Section 167 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 167 lets the Adjudicating Authority, on the bankruptcy trustee's application, set aside or vary an extortionate credit transaction to which the bankrupt is or has been a party, if it was entered into in the two years ending on the bankruptcy commencement date. A debt extended by a regulated provider of financial services in compliance with the law is outside the section.
The article follows the IBBI consolidated text of the Code amended up to 12 August 2021 (the "consolidated text").
On the trustee's application, the Adjudicating Authority may set aside the whole or part of the debt, vary the terms or the security, order payment to the trustee, or order surrender of security. The transaction must have been entered into during the two years ending on the bankruptcy commencement date. Credit is extortionate if it requires exorbitant payments or is unconscionable under the principles of law relating to contracts. Credit extended by a regulated provider of financial services in compliance with the law in force is excluded.
Sub-sections (1) and (2): application and period
"Subject to sub-section (6), on an application by the bankruptcy trustee, the Adjudicating Authority may make an order under this section in respect of extortionate credit transactions to which the bankrupt is or has been a party."
Two details. The application is by the trustee, as with sections 164 and 165. And the transaction can be one to which the bankrupt "is or has been a party", which reaches both subsisting and past credit. The words "subject to sub-section (6)" make the exemption in that sub-section a limit on the whole section.
The period is in sub-section (2): the transactions "should have been entered into by the bankrupt during the period of two years ending on the bankruptcy commencement date". Note the end-point: the bankruptcy commencement date (the date of the bankruptcy order under section 126, section 79(6)), whereas sections 164 and 165 count back from the application for bankruptcy. The difference in end-points is in the text and is not harmonised here. If you hold or are reviewing a loan made to someone who later became bankrupt, a financial and legal due diligence team can help you work through the dates and the terms.
Sub-section (5): what is "extortionate"
"For the purposes of this section, an extortionate credit transaction is a transaction for or involving the provision of credit to the bankrupt by any person–"
| Clause | Test |
|---|---|
| (a) | On terms requiring the bankrupt to make exorbitant payments in respect of the credit provided |
| (b) | Which is unconscionable under the principles of law relating to contracts |
The two limbs are alternatives (joined by "or"). The provider can be "any person" (subject to the exemption in sub-section (6)). The text does not set an interest rate or a ceiling for "exorbitant" and does not define "unconscionable"; for the latter it points to "the principles of law relating to contracts". Please check the current law on those principles; this article states none.
Sub-section (3): the orders
An order of the Adjudicating Authority "may":
| Clause | Order |
|---|---|
| (a) | Set aside the whole or part of any debt created by the transaction |
| (b) | Vary the terms of the transaction or vary the terms on which any security for the purposes of the transaction is held |
| (c) | Require any person who has been paid by the bankrupt under any transaction to pay a sum to the bankruptcy trustee |
| (d) | Require any person to surrender to the bankruptcy trustee any property of the bankrupt held as security for the purposes of the transaction |
The orders can be combined; the list is introduced by "may" and is not exclusive in terms, though no residual clause like the one in sections 164 and 165 ("any other order it thinks fit") appears here. The list is of four orders only.
Sub-section (4): where the money goes
"Any sum paid or any property surrendered to the bankruptcy trustee shall be included in the estate of the bankrupt." That ties the proceeds to the estate that is distributed under Chapter V; see section 155 in Sections 155 and 156.
Sub-section (6): the exemption
"Any debt extended by a person regulated for the provision of financial services in compliance with the law in force in relation to such debt, shall not be considered as an extortionate credit transaction under this section."
Three elements: the lender must be "a person regulated for the provision of financial services"; the debt must have been extended "in compliance with the law in force in relation to such debt"; and then the debt is not an extortionate credit transaction under this section. A regulated lender that did not comply with the law governing that debt does not have the benefit of the words as printed. The Code does not say which regulators or which laws; the reader should check the law that regulates the lender and the debt.
A worked example
Anil Thakur borrows from an unregulated private lender, Bhavna Traders, at a rate that requires him to pay back more than three times the sum borrowed within eight months, and he provides a car as security. Fifteen months later a bankruptcy order is passed against him. The trustee applies under section 167.
The loan was entered into within two years ending on the bankruptcy commencement date (sub-section (2)). If the terms require "exorbitant payments", sub-section (5)(a) is satisfied. The Adjudicating Authority may set aside part of the debt (sub-section (3)(a)), vary the terms of the loan or the security (clause (b)), order Bhavna Traders to pay back sums received from Anil (clause (c)) or surrender the car to the trustee (clause (d)). Anything paid or surrendered goes into the estate (sub-section (4)).
Had the lender been a regulated financial services provider that extended the loan in compliance with the law in force, sub-section (6) would take the debt outside the section. The names and facts are invented, and the example is not a prediction of any outcome.
Neighbouring sections
- Section 165 on preferences and Section 166 on the effect of orders.
- Proof of debt for creditors whose debts survive is in section 171: see Sections 171 and 172.
- Sections 50 and 51 of the Code also deal with extortionate credit transactions: extortionate credit transactions under sections 50 and 51.
Law around this section
The Amendment Act, 2026 (No. 6 of 2026) has no clause that amends section 167. 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 a loan that may be extortionate?
Lenders who extended credit to someone now bankrupt, and bankrupts who borrowed on harsh terms, should check the period, the terms and the lender's status against section 167. Our team can help through a financial and legal due diligence review.
Key takeaways
- Only the bankruptcy trustee may apply under section 167.
- The transaction must have been entered into in the two years ending on the bankruptcy commencement date.
- Credit is extortionate if it requires exorbitant payments or is unconscionable under the principles of law relating to contracts.
- The Adjudicating Authority may set aside debt, vary terms or security, order payment to the trustee or order surrender of security.
- Debt extended by a regulated financial services provider in compliance with the law is excluded.
Read next
- Sections 168 to 170: obligations under contracts and death of the bankrupt
- Section 166 of the Insolvency and Bankruptcy Code, 2016: effect of orders on undervalued and preference transactions
- Section 165 of the Insolvency and Bankruptcy Code, 2016: preference transactions of a bankrupt
- Avoidance transactions under IBC: sections 43 to 51
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.