By Richa Saraf  (richa@vinodkothari.com)

Sections 45, 49, 66, 69 of the Insolvency and Bankruptcy Code, 2016 requires and empowers the Liquidator to apply to the Adjudicating Authority for appropriate orders in case of any vulnerable transactions that the Liquidator comes across during the process of liquidation. Such transactions may either be with respect to breach of applicable law, or deleterious to the interests of creditors or stakeholders, or otherwise, not transactions designed to be in good faith. The transactions, whether being undervalued or fraudulent shall be considered vulnerable to the interest of the stakeholders of the Company.

The article hinges on the crucial question of applicability of the limitation to the aforementioned sections. In this regard, we shall discuss how the provisions were imbibed in the Code, despite there being no equivalent in the Companies Act, 2013 or previous Companies Act. The general notion is that limitation should be applicable to all transactions, including fraudulent transactions referred to in Section 49 of the Code. However, the article will explain as to how undervalued transaction, done deliberately without due compliance, partakes the nature of a fraudulent transaction, and since fraud is a nullity forever, in case of such transactions, as covered by Section 49, there is no question of any look- back period at all.

Deciphering the intent of incorporation of provisions relating to vulnerable transactions:

The concept of “fraudulent preference” existed both in Companies Act, 1956 and 2013, however, the provision pertaining to undervalued and fraudulent transaction is a unique incorporation in the Code, adopted from the UK Insolvency Act, 1986. The Bankruptcy Law Reform Committee, referring to Section 243 of UK Insolvency Act, 1986, recommended that a provision voiding transactions defrauding creditors should be included. It is further, pertinent to note that the Committee, while discussing the intent behind insertion of this provision in the statute, observed that the provision for fraudulent transactions should not have any time- bar. The relevant extract from Interim Report (page 98-99) of the Committee is reproduced below:

“In the UK, Section 423 of the IA 1986 voids transactions at undervalue if such transactions have been entered into with the intention of putting the assets beyond the reach of, or otherwise prejudicing the interests of a person who is making or may make a claim against the company. While the scope of this provision is similar to that of the provision avoiding transactions at undervalue (Section 238, IA 1986), Section 423 actions differ in that they do not have any time limit for the challenged transactions, and is available in and outside formal insolvency proceedings. The inclusion of such a provision in the CA 2013 would reinforce the protection given to creditors under avoidance law by permitting the liquidator to set aside transactions entered into prior to the one year period ending in the company’s insolvency. This is necessary to guard against the siphoning away of corporate assets by managers who have knowledge of the company’s financial affairs in cases where a long period of financial trouble, extending over a year, ends in insolvency.


A provision invalidating transactions defrauding creditors similar to Section 423 of the IA 1986 should be inserted in CA 2013. Such provision would apply without any time limits and should be available in and outside formal insolvency proceedings.

It is clear that the analogous provision in the UK law does not have any limitation period, and also, there is no limitation period with reference to Sections 49 and 66 in the language of the law itself. Here, it is relevant to cite Report of Insolvency Law Committee (March, 2018), by virtue of which an amendment was made to exclude time limit from Section 69 of the Code:

“24.1. Section 69 of the Code provides for punishment for transactions defrauding creditors by the corporate debtor or its officers “on or after the insolvency commencement date”. However, as per sub-section (a), if the transaction results in a gift or transfer or creation of a charge or the accused has caused or connived in execution of a decree or order against the property of the corporate debtor, the accused shall not be punishable if such act was committed five years before the insolvency commencement date or if she proves that she had not intended to defraud the creditors. In this respect, the pre-fixing of the offence with “on or after the insolvency commencement date” is erroneous. Further, pre-fixing the same phrase in sub-section (b) is also erroneous, as the transaction involves concealment or removal of any property within two months from the date of any unsatisfied judgement or order for payment of money. Thus, the Committee decided that the phrase “on or after the insolvency commencement date” be deleted from section 69.”

Additionally, vulnerable transactions are generally considered to be transactions of a continuing nature, having their adverse and prejudicial impact on the ongoing financial position of the Company, which has already slipped into distress, and therefore, the concept of any look-back period or claw-back period shall not be applicable, since it cannot be contended that a transaction, done with a deliberate, culpable design, becomes washed of its gullibility merely because the liquidation proceedings are initiated certain number of years after the date of commission of the relevant transaction.

