Legal Implications Of Technical Write-Off And Avoidance (PUFE) Applications In Insolvency Proceedings

A. Introduction

The Insolvency and Bankruptcy Code, 2016 (“IBC”)¹ represents a watershed in India’s corporate insolvency framework. It seeks to consolidate laws relating to insolvency and ensure time-bound resolution of distressed entities while protecting the value of assets and promoting equitable treatment of creditors. Parallel to the IBC regime, the Reserve Bank of India (“RBI”) regulates the manner in which banks and financial institutions treat non-performing assets in their books of account. One of the most significant measures in this regard is the concept of a technical write-off, particularly after the introduction of the RBI Circular dated 8 June 2023 on Compromise Settlements and Technical Write-offs.² In insolvency practice, another crucial dimension is the use of avoidance applications, commonly known as PUFE (Preferential, Undervalued, Fraudulent, and Extortionate) transactions. These provisions allow the resolution professional or liquidator to claw back transactions which have unjustly enriched certain creditors or stakeholders at the expense of the corporate debtor’s estate.

The interaction of these two frameworks raises recurring questions, like, Can a creditor who has technically written off a loan still file or maintain a claim in insolvency proceedings? Does such write-off dilute the creditor’s standing in the committee of creditors (“CoC”)? Do technical write-offs shield or limit the scope of avoidance proceedings? This article addresses these questions by analyzing the statutory framework, regulatory guidance, and judicial precedents, and by situating technical write-offs alongside avoidance applications in the insolvency context.

B.    Technical Write-Offs: Concept and Regulatory Position 

A technical write-off is a measure by which a lender derecognizes a non-performing asset in its balance sheet for accounting and provisioning purposes, while the debt continues to remain outstanding at the borrower’s account level. As clarified by the RBI, such write-offs do not entail any waiver or relinquishment of claims.³ The legal obligation of the borrower remains unaffected. Thus, the write-off is intended to “cleanse” the balance sheet of banks, improve capital adequacy ratios, and reflect realistic asset quality, but it does not alter the underlying contractual or statutory rights of recovery.

This distinction is expressly made in the RBI’s 2023 Framework, which defines a compromise settlement as a negotiated arrangement involving waiver of claims, but defines a technical write-off as an accounting act “without involving any waiver of claims against the borrower, and without prejudice to the recovery of the same.” In its FAQs dated 20 June 2023, the RBI reiterated that technical write-offs are common banking practice and do not in any manner confer benefit on defaulting borrowers.⁴ In Salim Akbarali Nanji v. Union of India⁵, the Supreme Court held that even after a write-off, the debt remains recoverable, and banks continue to pursue recovery steps. Similarly, the NCLT in RTIL Ltd. v. Nitin Kasliwal⁶ emphasized that write-offs are internal accounting matters and cannot, without more, be characterized as fraudulent trading under Section 66 of IBC.

C.    Technical Write-Offs in Insolvency Proceedings 

The central legal implication of a technical write-off in insolvency is that it does not affect the creditor’s ability to file or pursue claims.⁷ Since the debt subsists, the financial creditor is entitled to submit its claim for the full outstanding amount, including interest, regardless of whether the exposure has been written off in its books. The resolution professional must verify the claim with reference to the loan agreements and evidence of default, not the bank’s internal accounting treatment. This also means that voting rights in the CoC are unaffected. The voting share is determined by the amount of admitted debt, not by the net carrying value in the bank’s financial statements post write-off. To put it simply, a creditor with a technically written-off exposure still participates fully in decision-making under IBC.

Further, technical write-offs do not prejudice the creditor’s entitlement in resolution or liquidation. In liquidation, recoveries are distributed pari-passu according to statutory waterfall priorities. A written-off creditor is treated identically to other creditors in the same class. In resolution, distribution depends on the plan approved by the CoC, but again, admission of claims is independent of accounting adjustments. The Telangana High Court’s decision in Mandava Holdings Pvt. Ltd. v. PTC India Financial Services Ltd.⁸ clarified that where a statute like the IBC prescribes a collective insolvency process, the RBI framework cannot override it. Although the case dealt with compromise settlements, not write-offs, the reasoning underscores that the IBC prevails. Importantly, technical write-offs are not compromises and therefore do not disturb collective creditor rights. As a matter of prudence, however, creditors undertaking technical write-offs during CIRP may intimate the CoC to avoid disputes. The RBI’s framework also mandates internal governance safeguards: board-approved policies on conditions for write-off, cooling-off periods, accountability thresholds, and reporting requirements. These ensure that write-offs are exercised responsibly without undermining recovery rights.

