IBC Section 66: Fraudulent trading or wrongful trading

Section 66 of Insolvency and Bankruptcy Code, 2016: Fraudulent trading or wrongful trading

Official Bare Act Text

Override / Mandate Mens Rea (Intent) Actus Reus (Conduct) Punishment Limitation Monetary

(1) If during the corporate insolvency resolution process or a liquidation process, it is found that any business of the corporate debtor has been carried on with intent to defraud creditors of the corporate debtor or for any fraudulent purpose, the Adjudicating Authority may on the application of the resolution professional pass an order that any persons who were 55 knowingly parties to the carrying on of the business in such manner shall be liable to make such contributions to the assets of the corporate debtor as it may deem fit.

(2) On an application made by a resolution professional during the corporate insolvency resolution process, the Adjudicating Authority may by an order direct that a director or partner of the corporate debtor, as the case may be, shall be liable to make such contribution to the assets of the corporate debtor as it may deem fit, if-

(a) before the insolvency commencement date, such director or partner knew or ought to have known that there was no reasonable prospect of avoiding the commencement of a corporate insolvency resolution process in respect of such corporate debtor; and

(b) such director or partner did not exercise due diligence in minimising the potential loss to the creditors of the corporate debtor.

Explanation.-For the purposes of this section a director or partner of the corporate debtor, as the case may be, shall be deemed to have exercised due diligence if such diligence was reasonably expected of a person carrying out the same functions as are carried out by such director or partner, as the case may be, in relation to the corporate debtor.

Legal Commentary & Landmark Judgments: Section 66

Section 66 imposes personal civil liability on directors, partners, and officers who knowingly conducted corporate business with intent to defraud creditors or for any fraudulent purpose.

Core Legal Standard: Under Section 66(1) (fraudulent trading), if during CIRP or liquidation it appears that business was carried on with intent to defraud creditors, NCLT may direct any persons who were knowingly parties to make personal contributions to the debtor's assets.
Operational Mechanism: Under Section 66(2) (wrongful trading), directors who knew or ought to have concluded that insolvency was unavoidable and failed to exercise due diligence to minimize potential losses to creditors can be held personally liable.

Key Landmark Precedents:

Gluckrich Capital Pvt. Ltd. v. State of West Bengal (2023) SCC OnLine SC 1187: Held that proceedings under Section 66 are civil in rem remedies for asset contribution before the NCLT and do not bar or substitute criminal investigations under the IPC or PMLA.
Anuj Jain v. Axis Bank Ltd. (2020) 8 SCC 401: Clarified that Section 66 requires strict proof of fraudulent intent or gross negligence in continuing corporate trading while insolvent.

Legal Commentary:

Section 66 pierces the corporate veil to hold rogue directors and management personally liable for asset stripping. It aligns Indian corporate insolvency law with modern wrongful trading standards, deterring directors from gambling with creditor funds when insolvency is imminent.