Avoidance Provisions Under IBC Are Restorative And Not Punitive In Nature: NCLT Kochi
Pranav B Prem
The National Company Law Tribunal, Kochi Bench has clarified that avoidance provisions under the Insolvency and Bankruptcy Code, 2016 are intended to undo the preferential effect of certain transactions and restore the corporate debtor’s estate, and not to impose punitive liability on the beneficiary of such transactions. Judicial Member Vinay Goel made the observation while partly allowing an avoidance application filed by the Resolution Professional of Astern Properties and Developers Pvt. Ltd. under Sections 43 and 44 of the Code. The Tribunal observed that “the avoidance provisions are intended to neutralise the preferential effect of a transaction and restore the Corporate Debtor's estate to the position it would have occupied but for such preference, and not to impose a punitive liability on the beneficiary.”
Astern Properties and Developers Pvt. Ltd. was admitted into the corporate insolvency resolution process on June 13, 2024. During the look-back period applicable to related parties, the Resolution Professional identified multiple transactions aggregating to more than ₹15 crore in favour of Astern Realtors Pvt. Ltd., the holding company which owns 99 per cent of the shareholding in the corporate debtor. The application also questioned certain withdrawals made by director Siraj Mather and a payment made to Moon Day Realtors Pvt. Ltd., alleging that these constituted preferential transactions.
On examining the material on record, the Tribunal held that the impugned transactions satisfied the ingredients of “preference” under Section 43 of the Code, as they were made to related parties during the relevant look-back period and had the effect of placing those parties in a more beneficial position than other creditors in the event of liquidation.
However, the Tribunal also took note of the fact that the holding company, Astern Realtors Pvt. Ltd., had during the same period infused substantial funds into the corporate debtor and incurred expenses for its benefit. The NCLT observed that directing a full refund of all amounts received without accounting for such infusions would result in unjust enrichment of the corporate debtor.
Balancing these considerations, the Tribunal held that the objective of avoidance proceedings is corrective and restorative. It ruled that the estate must be replenished only to the extent of the net preferential benefit actually enjoyed, rather than by mechanically ordering disgorgement of the entire amount received.
Accordingly, the NCLT directed Astern Realtors Pvt. Ltd. to refund the net preferential amount of approximately ₹7.92 crore, after allowing adjustment for the funds infused and expenses incurred for the benefit of the corporate debtor. The Tribunal also directed the concerned director and the related-party entity to return the amounts received by them.
The Tribunal clarified that upon such refund, the underlying claims of the related parties would revive and would be dealt with in accordance with the waterfall mechanism prescribed under the Insolvency and Bankruptcy Code. The decision reiterates that avoidance proceedings under the IBC are not penal in nature but are designed to reverse distortions caused by preferential transactions and ensure equitable distribution among stakeholders in the insolvency process.
Appearance
For Applicant: Advocate Vinod PV
For Respondents: Advocates KR Shiyas, Pradeep Joy, Rohan Kumar
Cause Title: CA Sreenivasan PR vs Astern Realtors Pvt Ltd & Ors
Case Number: IA(IBC)/239/KOB/2025 IN CP(IBC)/12/KOB/2024
Coram: Judicial Member Vinay Goel
