Since the inception of theInsolvency and Bankruptcy Code, 2016, (“Code”), the Real Estate Sector has been languishing before the courts due to several transactions entered by the Builder(s) subverting and jeopardising the legitimate interest of innocuous creditors. The Code encapsulated a set of transactions as explained hereinbelow, which are to be avoided by the Interim Resolution Professional (“IRP”) and the Liquidator appointed by National Company Law Tribunal (“NCLT”) for the companies which are under insolvency or liquidation. In common parlance, the set of transactions is Preference, Undervalued, Fraudulent and Extortionate Transactions (“PUFE Transactions”). Each of the afore-stated has been analysed apropos the real estate sector in India to bring forward the conceptual nature.  

Preference Transactions 

Section 43 of the Code discusses the conditions that may lead to transactions being categorized as preferential in nature. Thus, if certain conditions exist in a set of transactions executed by the corporate debtor, that may amount to be preferential in nature, then they are only avoidable at the instance of IRP or Liquidator on filing an application before NCLT. The conditions for transactions being classified as preferential are as follows:

a. Property is transferred for the benefit of a creditor, surety, or guarantor, or on account of a prior financial obligation, operational debt, or other responsibilities incurred by the corporate debtor; and

b. Such a transfer puts the creditor in a preferential position other than he would have been if the assets were to be liquidated and distributed in the list of priority as mentioned in Section 53 of the Code.

c. The transactions would be deemed preferential in nature if carried out with the related party within two years from the date of initiating of insolvency proceedings and one year for non-related or other parties from the date of intimation of insolvency proceedings against Corporate Debtor.

To avoid any uncertainty, the Code accentuates that the following transactions are to be excluded from preferential transactions:

a. Transactions made in the ordinary course of the corporate debtors’ or the transferee’s business or financial affairs;

b. Any transfer that creates a security interest in the corporate debtor’s property to the extent that;

i. such security interest secures new value and was given at the time of or after the signing of a security agreement that contains a description of such property as a security interest, and was used by the corporate debtor to acquire such property; and

ii. such transfer was registered with an information utility on or before thirty days after the corporate debtor receives possession of such property:

Provided, however, that any transfer undertaken in accordance with a court order does not preclude it from being treated as giving of preference by the corporate debtor.

In certain cases where the court found that the transactions are not carried out in the ordinary course of business to create a new value of the interest of the corporate debtor as explained above but acted to give preferential advantage to any related party or other party, then such a transaction is to be avoided under Section 44 of the Code. It was primarily aimed at reversing the effects of the preferential transactions and required the person to whom the preference is granted, to repay any gain they may have made as a result of such preference.

The case ofIDBI Bank Ltd. v. Jaypee Infratech Ltd. (“IDBI”) is an authoritative precedent of PUFE Transactions that was affirmed by the Supreme Court inJaypee Infratech Ltd. Interim Resolution Professional v. Axis Bank Ltd.

M/s Jaiprakash Associated (“JAL”) incorporated a subsidiary viz., M/s Jaypee Infratech Ltd. (“JIL”) as a special purpose business to handle certain project design, engineering, development, and construction. JAL owned 70% of the stock of JIL. Significantly, JIL ran into financial difficulties and defaulted in contractual obligations to meet its project completion and debt payback deadlines. Accordingly, the Life Insurance Corporation (“LIC”) declared JIL’s account as a non-performing account. Since JIL’s account was categorized as non-performing, its financial creditors such as IDBI, filed an application before the Allahabad Bench of the NCLT under section 7 of the Code that was admitted and the NCLT appointed an IRP. After examining the transactions, the IRP filed an application before the NCLT seeking transactions to be declared as fraudulent, preferential, and undervalued.  

According to the NCLT, since JIL had executed the set of transactions whilst undergoing financial difficulties, it failed to work carefully to reduce the creditors’ losses and mortgaged the land without JAL’s counter-guarantee. JIL had also failed to obtain the necessary approvals from the JLF lenders as well as the shareholders for the contested deal. Thus, the NCLT observed that the impugned transactions took place throughout the relevant period and that they constitute preferential transactions under Section 43 of the Code.

