Section 66 of IBC, 2016
Table of Contents
The Insolvency and Bankruptcy Code, 2016 (“the IBC”) is a landmark legislation designed to streamline corporate debtor restructuring and ensure timely resolution of insolvency cases. It emphasizes director accountability during insolvency by holding them personally liable for actions that worsen the financial position of a failing company, thereby protecting creditor interest. Section 66 of the IBC serves as a critical safeguard, enabling the Adjudicating Authority to impose liability on directors or other persons who conduct business with fraudulent intent or engage in wrongful trading. This provision deters misconduct, ensures fraudulent intent or engages in wrongful trading. This provision deters misconduct, ensures responsible corporate governance, and promotes fairness in the resolution process by making individuals accountable for their actions during corporate distress.
Structure of Section 66
Section 66(1): Fraudulent Trading
If, during the CIRP or liquidation process, it is found that:
The business of the corporate debtor was carried on with intent to defraud creditors or for any fraudulent purpose, then the National Company Law Tribunal (NCLT) can, on an application by the resolution professional (RP), order that persons knowingly involved in such fraudulent conduct contribute to the assets of the corporate debtor.
Section 66(2): Wrongful Trading
If before the insolvency commencement date:
A director or partner knew or ought to have known that there was no reasonable prospect of avoiding insolvency, and yet failed to exercise due diligence in minimizing potential loss to creditors, the NCLT may order such persons to contribute to the assets of the company.
Unlike fraudulent trading, this does not require proof of intent to defraud.
Read more : Time Limit on Admissibility of Claims During CIRP: Where to Draw the Line?
Objective of Section 66 of IBC
The objective of this section 66 of the IBC is to hold directors and others personally liable for fraudulent or wrongful trading when a company is heading towards insolvency, thereby protecting creditors and ensuring responsible conduct during corporate distress. It was introduced to prevent the misuse of corporate structures by individuals in charge of failing businesses, ensuring they cannot escape liability through fraud or negligence.
Key Differences between Fraudulent and Wrongful Trading under the IBC in tabular form
| Section 66(1) – Fraudulent Trading | Section 66(2) – Wrongful Trading | |
| Intent Required | Yes, intent to defraud creditors for any fraudulent purpose is required. | No intent is required, it focuses on negligence or failure to act responsibly |
| Who can be held liable | Any person who knowingly participated in fraudulent activities, including directors, employees, or outsiders | Only directors or partners who knew or ought to have known that the company had no reasonable change of recovery |
| Nature of offense | Criminal or fraudulent in nature, involving deliberate deceit | Civil or negligent in nature, arising from a failure to exercise due care |
| When triggers | During the insolvency process or liquidation, when fraudulent intent is discovered | Before the insolvency begins, when a director continues business dispute knowing insolvency in inevitable |
| Focus of Inquiry | The specific intent behind business decisions and actions | The overall conduct and management of the company when insolvency was imminent |
| Consequence | The AA can order the guilty party to contribute to the debtor’s assets | AA can order the director or partner to contribute to the debtor’s assets to minimise creditor losses |
| Application Filing | Filed by the RP during insolvency or liquidation | Filed by the RP before insolvency begins |
Judicial Interpretations of Section 66
In Anuj Jain v. Axis Bank Ltd., the Supreme Court clarified that section 66 applies only when there is evidence of fraudulent or wrongful trading with intent to defraud creditors. Further it held that mere creation of security interests by a corporate debtor for its holding company, even if in a related party context, does not constitute fraudulent trading if done in the ordinary course of business, without intent to defraud. The court emphasised that the absence of such intent, particularly where transactions are part of normal business operations like a guarantor’s role, precludes liability under section 66. In Shailesh Sangani v. Joel Cardoso, the court recognized that both preferential transactions under section 43 and fraudulent trading under section 66 can coexist, with each carrying distinct legal consequences and requiring separate factual and legal inquiries. In IDBI Bank v. Jaypee Infratech Ltd., the court reinforced promoter accountability under section 66, holding that promoters can be personally liable for fraudulent or wrongful trading if they knowingly engaged in transactions that harmed the corporate debtor’s assets or creditor’s interests during financial distress.
Role of the Resolution Professional
The RP investigates potentially fraudulent or wrongful transactions by forming an opinion within 75 days, making determination by 115 days, and filing an application before the NCLT within 135 days of the insolvency commencement date to avoid such transactions under section 43-51 and section 66 of the IBC. The NCLT has the authority to adjudicate on their validity and order the recovery of assets or their value for the benefits of creditors. RPs also face significant challenges in proving intent or negligence in transactions, particularly when evidence is incomplete or when the corporate debtor’s management has obscured financial records, making it difficult to establish a clear case of such transactions under the IBC.
Section 66 and its Interplay with Other Provisions
Section 66 addresses fraudulent and wrongful trading by holding directors and other persons liable for contributions to the corporate debtor’s assets if business was conducted with intent to defraud creditors or without due diligence when insolvency was imminent, distinct from section 43-51 which focus on avoiding specific pre-insolvency transactions like preferential or undervalued transfers. While these sessions aim to recover assets transferred improperly, section 66 targets the conduct of business itself during insolvency, focusing on the intent and negligence of individuals rather than validity of individual transactions. This provision reinforces director duties under the Companies Act, 2013 by imposing a duty to act in the best interest of creditors once insolvency is foreseeable, aligning with the principle of due diligence expected of a reasonable director. There is potential overlap with criminal liability under other laws, which provides for imprisonment and fines for fraudulent acts, thereby creating a dual civil and criminal accountability.
Conclusion
Section 66 of the IBC acts as a deterrent against misconduct by directors and others in failing businesses, ensuring personal liability for fraudulent or wrongful trading, thereby promoting transparency and accountability in the insolvency process. It is crucial for creditors as it safeguards their interests by enabling recovery of losses, empowers insolvency professionals to pursue claims against responsible individuals, and holds directors accountable for failing to act responsibly when insolvency is imminent. By enforcing ethical conduct and discouraging asset stripping or negligence, section 66 strengthens India’s insolvency regime, contributing to higher recovery rates and greater investor confidence in the resolution framework.
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