Section 66 IBC: Director Liability for Wrongful Trading

Section 66 reaches past the company to the people who ran it. Fraudulent trading catches anyone who knowingly took part in running the business to cheat creditors; wrongful trading catches directors who carried on when they should have known insolvency was unavoidable and failed to limit the loss. Questions test the mental element, who can be made to pay, the due diligence defence and the orders available.

1. The Law in Brief

Figure 1: Fraudulent and wrongful trading compared

• Section 66(1). If any business of the corporate debtor was carried on with intent to defraud creditors or for any fraudulent purpose, the NCLT may direct any persons knowingly party to it to contribute to the debtor's assets.
• Section 66(2). A director or partner who, before commencement, knew or ought to have known there was no reasonable prospect of avoiding the CIRP, and did not exercise due diligence to minimise the potential loss to creditors, may be directed to contribute.
• Procedure. Applications are made by the resolution professional or, after 2026, the liquidator; a creditor may apply under section 47 if they fail to act. Section 66 proceedings are separate from avoidance applications (Piramal Capital, 2025) and survive the end of the CIRP (section 26)

2. Who Is Liable for Fraudulent Trading under Section 66(1)?

• Issue. Whether persons other than directors can be made liable for fraudulent trading, and on what proof.
• Law. Section 66(1) applies to any persons who were knowingly parties to carrying on the business with intent to defraud creditors or for a fraudulent purpose. Intent must be proved but may be inferred from the pattern of transactions. The NCLAT has applied the provision to apparent third parties managed by the same persons as the debtor (Royal India Corporation, 2024). The liability is a civil contribution, separate from criminal prosecution.
• Application. Payments against fictitious purchase orders, routed through associates to family companies, show an intent to defraud creditors. DE Traders and its partners received and passed on the money knowing there was no supply.
• Conclusion. The NCLT may direct Mr C, DE Traders and its partners to contribute to AB Ltd's assets, up to the amounts diverted. Criminal proceedings and avoidance applications may run separately.

3. When Are Directors Liable for Wrongful Trading?

• Issue. Whether the directors are liable for wrongful trading, and whether Ms H can rely on due diligence.
• Law. Section 66(2) makes a director liable to contribute if, before commencement, he knew or ought to have known that there was no reasonable prospect of avoiding the CIRP, and did not exercise due diligence to minimise the potential loss to creditors. Due diligence is judged by what could reasonably be expected of a person in the same role, given his knowledge, skill and experience. No dishonesty is required.
• Application. From January 2025, the board knew the company could not avoid insolvency. The executive directors increased creditors' losses by taking advances and new credit. Ms H objected and pressed for advice, steps a reasonable independent director could be expected to take.
• Conclusion. The managing director and the two executive directors may be directed to contribute, broadly in proportion to the losses caused to creditors after January 2025. Ms H has a strong case that she exercised due diligence and should not be made liable.

Figure 2: Orders and limits under sections 66 and 67

4. Does Section 66 Apply to the Section 10A Period?

• Issue. Whether a wrongful trading application can be based on the section 10A period, and whether a liquidator may apply.
• Law. Section 66(3), inserted in 2020, bars an application under section 66(2) in respect of a default for which initiation of the CIRP was suspended under section 10A. The 2026 Amendment added the liquidator to section 66, so a liquidator may apply.
• Application. The defaults between 25 March 2020 and 24 March 2021 fall within the section 10A period. The 2024 losses are outside it. The liquidator now has standing.
• Conclusion. The application fails to the extent it relies on defaults in the section 10A period, but may proceed in respect of the 2024 losses, subject to proof of the elements of section 66(2)

5. What Orders Can Be Made under Section 67?

• Issue. The further orders the NCLT may make where the person liable under section 66 is also a creditor of the corporate debtor.
• Law. Section 67(1) allows the NCLT to make 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. Under section 67(2), where the person liable is a creditor, the NCLT may direct that the whole or part of the debt owed to him, with interest, ranks after all other debts under section 53.
• Application. Mr L is both liable to contribute and a creditor, secured and unsecured. His claims can be used to secure his liability and pushed to the bottom of the waterfall.
• Conclusion. The liquidator may seek orders making Mr L's ₹15 crore liability a charge on his ₹10 crore loan claim and on his charge over the property, and directing that any balance of his claims ranks after all other creditors.

6. Frequently Asked Questions

Is liability under section 66 criminal?

No. It is a civil contribution to the estate; criminal offences such as section 69 and the general law operate separately.

Who benefits from section 66 recoveries after a plan is approved?

As the plan provides; in Piramal Capital (2025), the Supreme Court set aside the NCLAT's order that had struck down a plan term letting the resolution applicant keep section 66 recoveries.

Is section 66 modelled on foreign law?

Yes, on sections 213 and 214 of the UK Insolvency Act, 1986.

7. Related Topics

• Topic 51: Fraudulent and Wrongful Trading. Section 66.
• Topic 52: Personal Liability of Directors and Promoters. Wider liability.
• Topic 125: Liquidation Order and CIRP Restoration. Section 33 and restoring the CIRP.