section 79(2). The text does not say who bears the burden of proving the conditions, nor how notice is proved; it is silent on both points.
Printing note. Clause (c) is printed "under-value" with a hyphen across a line break. It is quoted as printed.
Sub-section (3): sums paid to the trustee
"Any sum required to be paid to the bankruptcy trustee under sub-section (1) shall be included in the estate of the bankrupt." The reference is to sub-section (1), although sub-section (1) lists what an order shall not require. The reference is quoted as printed. Section 155(1)(c) separately brings into the estate all property which, by virtue of any provision of Chapter V, is comprised in it.
How the section works with sections 164 and 165
- Section 164 lets the trustee seek orders against undervalued transactions within two years of the application for bankruptcy; see Section 164.
- Section 165 does the same for preferences, with six months for ordinary persons and two years for an associate; see Section 165.
- Section 166 then asks, for each person who ends up holding property or a benefit, whether he meets all five conditions.
The contrast with section 158 should also be noted. Under section 158(2), a disposition made between the filing of the application and the bankruptcy commencement date gives rise to no right against any person even if he received the property in good faith, for value and without notice of the filing. Section 166 protects a person with those qualities against orders under sections 164 and 165. The two sections address different situations and are quoted here as printed; see Sections 157 and 158.
A worked example
Karthik Rao, shortly before his bankruptcy, gives a flat to his friend Zoya Khan for no consideration. The trustee obtains an order under section 164(4). Zoya had already sold the flat for full price to Meena Joshi, who bought it in good faith, for value, with no notice of any undervalue, no notice that Karthik had applied for bankruptcy or been made bankrupt, and who is not an associate of Karthik.
Under section 166(1)(a), the order does not give rise to a right against Meena, a person interested in the property, if all five conditions of sub-section (2) are met. Under section 166(1)(b), it also does not require Meena to pay the trustee for the benefit received. The position of Zoya, who received the flat as a gift, is not decided by section 166: she gave no value, so condition (b) is not met. If Zoya received a sum on the resale, any amount she is required to pay to the trustee under the order is included in the estate under section 166(3).
The names and facts are invented, and the example does not predict the outcome of any case.
Practical checks for a buyer or lender
- Was value actually given?
- What did you know, or have notice of, about the bankrupt's application or order?
- Is there any relationship that falls within the section 79(2) list of associates?
- When was the interest acquired or the benefit received compared with the dates in sections 164 and 165?
Law around this section
The Amendment Act, 2026 (No. 6 of 2026) has no clause that amends section 166. It comes into force on the date or dates the Central Government notifies; the notification is not in the texts consulted, so check whether any change to a neighbouring provision has been notified.
For personal guarantors to corporate debtors, the Insolvency and Bankruptcy Board of India (Bankruptcy Process for Personal Guarantors to Corporate Debtors) Regulations, 2019 (the copy consulted is amended up to 02-06-2026) apply alongside Part III; no rules or regulations for other individuals or for partnership firms are in the texts consulted.
Amendments and notifications made after 12 August 2021, other than the Amendment Act, 2026, are not in the texts consulted and should be checked.
Need help with property that came from a bankrupt?
Buyers, lenders and relatives who hold property or benefits that originated with a bankrupt should know whether they can meet each condition in section 166(2). Our team can help you assess this through a financial and legal due diligence review.
Key takeaways
- Section 166 applies to orders under section 164 or 165 only.
- The protection covers a right against the property and a payment to the trustee, and extends to a person "whether or not he is the person with whom the bankrupt entered into such transaction".
- Five conditions must all be present: good faith, value, no notice of the undervalue or preference, no notice of the bankruptcy application or order, and not an associate.
- Sums required to be paid to the trustee are included in the estate.
Read next
- Section 167 of the Insolvency and Bankruptcy Code, 2016: extortionate credit transactions of a bankrupt
- Section 165 of the Insolvency and Bankruptcy Code, 2016: preference transactions of a bankrupt
- Section 164 of the Insolvency and Bankruptcy Code, 2016: undervalued transactions of a bankrupt
- Undervalued transactions under section 164 and section 164A
Disclaimer: Based on the IBBI consolidated text of the Insolvency and Bankruptcy Code, 2016 amended up to 12 August 2021 and on the Insolvency and Bankruptcy Code (Amendment) Act, 2026 (No. 6 of 2026), which comes into force on the date or dates notified by the Central Government, as consulted on 2 October 2026. It explains the words of the statute only; commencement notifications, other amendments made after 12 August 2021, notified thresholds, the rules and IBBI regulations, and the way tribunals and courts apply these sections should be checked. This article is general information, not legal advice; check the official text before acting.