Section 66 of the Insolvency and Bankruptcy Code (IBC), 2016, is a critical safeguard that prevents misuse of corporate structures during insolvency. It targets directors and others who carry out a company’s business with fraudulent intent or without exercising reasonable care when insolvency is imminent. This provision allows the Adjudicating Authority to hold such individuals personally liable for losses caused to creditors. By penalizing wrongful and fraudulent trading, Section 66 promotes responsible corporate governance and strengthens creditor confidence in the resolution process.

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What is Section 66 of IBC?

Section 66 deals with situations where the company’s business has been carried out with fraudulent intent or irresponsible management, even as the company is heading towards insolvency. It empowers the Adjudicating Authority, usually the NCLT, to hold individuals personally liable for contributing to the corporate debtor’s assets if they are found guilty of such misconduct.

This section is a deterrent against management trying to cheat creditors or engaging in risky business decisions without exercising due care.

Scope of Section 66: Two Main Offences

Section 66 has two main sub-sections that address different kinds of misconduct:

1. Fraudulent Trading [Section 66(1)]

This applies when:

• It is discovered during insolvency or liquidation that the company’s business was being conducted with intent to defraud creditors or for any fraudulent purpose.

• The Resolution Professional (RP) files an application to the Adjudicating Authority (NCLT).

• If proven, any person who knowingly participated in this fraudulent activity may be ordered to contribute to the assets of the corporate debtor.

Example: If directors siphon off money before insolvency knowing the company cannot pay its debts, they can be personally made to repay the amount.

2. Wrongful Trading [Section 66(2)]

This section is wider in scope and focuses on negligence rather than fraud.

It applies when:

• A director or partner knew or ought to have known before insolvency that the company had no reasonable chance of recovery.

• Yet, he/she did not take steps to minimize the losses to creditors.

• In such cases, the director or partner can be held personally liable.

This clause is essential to ensure that company directors do not continue running the business carelessly when they know insolvency is unavoidable.

Explanation Clause: A director is considered to have exercised due diligence if they acted as a reasonably competent person in a similar position would have done under similar circumstances.

3. Exception under Section 66(3)

The government added Section 66(3) through the Amendment Act, 2020, which provides:

• No application can be filed under Section 66(2) if the default occurred during the suspension period under Section 10A.

Section 10A was introduced in response to the COVID-19 pandemic to suspend the initiation of insolvency proceedings for defaults during a specific period. As a result, wrongful trading applications related to defaults in that time cannot be pursued.

Key Differences: Fraudulent vs Wrongful Trading

Fraudulent and wrongful trading may sound similar, but they differ in intent and liability. Here's a quick comparison to help you understand the key distinctions between the two: 

Why is Section 66 of IBC Important?

Section 66 plays a watchdog role in the IBC framework. This provision helps build trust in the insolvency resolution system and supports fair conduct during the corporate distress phase. It ensures that

• Company promoters and directors act responsibly, especially when insolvency is on the horizon.

• Creditors are protected from directors who try to delay insolvency and worsen the financial situation.

• Individuals cannot misuse the corporate structure to escape liability through fraud or negligence.

Real-Life Relevance

Courts and tribunals have often invoked Section 66 when:

• There is evidence of asset stripping.

• Directors gave wrongful personal guarantees or diverted funds.

• Financial statements were manipulated to hide true losses.

• No steps were taken by the management to inform or protect creditors even when insolvency was obvious.

For example, if a company’s director continues to take loans knowing there is no prospect of repayment and doesn't alert creditors, he may be held liable under this section.

In a nutshell,

Section 66 of the IBC acts as a strong deterrent against misconduct on the part of those in charge of failing businesses. It makes sure that directors and other important people can't get away with lying or being careless while the company is on the verge of insolvency. By making people responsible for their actions this rule supports the IBC's main goal of quick and fair resolution. Whether it's fraud or failing to act responsibly, Section 66 helps creditors get their money back and keeps the insolvency framework honest. In the end, it safeguards the interests of all stakeholders and encourages ethical business practices.

Related Posts:

• Difference Between Insolvency and Bankruptcy

• Integrated Law Course 

• Master in Law Abroad

• Is Lawyering a Good Career in India?

• Section 43 of IBC

• Section 60 of IBC

FAQs on Section 66 of IBC

Q1. Who can be held liable under Section 66(1)?

Any person (including directors, employees, or outsiders) who knowingly participated in fraudulent trading.

Q2. Can someone be punished even without committing fraud under Section 66?

Yes. Under Section 66(2), directors or partners can be penalized for negligence, even if there was no fraudulent intent.

Q3. Is there a penalty for wrongful trading during COVID-19?

No. As per Section 66(3), wrongful trading cases cannot be filed for defaults that occurred during the Section 10A suspension period.

Q4. Who can file a case under Section 66?

Only the Resolution Professional appointed in a CIRP can file an application before the Adjudicating Authority.

Q5. What is the outcome if Section 66 is proven?

The guilty parties may be ordered to contribute funds to the company’s assets to reduce creditor losses.