Undervalued Transactions 

An undervalued transaction is primarily in cases where the corporate debtor possesses a malafide intention to cause a wrongful gain to its related party or sell off assets in a short period of time well below the real value to increase cash liquidity. Section 45 of the Code enunciates the concept of undervalued transactions in case of the following:

a. Gives someone a gift; or

b. Enters into a transaction with a person in which the corporate debtor transfers one or more assets for a consideration that is significantly less than the value of the consideration provided by the corporate debtor, and such transaction does not occur in the corporate debtor’s ordinary course of business.

Pertinently, the time period for questioning an undervalued transaction has been categorized on the basis of a related or non-related party. Accordingly, the undervalued transaction with a ‘related party’ might be questioned within two years preceding the date of commencement of insolvency proceedings, whereas, an undervalued transaction with an ‘unrelated party’ could be questioned within one year preceding the date of commencement of insolvency proceedings.

If NCLT finds that the transaction was undervalued and that the Resolution Professional (“RP”) or liquidator failed to report it despite having sufficient information or the opportunity to do so, the NCLT can order the position to be restored to what it was prior to the transaction and require the insolvency board to initiate proceedings against the liquidator or RP.

Fraudulent Transactions

The scope and ambit of determining fraudulent transactions are comparatively wide under the Code to protect the legitimate interests of the creditors against the corporate debtor. This is demonstrable by the wording employed under Section 66(1) of the Code that addresses fraudulent trading. Accordingly, if it is proven during the insolvency process that the seller conducted business with the intent to defraud creditors or for any fraudulent purpose, the NCLT can issue an order directing any individual who was knowingly a party to the seller’s business conduct to make such contributions to the seller’s assets as the NCLT deems appropriate.

While section 66(2) of the Code addresses wrongful trading (i.e. behaviour that does not amount to fraud but falls short of the rules regulating directors’ responsibilities to act properly in the event of insolvency), the NLCT may impose a financial penalty on the director or partner.

Extortionate Transactions

Extortionate transactions are covered under Section 50 of the Code, entered into by the Corporate Debtor in the period of two years preceding the insolvency commencement date, which requires making of exorbitant payments by the corporate debtor to any of its creditors. Such transactions may be avoided by an order of the NCLT. This provision does not apply if a person’s debt is in compliance with the law. In  NCLT determines that the terms of the credit transaction require Corporate Debtor to make excessive payments to its lender, the NCLT may inter-alia, order the seller to:

a. Restore the position as it existed prior to such transactions;

b. Put aside the entire or a portion of the amount owed as a result of the deceptive credit transaction;

c. Change the terms of the transaction;

d. Demand that any person who participated in the extortionate transaction refund any money obtained;

e. Demand the release of the corporate debtor’s security interest in the exorbitant transaction in favour of the liquidator or RP.

The relevant period for determining whether a transaction is exorbitant is the two-year period preceding the date of initiation of insolvency.

Thus, as a result, contracting parties and creditors must ensure that they have access to a company’s most recent financial position before engaging in any transaction, particularly those involving the transfer of assets or value from such a corporation. When there are symptoms of the financial crisis, the risk of avoiding a transaction should be carefully assessed and weighed.

Role of NCLT

It is vital for the effectiveness of any bankruptcy regime that troubled enterprises are barred from adopting actions that would obstruct creditor’s recovery if insolvency proceedings were to be initiated. Such safeguards are indispensable in India, where corporations are frequently controlled by promoter groups that may aim to shift wealth from assets to other group companies for their own advantage through opaque arrangements. As a result, under the Code, the NCLT has the authority to reverse any such transaction in order to protect the interests of creditors and other stakeholders.

The Supreme Court of India has clarified certain fundamental characteristics of preferential transactions under Section 43 of the Code in the case of Anuj Jain Interim Resolution Professional for Jaypee Infratech Limited v. Axis Bank Limited (“Jaypee Infratech”).

Another instance of the role of NCLT can be gleaned in the following case study:

In April 2009, C&C Towers Ltd (“CCTL”) and the Greater Mohali Area Development Authority (“GMADA”) signed a 20-year concession agreement for an “inter-state bus terminal, three multi-story towers with retail and office spaces, a multiplex, a five-star hotel, a banquet hall, hypermarkets, and a helipad on top of one tower.” CCTL promptly gave a group subsidiary, C&C Construction Ltd, a pre-construction advance of Rs. 110.78 crore and a mobilisation advance of Rs. 63.30 crore (CCCL, a listed firm that is also bankrupt). In November 2010, a group of public sector banks, including the State Bank of India (“SBI”), the State Bank of Hyderabad, the State Bank of Patiala, the Punjab National Bank (“PNB”), and the Punjab & Sind Bank, sanctioned project finance as usual.