Distinction between Section 45 and Section 49:

Both Sections 45 and 49 pertains to avoidance of undervalued transactions, the only difference being that Section 49 deals with undervalued transactions undertaken with malafide or wrongful intent, while for Section 45; the presence of any motive is not required. The reference in Section 49 to transactions covered by section 45 is merely for the factual ambit of transactions covered by the section, and the additional element of intent marks the crucial difference between the two sections.

Moreover, while a look- back period has been provided for undervalued transactions under Section 46, there is no limitation period for fraudulent transactions covered under Sections 49 and 66 of the Code. The intent being “once a fraud, always a fraud”, a time- honored doctrine clearly applies. The maxim “fraud vitiates every transaction into which it enters applies to judgments as well as to contracts and other transactions” is a part of common law jurisprudence, largely based upon equitable doctrines and has been has been upheld by courts repeatedly in several cases such as The People of the State of Illinois v. Fred E. Sterling, 357 Ill. 354; 192 N.E. 229 (1934), Allen F. Moore v. Stanley F. Sievers, 336 Ill. 316; 168 N.E. 259 (1929), and further, In re Village of Willow brook, 37 Ill.App.2d 393 (1962), wherein it  was observed “It is axiomatic that fraud vitiates everything.”.

Fraud destroys the validity of everything into which it enters, and that it vitiates the most solemn contracts, documents, and even judgments, is well settled, and has been time and again reiterated in various judgments in broad and sweeping language. If both the sections were to encompass a time-limit then it would defy the whole purpose, and the reason for incorporating two separate provisions in the Code would fail. The basic essence is that any person who has done any wilful act should not be allowed to get away by citing reasons such as lapse of time.

In light of the aforesaid, it can be concluded that while an undervalued transaction is a matter of fact, for which intention does not matter, however, when the intention to cause a prejudice to the creditors is embedded in such undervalued transaction, the transaction comes within the offence of Section 49. If a transaction, so imbibed with malafide intent, was subject to the same fate and the same limitation as a transaction mentioned in Section 45, then Section 49 would not have any relevance at all. On the contrary, it can be pointed out that Section 49 was inserted specifically for the so-called willful defaulters, for which the limitation of time, mentioned in Section 45, cannot be relevant at all. Thus, it will not be correct to say that there is any claw-back for willfully undervalued transactions under Section 49 and fraudulent conduct of business under Section 66.


By Vishal Hablani (resolution@vinodkothari.com)


The Supreme Court with its decision on December 15, 2017, in the case Macquarie Bank Limited v. Shilpi Cable Technologies Ltd.[1], cleared the ambiguities w.r.t. interpretation of Section 8 and 9(3)(c) of the Insolvency and Bankruptcy Code, 2016 ( ‘the Code’). The decision overturned the concurring rulings laid down by the NCLAT in three cases, viz. Uttam Galve Steels Limited v. DF Deutsche Forfait AG & Anr.[2], Senthil Kumar Karmegam v. Dolphin Offshore Enterprises & Anr.[3], and Goa Antibiotics & Pharmaceuticals Ltd. v. Lark Chemicals Pvt. Ltd.[4]

The judgements laid down by the National Company Law Appellate Tribunal (‘NCLAT’) in the abovementioned cases settled the law, that a lawyer, law firm, C.A., or a C.S. cannot send demand notices to the Corporate Debtor on behalf of an operational creditor, unless they are authorized by the Board. Also, if authorised, they are required to clearly state their position in relation to the operational creditor, in the concerned demand notice.

Importantly, the Hon’ble Supreme Court (‘SC’) in this judgement, also dealt with the issue of requirement of a certificate from the financial institutions maintaining accounts of the operational creditor under Section 9(3)(c) of the Code.

Brief Facts of the Case:

The Appellant had challenged the order passed by the NCLAT before SC. The petitioner demanded the payment for supply of goods to the respondent. When the demand was not met, the Appellant issued a demand notice under Section 8 of the Code for payment of the outstanding debt. Later, the Appellant initiated insolvency proceedings under Section 9 of the Code. The NCLAT, in its impugned judgement (dated 17/7/2017), agreed with the stand of National Company Law Tribunal (‘NCLT’), and dismissed the appeal for non-compliance with the mandatory provision contained in Section 9(3)(c) of the Code. Moreover, it took an obstinate view that an advocate/lawyer cannot issue a demand notice on behalf of an operational creditor under Section 8 of the Code.