D.    Avoidance Applications (PUFE Transactions) under the IBC 

IBC provides a distinct mechanism to undo transactions of the corporate debtor that prejudice the creditor body as a whole. Sections 43 to 51 cover preferential, undervalued, and extortionate credit transactions, while Section 66 addresses fraudulent and wrongful trading by directors or partners.⁹ These provisions are designed to enlarge the debtor’s estate and prevent erosion of value in the period preceding insolvency. The jurisprudence, beginning with Anuj Jain v. Axis Bank¹⁰ and reinforced in subsequent Supreme Court rulings, emphasizes that avoidance actions are debtor-centric, they scrutinize the conduct of the corporate debtor and related parties, not the accounting choices of individual creditors.

In this framework, the fact that a creditor may have technically written off its loan exposure does not limit the scope or pursuit of PUFE applications. Write-offs are creditor-side accounting measures with no bearing on whether the debtor’s transactions meet the statutory tests of preference, undervalue, or fraud. Resolution professionals remain duty-bound to file avoidance applications irrespective of such write-offs, and any recoveries ordered by the tribunal accrue to the benefit of the estate, to be distributed as per the resolution plan or liquidation waterfall. Thus, while technical write-offs may clean up bank balance sheets, they do not restrict or insulate the debtor from avoidance scrutiny, ensuring that the statutory objective of asset maximization and creditor equality remains intact.

Further clarity has been provided by the Supreme Court in the DHFL/Piramal line of cases, where the Court distinguished between different categories of avoidance recoveries. It held that recoveries under Chapter III provisions, preferential, undervalued, or extortionate transactions, are inherently estate-enlarging and must flow back for the benefit of the collective creditor body. By contrast, Section 66 recoveries arising from fraudulent or wrongful trading can, as a matter of the committee of creditors’ commercial wisdom, be allocated to the resolution applicant if the plan so provides. This distinction underscores that while avoidance actions remain central to the insolvency process, the distribution of their fruits is ultimately guided by statutory objectives and creditor autonomy, unaffected by any technical write-off undertaken by individual lenders.¹¹

E.    Interaction of Technical Write-Offs and PUFE Applications 

The key point of interaction is that technical write-offs do not affect or restrict avoidance actions. Since a write-off is not a transaction by the debtor, it cannot be the subject of avoidance proceedings. Avoidance focuses on the debtor’s conduct, preferences, undervaluations, fraudulent or extortionate dealings, not on how creditors account for their exposures.

Equally, avoidance actions are not nullified by the fact that a creditor has written off the underlying loan. The resolution professional is duty-bound under Section 25(2)(j)¹² to pursue avoidance irrespective of provisioning decisions of banks. Indeed, the Supreme Court has underscored that recoveries from avoidance applications belong to the estate, unless the resolution plan approved by the CoC provides otherwise. In the DHFL/Piramal matter, the Court distinguished between Chapter III recoveries (which ordinarily augment the estate) and Section 66 recoveries (which may be allocated to resolution applicants if the CoC so decides, as part of its commercial wisdom). Thus, write-offs and avoidance occupy distinct domains. Write-offs affect the creditor’s balance sheet but not the estate. Avoidance restores estate value by reversing debtor-side misconduct. Together, they ensure that insolvency resolution proceeds on fair and equitable lines.

F.    Invocation of Contractual Set-Off (FLDG)

Consider the example of a bank invoking a First Loss Default Guarantee (FLDG) clause or exercising a contractual set-off against borrower funds held with it, prior to CIRP. Could this be challenged as a preferential transaction? The Supreme Court in Bharti Airtel Ltd. v. Vijaykumar V. Iyer¹³ clarified that while statutory set-off under the Code of Civil Procedure does not apply to CIRP, contractual set-offs validly existing before the insolvency commencement date are enforceable. The Court reasoned that the moratorium does not alter contractual rights existing prior to CIRP. Applying this reasoning, invocation of FLDG or set-off before CIRP would not amount to a preference. First, it is a unilateral action of the bank pursuant to contract, not a transfer by the debtor. Second, it is in the ordinary course of business and squarely within the exceptions of Section 43(3). Hence, the transaction would survive scrutiny and not be liable to reversal under avoidance provisions.

