Section 50 IBC: Extortionate Credit Transactions

Section 50 of the Insolvency and Bankruptcy Code, 2016 deals with avoidance of extortionate credit transactions involving financial or operational debt received by a corporate debtor on terms requiring exorbitant payments. It authorises the liquidator or resolution professional to approach the Adjudicating Authority when the statutory conditions are satisfied.

Legal framework: Section 50 should be read with the applicable IBBI regulations governing the circumstances in which a credit transaction may be treated as extortionate and with Section 51, which specifies the orders the Adjudicating Authority may pass.

Section 50 - Extortionate Credit Transactions

(1) Where the corporate debtor has been a party to an extortionate credit transaction involving the receipt of financial or operational debt during the period within two years preceding the insolvency commencement date, the liquidator or the resolution professional as the case may be, may make an application for avoidance of such transaction to the Adjudicating Authority if the terms of such transaction required exorbitant payments to be made by the corporate debtor.

(2) The Board may specify the circumstances in which a transaction shall be covered under sub-section (1).

Explanation. For the purpose of this section, it is clarified that any debt extended by any person providing financial services which is in compliance with any law for the time being in force in relation to such debt shall in no event be considered as an extortionate credit transaction.

Meaning of Extortionate Credit Transaction

An extortionate credit transaction under Section 50 is a credit transaction involving receipt of financial debt or operational debt by the corporate debtor where the statutory requirements are met and the terms require exorbitant payments from the corporate debtor. The provision is aimed at transactions whose credit terms are excessively burdensome within the framework prescribed under the Code and applicable regulations.

Essential Requirements Under Section 50

Corporate debtor must be a party: the relevant credit transaction must involve the corporate debtor.
Receipt of debt: the transaction must involve receipt of financial debt or operational debt.
Relevant period: the transaction must fall within the statutory period specified by Section 50.
Exorbitant payments: the terms must require exorbitant payments to be made by the corporate debtor.
Application to the Adjudicating Authority: the liquidator or resolution professional may seek avoidance of the transaction when the statutory requirements are satisfied.

Relevant Period for Extortionate Credit Transactions

Section 50 specifies a look-back period of two years preceding the insolvency commencement date for an extortionate credit transaction involving receipt of financial or operational debt. The date and nature of the transaction are therefore important when considering whether an avoidance application falls within this provision.

Role of the Insolvency and Bankruptcy Board of India

Section 50(2) empowers the Insolvency and Bankruptcy Board of India to specify circumstances in which transactions are covered by Section 50(1). The applicable insolvency resolution or liquidation regulations should therefore be checked along with the Code when assessing a particular credit transaction.

Exclusion for Lawful Financial Services Debt

The Explanation to Section 50 provides an express exclusion for debt extended by a person providing financial services where that debt complies with the law applicable to it. Such debt is not to be considered an extortionate credit transaction for the purposes of Section 50.

Who May Apply Under Section 50?

The section expressly permits the liquidator or resolution professional, as the case may be, to make an application to the Adjudicating Authority for avoidance of an extortionate credit transaction. The wider avoidance framework should also be read with Section 47 where applicable.

Adjudicating Authority

For corporate persons under the IBC, the Adjudicating Authority is the National Company Law Tribunal having jurisdiction under the Code. If an extortionate credit transaction is established, the consequential powers of the Adjudicating Authority are dealt with in Section 51.

Related IBC Provisions

For the wider avoidance transaction framework, see Section 43 on preferential transactions, Section 44 on orders concerning preferential transactions, Section 45 on undervalued transactions, Section 46 on the relevant period for undervalued transactions, Section 47 concerning applications by creditors, members or partners, Section 48 on orders in undervalued transactions, and Section 49 on transactions defrauding creditors.

Official Legal Resources

For the authoritative Code, amendments, commencement notifications, regulations and circulars, refer to the official Insolvency and Bankruptcy Board of India Legal Framework and the Government of India's India Code.

This article is intended as a general legal reference. The current statutory text, applicable regulations, commencement notifications and binding judicial decisions should be checked for the facts and date relevant to a particular proceeding.