The SC, allowing the appeal of the operational creditor, set aside the NCLAT judgment on both the counts. In order to come up with the judgment, reliance was placed on Article 14 of the Constitution of India and Doctrine of Harmonious Construction for the interpretation of Advocates Act, 1961 (‘Advocates Act’) with the Code.

Relevant Provisions of the Law:

Insolvency and Bankruptcy Code, 2016:


Section 3: “Definitions –


(14) “financial institution” means—

(a) a scheduled bank;

(b) financial institution as defined in section 45-I of the Reserve Bank of India Act, 1934;

(c) public financial institution as defined in clause (72) of section 2 of the Companies Act, 2013; and

(d) such other institution as the Central Government may by notification specify as a financial institution;


(23) “person” includes—

(a) an individual;

(b) a Hindu Undivided Family;

(c) a company;

(d) a trust;

(e) a partnership;

(f) a limited liability partnership; and

(g) any other entity established under a statute, and includes a person resident outside  India;


Section 8: “Insolvency Resolution by Operational Creditor (1) An operational creditor may, on the occurrence of a default, deliver a demand notice of unpaid operational debtor copy of an invoice demanding payment of the amount involved in the default to the corporate debtor in such form and manner as may be prescribed.


Explanation.— For the purposes of this section, a “demand notice” means a notice served by an operational creditor to the corporate debtor demanding repayment of the operational debt in respect of which the default has occurred.


Section 9: “Application for initiation of corporate insolvency resolution process by operational creditor – (1) After the expiry of the period of ten days from the date of delivery of the notice or invoice demanding payment under sub-section (1) of section 8, if the operational creditor does not receive payment from the corporate debtor or notice of the dispute under sub-section (2) of section 8, the operational creditor may file an application before the Adjudicating Authority for initiating a corporate insolvency resolution process.


(3) The operational creditor shall, along with the application furnish—


(c) a copy of the certificate from the financial institutions maintaining accounts of the operational creditor confirming that there is no payment of an unpaid operational debt by the corporate debtor; and

(5) The Adjudicating Authority shall, within fourteen days of the receipt of the application under sub-section (2), by an order—


(ii) reject the application and communicate such decision to the operational creditor and the corporate debtor, if— (a) the application made under sub-section (2) is incomplete; (b) there has been repayment of the unpaid operational debt; (c) the creditor has not delivered the invoice or notice for payment to the corporate debtor; (d) notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility; or (e) any disciplinary proceeding is pending against any proposed resolution professional: Provided that Adjudicating Authority, shall before rejecting an application under subclause (a) of clause (ii) give a notice to the applicant to rectify the defect in his application within seven days of the date of receipt of such notice from the adjudicating Authority.


Advocates Act, 1961:


Section 30: Right of advocates to practise. — Subject to provisions of this Act, every advocate whose name is entered in the 1[State roll] shall be entitled as of right to practise throughout the territories to which this Act extends,—

(i) in all courts including the Supreme Court;

(ii) before any tribunal or person legally authorised to take evidence; and

(iii) before any other authority or person before whom such advocate is by or under any law for the time being in force entitled to practise.


Constitution of India:


Article 14: Equality before law – The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India.


Article 19: Protection of certain rights regarding freedom of speech, etc. –

(1) All citizens shall have the right—

          (g) to practise any profession, or to carry on any occupation, trade or business.


Contentions Presented by the Appellant:

The Appellant argued that on a conjoint reading of Section 9(3)(c) of the Code with Rule 6 and Form 5 of the Insolvency and Bankruptcy (Application to Adjudicating AuthorityRules2016 (‘Adjudicating Authority Rules’), it can be found that Section 9(3)(c) is not mandatory, but only directory in nature. Further, it was argued that Section 9(3)(c) is only a procedural provision, and is not a pre-requisite for admission of an application under Section 9(1) of the Code. It was further supported by the fact that, if certificate is not furnished by the financial institution, the application should not be rejected under Section 9(5)(ii). Such certificate under Section 9(3)(c) is just an additional requirement, and is to be provided only “if available”. Moreover, it was argued that there might be situations where it is possible that an operational creditor might have a non-scheduled bank as his banker, or a foreign supplier who is an operational creditor, defined as “person” under Section 3(23) may deal with some other foreign banker who is not covered under Section 3(14) of the Code. It would then become impossible for the petitioner to obtain the requisite certificate and satisfy the condition laid down under Section 9(3)(c). This loophole in the provision(s) cannot operate in a manner to nonsuit the petitioner.

