IBBI’s New Rules on Avoidance Transactions in Insolvency

What Are Avoidance Transactions?

Avoidance transactions or pre-insolvency transactions are transactions that a company enters into before entering insolvency. They can be a means of benefiting certain people unfairly, or of reducing what is available to creditors. These transactions can include, but are not limited to selling assets for less than they are worth (undervalued transactions), favoring one class of creditor over another (preferential transactions), fraudulently entering into a transaction, or being lent on extremely harsh terms. This kind of transaction often erodes the company's assets and makes it more difficult for creditors to get back what they are owed once insolvency proceedings begin.

What Has Changed in the New Rules?

The IBBI (Insolvency and Bankruptcy Board of India) has brought the Insolvency and Bankruptcy (Fifth Amendment) Regulations, 2025, which significantly tighten up the rules about how transactions involving potential preferences (or 'Avoidance Transactions') should be managed during a Corporate Insolvency Resolution Process (CIRP). The main changes are:

Mandatory disclosure: Resolution Professionals (RPs) must now include full details of each avoidance transaction that has been identified in the Information Memorandum (IM), a document used to brief its creditors, potential buyers, etc.

Continuous updates: New avoidance transactions or the status of existing ones must all be up to date on the IM, if they have been discovered since it was last published and are still going ahead in some way, admitted if they might not happen after all.

Restrictions on assignment: Under a resolution plan, no rights may be passed away to pursue avoidance transactions or fraudulent trading for that matter unless these seekings have been properly disclosed in the IM and all potential applicants informed before its final submission date.

These changes will take immediate effect and apply to all ongoing and future insolvency cases, except where a resolution plan has already been submitted to the Adjudicating Authority before this amendment came into force.

Why Is Disclosure Important?

The new disclosure regime is intended to make insolvency processes more open and transparent. Every avoidance transaction has to be declared, so that IBBI aims:

Prevent hidden deals: No party can hide or quietly transfer questionable transactions without the knowledge of creditors or potential buyers.

Protect fair bidding: Prospective resolution applicants, or bidders, shall know in time what they are getting into and how much risk is involved when dealing with a distressed company. This helps to ensure more accurate bids and increases competition.

Protect creditors: By telling creditors the complete story about all previous financial mismanagement, they can adjust their expectations and formulate a strategy of recovery that is finally feasible.

Deter misconduct: The threat of exposure and reversal of avoidance transactions is expected to discourage promoters and management from engaging in such practices before insolvency.

How Will This Affect Resolution Plans?

Under the new rules, resolution plans—the proposals submitted by bidders to revive or acquire the insolvent company—face stricter scrutiny:

• A plan cannot provide for the assignment (transfer) of avoidance transactions or fraudulent/wrongful trading unless:
  • The transaction has been disclosed in the IM, and
  • All prospective applicants have been informed before the final bid submission.
• This ensures that such transactions are not used as bargaining chips or hidden assets in the resolution process.
• The Committee of Creditors (CoC) and bidders are empowered to make decisions with full knowledge of any questionable past dealings, reducing the risk of future disputes or surprises.

Why Did IBBI Make These Changes?

The IBBI’s amendments are a response to persistent issues in the insolvency ecosystem:

• Widespread misuse: Many companies entering insolvency have engaged in avoidance transactions, often to benefit insiders or related parties, which reduces the assets available for genuine creditors.
• Low recovery rates: As of March 2025, over 1,396 avoidance applications involving nearly ₹3.85 lakh crore had been filed, but only a small portion had been resolved and recovered.
• Need for fairness: By enforcing upfront disclosure and restricting the assignment of these transactions, IBBI aims to ensure that the resolution process is fair, transparent, and maximizes value for all stakeholders.
• Deterrence: The changes are expected to discourage fraudulent promoters from diverting assets or engaging in misconduct, knowing that such actions will be exposed and addressed during insolvency.

What Do Experts Say?

Industry experts have welcomed the amendments as a major step forward:

• Hari Hara Mishra, CEO of the Association of ARCs in India, noted that the new rules will deter unscrupulous promoters and improve value recovery for creditors. He pointed out that many non-performing assets (NPAs) are the result of fraudulent diversions, and the new disclosure requirements will help address this issue.
• Akshat Khetan, Founder of AU Corporate Advisory and Legal Services, called the Fifth Amendment a significant shift towards ongoing transparency, ensuring that the resolution process does not shelter hidden liabilities.

Conclusion: A Step Towards More Transparency

The IBBI’s fifth amendment regulations, 2025, push India’s insolvency process out of the twilight and into a whole new era. When the disclosure of avoidance transactions themselves is compelled by law and the parameters for their treatment in resolution plans are so restricted, the regulator is driving towards a culture of transparency and justice. It is believed that this will result in better returns for creditors, more informed bidding and a bigger deterrent against financial wrongdoing by distressed firms.