Fraudulent and Wrongful Trading under IBC: Section 66

Avoidance provisions reverse particular transactions. Section 66 looks instead at how the business was run. Where it was carried on to cheat creditors, everyone knowingly involved can be made to pay into the estate; and where directors carried on trading after they knew, or should have known, that insolvency was inevitable, they can be made to contribute for failing to protect creditors. This note explains both forms of liability, the procedure, the consequences under section 67 and the leading decisions.

1. Fraudulent Trading, Section 66(1)

• The provision. If during the CIRP 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 NCLT may, on the application of the resolution professional, direct that any persons who were 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.
• Any person. Liability is not confined to directors; promoters, group companies, and other third parties who knowingly took part can be made to contribute.
• Intent. Intent to defraud must be pleaded and proved; it may be inferred from the pattern and circumstances of transactions, such as diversion of funds to related entities, fictitious entries or round tripping.
• Nature of liability. The liability is civil, a contribution to the estate rather than a punishment; criminal offences for fraud are separate.

Figure 1: The two limbs of section 66

2. Wrongful Trading, Section 66(2)

• The provision. On an application by the resolution professional during the CIRP, the NCLT may direct that a director or partner of the corporate debtor shall be liable to make such contribution to its assets as it may deem fit, if (a) before the insolvency commencement date, the director or partner knew or ought to have known that there was no reasonable prospect of avoiding the commencement of a CIRP; and (b) the director or partner did not exercise due diligence in minimising the potential loss to the creditors.
• Due diligence. The Explanation provides that a director or partner is deemed to have exercised due diligence if it was such as could reasonably be expected of a person carrying out the same functions, having regard to his knowledge, skill and experience.
• No dishonesty needed. Wrongful trading is a form of negligence; a director who honestly but unreasonably kept trading and incurring debts can be liable.
• Section 66(3). Inserted in 2020, it bars an application under section 66(2) in respect of a default for which initiation of the CIRP is suspended under section 10A (Topic 15)

Figure 2: Testing a wrongful trading claim

3. Consequences, Section 67

Figure 3: What follows an order under section 66

• Further directions. The NCLT may give directions for giving effect to the order, including making the liability a charge on any debt or obligation owed by the corporate debtor to the person liable, or on any mortgage, charge or interest held by that person on the debtor's assets.
• Subordination. Where the person liable is a creditor, the NCLT may direct that the whole or part of the debt owed to that person, with interest, ranks after all other debts in the order of priority under section 53.

4. Procedure and Proof

• Who applies. Section 66 originally referred to applications by the resolution professional; the 2026 Amendment added the liquidator to both sub-sections and renamed the section fraudulent or wrongful trading, and a creditor may now apply under section 47 where the professional fails to act.
• Transaction audit. Resolution professionals commonly appoint forensic or transaction auditors to review the debtor's books; their findings found the application, but the NCLT looks for evidence establishing the intent or the director's knowledge, not merely the auditor's conclusions.
• Separate proceedings. Applications under section 66 are proceedings in Chapter VI, distinct from avoidance applications under Chapter III; in Piramal Capital v 63 Moons Technologies (2025), the Supreme Court directed that combined applications be separated and each decided under its own provisions (Topic 47)
• After the CIRP. Like avoidance applications, section 66 proceedings may continue after approval of the plan, and the 2026 Amendment provides that the end of the CIRP or liquidation does not affect them.

5. Decisions of the NCLAT

• Royal India Corporation v Nandkishor Deshpande, 2024. The NCLAT upheld an order under section 66(1) against an entity managed by the same persons as the corporate debtor, holding that the provision extends to any person knowingly party to the fraudulent conduct, including an apparent third party, and relying on Phoenix ARC v Spade Financial Services (2021)
• Swapan Kumar Saha v Ashok Kumar Agarwal, 2025. Decided on 6 November 2025, the NCLAT upheld an order requiring a suspended director to contribute about 8.71 crore rupees for shares bought by the debtor at an inflated price and later sold to him at a much lower price; it held that a single proven instance of fraud is sufficient, that sections 66(1) and 66(2) operate independently, and that the claim was not defeated by the passage of time.

6. Comparison with Other Laws

• Section 339 of the Companies Act, 2013. Provides a similar remedy for fraudulent conduct of business in winding up, making those responsible personally liable without limitation for the company's debts; section 66 is the counterpart for insolvency under the Code.
• United Kingdom. Section 66 is modelled on sections 213 and 214 of the Insolvency Act, 1986, which provide for fraudulent and wrongful trading.
• Criminal law. Fraud may also be prosecuted under the Companies Act, the Bharatiya Nyaya Sanhita and the Code's own offences; section 66 does not displace them.

7. Frequently Asked Questions

Can a bank or a group company be made liable under section 66?

Under section 66(1), yes, if it was knowingly a party to the business being carried on with intent to defraud creditors. Section 66(2), however, applies only to directors and partners.

A director continued to take advances from customers after the company's lenders had recalled their loans. Is this wrongful trading?

Possibly. If he knew or ought to have known that there was no reasonable prospect of avoiding a CIRP and did not act with due diligence to minimise creditors' losses, the NCLT may order him to contribute under section 66(2).

Can a director who is also a creditor still recover his loan after a section 66 order?

The NCLT may subordinate his debt so that it ranks after all other debts under section 53, and may make his liability a charge on what the company owes him (section 67).

8. Related Topics

• Topic 47: Avoidance Transactions. Definitions and look-back.
• Topic 52: Personal Liability of Directors and Promoters. Wider liability.
• Topic 76: Offences and Penalties after 2026. Criminal and civil penalties.