The Appellant went ahead to further submit two important points:

Firstly, that the expression “position with or in relation to the operational creditor” demonstrates that a lawyer, authorized by the operational creditor, would come under the ambit of the said provision.

Secondly, it was emphasised that under Section 30 of the Advocates Act, 1961 the effect of the expression “practise” applies to lawyers, vis-a-vis Tribunals such as the NCLT and NCLAT.

Findings of the Court:

Findings of the court can be summarised by taking into consideration the two prime issues addressed by the Court. They are:

  1. Is the provision contained in Section 9(3)(c) mandatory?

The Court took into consideration the expression “confirming” under Section 9(3)(c) and took the view that a certificate is a mere piece of evidence which only “confirms” that the debt has not been paid. It cannot be construed as a condition precedent for triggering the insolvency process under the Code. Moreover, the certificate is to be provided only “if available”. This can be construed by reading Item 7 of Part V contained in Form 5 under Rule 6, along with Item 8, which talks about other documents in order to prove the existence of an operational debt and the amount in default. Further, Annexure III in the Form speaks about copies of relevant accounts kept by banks/financial institutions maintaining accounts of the operational creditor, confirming that there is no payment of the unpaid operational debt, only “if available”.

Taking into consideration the possibilities presented by the Appellant (as mentioned above), when it becomes impossible for an operational creditor to comply with the provision laid down in Section 9(3)(c), the Court took the view:

The Code cannot be construed in a discriminatory fashion so as to include only those operational creditors who are residents outside India who happen to bank with financial institutions which may be included under Section 3(14) of the Code. It is no answer to state that such person can approach the Central Government to include its foreign banker under Section 3(14) of the Code, for the Central Government may never do so. …….argument that such persons ought to be left out of the triggering of the Code against their corporate debtor, despite being operational creditors as defined, would not sound well with Article 14 of the Constitution, which applies to all persons including foreigners. Therefore, as the facts of these cases show, a so called condition precedent impossible of compliance cannot be put as a threshold bar to the processing of an application under Section 9 of the Code.

The Court further interpreted expression “shall” under Section 9(3) in a liberal manner, taking into consideration the possibility of non compliance with the provision laid down in Section 9(3)(c). It took the view that strict interpretation would cause inconvenience to innocent persons, and would defy the objective of the Act.

  1. Can a lawyer issue a demand notice on behalf of the operational creditor?

The Court took into consideration the expression “delivered”, as stated in Section 8, and took the view that an operational creditor is only required to deliver the demand notice. The notice can be issued by an authorized agent, who can be a lawyer as well. As per Forms 3 and 5 signature of the person “authorized to act” on behalf of the operational creditor is required to be appended to both the demand notice as well as the application under Section 9 of the Code. This authorized agent has to state his position with or in relation to the operational creditor. The expression “in relation to” was interpreted in the widest possible manner, as the Court took the view that, it includes a position which is outside or indirectly related to the operational creditor. It was concluded that both the expressions “authorized to act” and “position in relation to the operational creditor” demonstrate that a lawyer acting on behalf of the creditor is included in the aforesaid expression.

Also, the expression “practise” stated under Section 30 of the Advocates Act was also elaborated at lengths, and the Court took the view that it would include all preparatory steps leading to the filing of an application before a Tribunal. The Court relied on Harish Uppal (Ex-Capt.) v. Union of India, (2003) 2 SCC 45 at 72, which states:

“The right of the advocate to practise envelopes a lot of acts to be performed by him in discharge of his professional duties. Apart from appearing in the courts he can be consulted by his clients, he can give his legal opinion whenever sought for, he can draft instruments, pleadings, affidavits or any other, he can participate in any conference involving legal discussions, he can work in any office or firm as a legal officer, he can appear for clients before an arbitrator or arbitrators etc.”

The Court applied the Doctrine of Harmonious Construction and read both the statutes together. Moreover, it was emphasised that Section 30 of the Advocates Act deals with the fundamental right under Article 19(1)(g) of the Constitution to practice one’s profession. Therefore, a conjoint reading of Section 30 of the Advocates Act and Section 8 and 9 of the Code together with the Adjudicatory Authority Rules and Forms thereunder would yield the result that a notice sent on behalf of the operational creditor by a lawyer would be in order.