G.   Practical Implications for Stakeholders

The discussion on technical write-offs and avoidance applications carries distinct implications for different stakeholders in the insolvency process. For banks and financial creditors, it is critical to recognize that technical write-offs are purely accounting exercises and do not curtail their rights under the IBC. Creditors remain entitled to submit claims for the full outstanding debt, participate in the committee of creditors, and receive distributions in resolution or liquidation. Compliance with the RBI’s governance framework, particularly board-approved policies, cooling-off periods, and reporting requirements, ensures that write-offs are exercised responsibly and insulated from any allegation of impropriety. Banks should, as a matter of prudence, also disclose the fact of technical write-off to the CoC during the corporate insolvency resolution process to avoid any misunderstanding.

For resolution professionals, technical write-offs should be treated as legally neutral while verifying claims and conducting insolvency proceedings. The RP must admit claims on the basis of the underlying loan documentation and evidence of default, without regard to the creditor’s provisioning decisions. More importantly, the RP remains duty-bound under Section 25(2)(j) to pursue avoidance applications where necessary, irrespective of whether creditors have technically written off exposures. Avoidance actions serve the collective estate and must not be undermined by individual accounting choices.

For resolution applicants, the existence of technically written-off claims in the claims matrix does not diminish creditor standing and must be factored into plan negotiations. Applicants should pay close attention to how avoidance recoveries, especially under Section 66, are allocated in the resolution plan. The Supreme Court has recognized that while Chapter III recoveries must flow to the estate, Section 66 recoveries may be allocated to the resolution applicant if approved by the CoC. Clear drafting on these aspects reduces post-approval disputes and provides certainty in implementation.

H.   Conclusion

The legal implications of technical write-offs and avoidance applications under the IBC must be carefully distinguished. A technical write-off is an internal accounting device undertaken by creditors for regulatory and balance sheet purposes, and it does not waive claims, reduce creditor rights, or relieve the borrower of liability. Avoidance provisions, in contrast, are statutory mechanisms designed to reverse transactions that unfairly erode the debtor’s estate and to ensure equitable distribution among creditors. While write-offs operate on the creditor’s side of the equation, avoidance provisions operate on the debtor’s side, and the two frameworks complement rather than conflict with one another. By affirming that write-offs are legally neutral and avoidance provisions are estate-enlarging, Indian courts and regulators have maintained clarity and coherence in the insolvency framework. Creditors can confidently undertake technical write-offs without fear of prejudicing against their claims, while resolution professionals and applicants can rely on avoidance provisions to safeguard collective interests. Together, these mechanisms uphold the IBC’s core objectives of value maximization, fairness, and creditor equality, strengthening the integrity of India’s insolvency regime.

Footnotes

^{1 Insolvency and Bankruptcy Code, No. 31 of 2016, Gazette of India, (May 28, 2016).}

^{2 Reserve Bank of India, Framework for Compromise Settlements and Technical Write-offs (June 8, 2023), https://rbi.org.in.}

^{3 Id.}

^{4 Reserve Bank of India, FAQs on Compromise Settlements and Technical Write-offs (June 20, 2023), https://rbi.org.in.}

^{5 Salim Akbarali Nanji v. Union of India, (2003) 6 SCC 1.}

^{6 RTIL Ltd. v. Nitin Kasliwal, NCLT Mumbai Bench, Order dated Apr. 24, 2023.}

^{7 ICSIIIP, Legal Implications of Writing Off Loans, Vol. 9 Issue 5 (2020).}

^{8 Mandava Holdings Pvt. Ltd. v. PTC India Fin. Servs. Ltd., Writ Petition No. 20620 of 2024.}

^{9 Insolvency and Bankruptcy Code, § 43-51, No. 31 of 2016, Gazette of India, (May 28, 2016).}

^{10 Anuj Jain, Interim Resolution Professional v. Axis Bank Ltd., (2020) 8 SCC 401.}

^{11 Comm. of Creditors of Dewan Hous. Fin. Corp. Ltd. v. Kapil Wadhawan, 2023 SCC OnLine SC 1071.}

^{12 Insolvency and Bankruptcy Code, § 25(2)(j), No. 31 of 2016, Gazette of India, (May 28, 2016).}

^{13 Bharti Airtel Limited and Ors. vs. Vijaykumar V. Iyer and Ors., MANU/SC/0008/2024.}

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