C&C Towers reportedly received Rs 490 crore from 400 property purchasers. However, due to the excessive delay in construction, the GMADA had to rely on bank guarantees worth Rs. 11.90 crore. Under a “Restructuring Agreement,” SBI and PNB enlisted the help of Edelweiss Asset Reconstruction Company (“EARC”). The corporate insolvency resolution process (“CIRP”) began on October 10, 2019, based on an application submitted under Section 7 of the Code by two persons.

The entire amount owed to creditors was Rs. 580.12 crore, with capital work-in-progress estimated at Rs. 399.89 crore. On the other hand, the real allocation to creditors under the resolution plan is as follows: Banks: 13.3 percent (of which only Rs 1 crore is paid upfront, with the rest paid in five-year instalments); fixed deposit holders: 12.8 percent; allottees: 10.6 percent; GMADA: 10%; statutory dues: 8% Only Rs. 72 crore, or 12.5 percent of the admitted claims, is involved. The Rs. 399.89 crore in capital work-in-progress, which should have at least doubled in value by now, has raised concerns.

In all such bankruptcy instances (especially in real estate involving public sector banks), the answer is simple – large-scale looting.

These PUFE transactions are meant to be added back in and recover the corporate debtor. Fortunately, the parties concerned were able to resolve these issues as well. A total of Rs. 1.85 crore in preferential payments to two C&C group entities was reported. A total of Rs. 91 lakh in undervalued transactions was discovered. Nothing was found to be extortionate, and the total amount of fraudulent transactions was only Rs. 2.51 crore. During this procedure, it was also discovered that there was a fake excess booking of 289,445 square feet for around 91,000 square feet of space.

The most incredible feature of this sham is that the major victims, the allottees, have no say in the entire process. They had no way of monitoring the project and were duped by the existence of tainted government-owned banks and the GMADA, as they received no assistance from law enforcement agencies, and were eventually consigned to the status of the Code outsiders. Property buyers, according to banking and resolution professional Rajendra Ganatra, cover the project cost as well as the full debt and equity servicing but have no locus standi in the Code.

In fact, homeowners’ rights were completely overlooked until the infamous examples of duped homebuyers like Amrapali and Jaypee Infratech began to dominate the media headlines. They were simply designated as unsecured financial creditors. It’s not nearly enough. They own the site and have put money into the project. Because they are under no legal duty and lack institutional resources to monitor the project, their rights should be on par with or even higher to secured lenders. To correct this grave error, real estate bankruptcy laws should be entirely revised.

Reverse CIRP 

In a significant factual matrix, certain homebuyers as being financial creditors had made an insolvency plea against a real estate companythat was admitted. However, a sui generis proposition cropped up before the National Company Law Appellate Tribunal (“NCLAT”) i.e. whether a corporate debtor might be subjected to the rigors of CIRP without a resolution applicant. Significantly, the NCLAT decided to conduct an ‘experiment’ by introducing the alien concept of Reverse CIRP.

The primary aim of the Code is directed towards resolving the debtors’ insolvency status in an expeditious and time-bound manner that is likely to maximize the value of the debtor’s assets in order to protect the interests of all stakeholders. However, once in the hands of CIRP, defaulting promoters and management of a corporate debtor lose control of the company, which is either liquidated or resolved of its debts subject to a successful resolution plan.

Normatively, despite being declared as financial creditors, homebuyers lack the commercial wisdom that is held by a financial institution apropos determining the commercial, technical and economic viability of a resolution plan. In this light, the NCLAT observed that a real estate developer’s CIRP should be interpreted in the opposite way, as infrastructure is the ‘asset’ of the corporate debtor company, which, under the Code, can only seek allotments of flats to be made, whereas homebuyers are unsecured creditors who can only seek allotments of flats to be made. In an ideal scenario, financial institutions would accept a haircut on their debts to resolve arrears, but homebuyers would not be able to take a haircut on their flats/apartments. Therefore, the CIRP was limited to the project under dispute and not extended to any other projects of the corporate debtor.

PUFE through the Judicial Lens 

1.M/s Embassy Property Developments v. State of Karnataka & Ors.