Intervention by the Supreme Court to clear the ambiguities w.r.t. interpretation of certain contentious provisions of the Code is commendable. In order to attain the objectives of the Code, the Court has interpreted certain expressions within the provisions liberally, as well as strictly, whenever required. From the above analysis it is evident that this ruling will have a long run impact on the suits filed by operational creditors on the account of two major relaxations provided therein.


[1] http://sci.gov.in/supremecourt/2017/29095/29095_2017_Judgement_15-Dec-2017.pdf

[2] http://nclat.nic.in/final_orders/Principal_Bench/2017/insolvency/28072017AT392017.pdf

[3] http://nclat.nic.in/final_orders/Principal_Bench/2017/insolvency/02112017AT1542017.pdf

[4] http://nclat.nic.in/final_orders/Principal_Bench/2017/insolvency/07112017AT1842017.pdf


-By Sikha Bansal & Vishal Hablani (resolution@vinodkothari.com)


The Insolvency and Bankruptcy Code, 2016 (“the Code”) facilitates resolution of corporate entities by providing for a “calm period” during which institution or continuation of suits or “proceedings” against the corporate debtor is prohibited. Recently in Power Grid Corporation of India Ltd. v. Jyoti Structures Ltd.[1] (Order dated 11th December, 2017), the Delhi High Court ruled that the moratorium provisions would apply to “debt recovery actions” against the corporate debtor and not to proceedings beneficial to corporate debtor. Read more

APPLICATION UNDER SARFAESI- A Liberal Approach by the Supreme Court

By Richa Saraf, (legal@vinodkothari.com)


In the case of M.D. Frozen Foods Exports Pvt. Ltd. v. Hero Fincorp Ltd.[1], the Hon’ble Supreme Court held that there was no illegality in an Non-Banking Financial Company (NBFC) invoking SARFAESI Act for recovery of loan arrears with respect to an account classified as Non-Performing Asset (NPA) before the NBFC got notified under the Act. It also clarified that NBFC is entitled to initiate both arbitration proceedings and SARFAESI proceedings with respect to a loan account, and that the ‘doctrine of election’ was not attracted in such a scenario. There was a cleavage of judicial opinions inter se the High Courts, while the Full Bench of the Orissa High Court, as also the Delhi High Court and the Allahabad High Court have taken a view favourable in terms of the simultaneous legal processes under the SARFAESI Act and arbitration recovery proceedings, the Andhra Pradesh High Court has taken a divergent view and after careful scrutiny of the rival contentions and the judicial precedents cited, the Apex Court has finally settled the law on the point. Below, we discuss the same.  Read more


By Richa Saraf, (legal@vinodkothari.com)

-Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd.[1]

The Supreme Court of India has provided a much required clarity on the provisions of Insolvency and Bankruptcy Code, 2016 (IBC) vis-à-vis the existence of dispute. In this article, we broadly discuss the various issues that were dealt with in the judgment.


Mobilox Innovations Pvt. Ltd. (hereinafter referred to as “Appellant” or “Corporate Debtor”) was engaged by Star TV for conducting tele-voting for the “Nach Baliye” program on Star TV, who in turn subcontracted the work to the Kirusa Software Pvt. Ltd. (Respondent). A Non-Disclosure Agreement (NDA) was also executed between the parties in this regard. Read more


By Richa Saraf, (legal@vinodkothari.com)

A writ petition has been filed in the Madras High Court, by Southern Polypet Private Limited, wherein the petitioner has challenged the Insolvency and Bankruptcy Code, 2016 (Code) as being contrary to the provisions of the Constitution of India and the Hon’ble High Court comprising Chief Justice Indira Banerjee and Justice M. Sundar has issued a notice with respect to this petition. Read more


By Richa Saraf , (legal@vinodkothari.com)

In a recent Calcutta High Court (“Hon’ble High Court”) ruling of Union Bank of India & Anr. v. State of West Bengal & Ors. (01.09.2017), the object and intention behind Section 14 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”) was discussed. The issue for consideration before the Hon’ble High Court was whether the District Magistrate can consider and dispose of an application under Section 14, subsequent to sale of the immovable property, over which security interest was claimed and the Hon’ble High Court answered in negative. Below, we discuss the ruling. Read more