Undervalued 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.
Section 164 lets the bankruptcy trustee unwind value that left the estate for nothing or for far too little in the two years before the bankruptcy application. Section 164A, inserted by the Amendment Act, 2026, deals with the narrower case of a transaction entered into deliberately to defeat a claimant.
The four gateways
Undervalued transactions are defined by four alternative gateways. A bankrupt enters into one where:
- the bankrupt makes a gift to another person;
- no consideration is received by the bankrupt from the recipient;
- the transaction is made in consideration of marriage; or
- the consideration provided is significantly less in value than what the bankrupt has provided.
The two conditions
Passing through a gateway is not enough. Undervalued transactions are only avoidable if both of the following hold:
| Condition | Requirement |
|---|---|
| Timing | The transaction must have occurred within two years before the filing of the bankruptcy application |
| Causation | It must have contributed to triggering the bankruptcy process |
Both must be satisfied. A gift made three years earlier is outside the window, and a small gift inside the window that had nothing to do with the bankruptcy is not caught.
Transactions between a bankrupt and their associates within the two-year period are automatically deemed undervalued.
The trustee does not have to establish the value differential in a dealing with an associate — the deeming does it. That is why the definition of "associate" in Part III is drawn so widely: immediate family, relatives, business partners, spouses or relatives of partners, employer and employee relationships, trustees and companies. Undervalued transactions among family are the ordinary case, not the exotic one, and proving the market value of a transfer between relatives years after the event is close to impossible.
What the Adjudicating Authority can order
On an application by the bankruptcy trustee, the Adjudicating Authority may:
- declare the transaction void;
- make a vesting order, requiring property transferred under the transaction to vest in the trustee and become part of the estate; or
- make any other restorative order necessary to restore the position to what it would have been had the transaction not occurred.
The ordinary course defence
An order declaring a transaction void will not be made if it can be demonstrated that the transaction was conducted in the ordinary course of business by the bankrupt. This is what keeps ordinary trading out of the undervalued transactions net. A retailer clearing stock below cost, a professional writing off an uncollectable fee or a business selling an asset into a weak market is not making a gift — it is trading, and the two-year window would otherwise sweep all of it in.
Section 164A — transactions defrauding creditors
Inserted by the Amendment Act, 2026, section 164A applies where the debtor has entered into an undervalued transaction as referred to in section 164(6) and the Adjudicating Authority is satisfied that the transaction was deliberately entered into:
- to keep assets beyond the reach of a person entitled to make a claim against the debtor; or
- to adversely affect the interests of such a person in relation to the claim.
Where satisfied, the Adjudicating Authority shall make an order (i) restoring the position as it existed before the transaction, as if it had not been entered into, and (ii) protecting the interests of the victims of the transaction.
The two safeguards in Section 164A
- An order shall not affect any interest in property acquired from a person other than the debtor or the debtor's associate, where it was acquired in good faith, for value and without notice of the relevant circumstances — nor any interest deriving from such an interest.
- An order shall not require a person who received a benefit in good faith, for value and without notice of the relevant circumstances to pay any sum, unless that person was a party to the transaction.
These matter because section 164A reaches deliberate asset-shielding, which is often layered through several hands. The provision follows the value as far as the participants and stops at the point where an innocent third party paid full value without knowing anything.
Common mistakes
- Trying to prove the value differential in an associate transaction when the deeming provision does the work.
- Ignoring the causation requirement — the transaction must have contributed to the bankruptcy.
- Treating loss-making trades as undervalued transactions, when the ordinary course defence applies.
- Pursuing a remote purchaser who took in good faith, for value and without notice.