Section 48 of IBC : Section 48: Order In Cases Of Undervalued Transactions

Explanation using Example

Imagine a company, XYZ Pvt. Ltd., is undergoing insolvency proceedings. Prior to the proceedings, the company had sold a valuable piece of machinery to another company, ABC Corp., at a significantly lower price than the market value. The insolvency resolution professional believes this transaction was undervalued and prejudicial to the interests of the creditors of XYZ Pvt. Ltd.

The resolution professional files an application with the Adjudicating Authority (National Company Law Tribunal - NCLT) to reverse the transaction under the Insolvency and Bankruptcy Code, 2016.

The NCLT, after examining the case, invokes Section 48 and orders the following:

1. The machinery transferred to ABC Corp. must be returned and vested back in XYZ Pvt. Ltd., so it can be included in the company's assets for the benefit of the creditors.
2. If XYZ Pvt. Ltd. had granted a security interest on other assets to secure the sale, the NCLT might release or partially discharge this security interest.
3. ABC Corp. may be directed to pay a sum to the liquidator or the resolution professional, equivalent to the benefit they received from acquiring the machinery at a low price.
4. The NCLT may also order that ABC Corp. must pay a fair market consideration for the machinery, as determined by an independent expert appointed by the court.

This ensures that the assets of the insolvent company are restored to a state that is fair to the creditors and that the company's value is not diminished through transactions that were not conducted at arm's length or were undervalued.