It was held that the “NCLAT has jurisdiction and power to try fraudulent questions but they would not have the jurisdiction to adjudicate upon the dispute such as those arising under the MMDR Act, 1957, especially when the disputes run around the decisions of statutory and quasi-judicial authorities.”

2.Raman Agarwal vs Mohit Chawla, RP of JR Agro Tech Pvt Ltd.

The NCLAT passed an order that “Adjudicating Authority (NCLT) of the country will never entertain the company applications in insolvency matters as Interlocutory Applications are maintainable under the Code.

3.Ebix Singapore Pte Ltd. v. Committee of Creditors of Educomp

The Supreme Court putting an end to a long-running debate under the Code, by ruling that a resolution plan approved by the committee of creditors (“CoC”) cannot be withdrawn or modified by the successful resolution applicant (“RA”).

Applying the Alternative Dispute Resolution Mechanisms

The Real Estate (Regulation and Development) Act (“RERA”) has perhaps brought forward countless incidents of consumer dissatisfaction with real estate developers and service providers since its establishment. Huge delays in project delivery, PUFE transactions as outlined hereinabove, increase in cost during construction, imbalanced builder-buyer agreements, and the lack of an efficient enforcement mechanism have intensified consumer anguish and agony over time, resulting in a steep rise in the number of complaints submitted before the judicial forums.

Not only has this increased the burden on RERA officials, but it has also increased the pressure on civil courts and consumer forums, which are already struggling with a crisis of docket explosion and the ever-increasing pendency of cases. As a result, it is past time for Alternative Dispute Resolution (“ADR”) to be utilized as a means of dispute resolution in the real estate sector. In fact, the mediation forums established under RERA allow the parties to reach a settlement as well.  

The parties involved in the creation, management, purchase, and sale are well-versed in the time and financial implications of disputes. ADR can assist both home buyers and builders in resolving their disputes expeditiously. While not all disputes can be resolved, the trend is clearly in favor of upholding and enforcing arbitration agreements, which are a cost-effective alternative to litigation.

Contract enforcement and management are directly tied to the utility and benefits of ADR. Almost every time ADR has been used, it has been incorporated into the contract, where the parties have previously agreed to employ this approach to resolve any potential disagreements.

However, it is important to remember that the majority of real-estate disputes are extremely technical in nature and must be handled by experts who have the necessary knowledge and understanding of the subject.


PUFE transactions in the real estate sector have become a menace and the amendments are ineffective in easing the process of instituting a suit against the infrastructure and real estate giants. In India, the real estate sector is one of the few that has grown at an exponential rate during the last two decades. It has attracted substantial investments from those who have invested their hard-earned life savings in order to realise their dreams of owning a home. However, due to stagnation, the most sought-after investment avenue has suffered a drop in appeal.

Per contra, on a meticulous reading, the amendments have proven to be beneficial to the homebuyers. The modification to the Code is beneficial to buyers who are experiencing difficulties as a result of unfinished real estate projects. Homebuyers are impacted by project delays because they invest a significant percentage of their funds to make a down payment on a property, pay an EMI on the loan, and continue to pay rent in their existing location. The recent Code amendment has now changed this scenario.

After achieving the status of financial creditor under the Code, homebuyers have the right to sue an erroneous developer under Section 7 of the Code. Financial creditors can file an application with the respective NCLT to initiate CIRP against a failing company by invoking section 7 of the Code. Homebuyers can also expect quick tracking of pending court actions against major real estate companies because they are represented in the CoC by an authorised representative. Therefore, similar to any other law, even this amendment has been welcomed by a few groups and vociferously opposed by a few others. Only time can tell the practical efficacy of these changes to the Code.


The views and opinions expressed by the authors are personal.

About the Authors 

Mr. Love Kumar Gupta is a Senior Associate at PSL Advocate & Solicitors, New Delhi.

Charvi Devprakash is a 3rd Year Law student at the PES University, Bangalore. She is also an Associate Editor at IJPIEL.

Editorial Team 

Managing Editor: Naman Anand 

Editors-in-Chief: Muskaan Singh and Jhalak Srivastav 

Senior Editor: Hamna Viriyam 

Associate Editor: Charvi Devprakash 

Junior Editor: Harshita Tyagi

Preferred Method of Citation  

Love Kumar Gupta and Charvi Devprakash, “Analysing the Perils of the Real Estate Sector in the Background of Insolvency & Bankruptcy Laws: Identifying Pufe Transactions” (IJPIEL, 29 April 2022) 




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