The Insolvency and Bankruptcy Code, 2016 (IBC) is a law in India designed to help businesses, individuals, and partnerships resolve financial troubles, such as when they can’t pay their debts. It aims to make the process of handling insolvency (when someone or a company can’t pay what they owe) fair, fast, and organized. One important part of this law is Section 67, which helps enforce rules against dishonest or harmful business practices, specifically those covered under Section 66 (fraudulent or wrongful trading). Let’s break down Section 67 in a simple way, explain how it works, and why it matters.
Unlock new career opportunities with The Legal School’s Certification in Bankruptcy & Insolvency Law: Corporate Restructuring & Debt Resolution, in collaboration with IndusLaw. This six-month program, led by industry experts, equips you with critical skills in insolvency litigation, financial distress management, and corporate rescue strategies. Earn a prestigious certificate and elevate your expertise in a rapidly evolving field!
What is Section 67 of the IBC?
Section 67 is like a tool that helps the Adjudicating Authority, which is usually the National Company Law Tribunal (NCLT), make sure that orders issued under Section 66 are actually followed.
Section 66 deals with situations where company directors or officers act dishonestly or carelessly, causing financial harm to the company or its creditors (people or entities the company owes money to). Section 67 gives the NCLT the power to take practical steps to enforce these orders, ensuring that those responsible face consequences and that creditors are protected.
This section became effective on December 1, 2016, when many parts of the IBC were officially put into action. It’s part of the section of the law that deals with corporate insolvency, meaning it applies to businesses (not individuals or partnerships).
Importance of Section 67 of IBC, 2016
When a company is struggling financially and goes through insolvency proceedings, it’s possible that some directors or officers may have acted dishonestly, for example, by hiding money or assets to avoid paying creditors.
Section 66 allows the NCLT to hold these individuals personally responsible, meaning they might have to pay back money or assets to the company. However, just saying someone is responsible isn’t enough; there needs to be a way to make sure that responsibility is enforced. That’s where Section 67 comes in, which gives the NCLT the power to make sure those orders are carried out in a practical way.
For example, Section 67 allows the NCLT to put a “charge” (like a legal claim) on certain assets or debts to secure the money owed. It also lets the NCLT decide which debts get paid first, ensuring fairness for creditors who might have been harmed by dishonest actions.
Also read about Section 12A of IBC, 2016.
Breaking Down Section 67: What Does It Say?
Section 67 is divided into two main parts, each explaining a specific power the NCLT has to enforce orders under Section 66. Let’s look at each part in detail:
Part 1: Creating a Charge on Assets or Debts (Sub-section 1)
When the NCLT makes an order under Section 66, saying that a director or officer is responsible for fraudulent or wrongful trading, it can take extra steps to make sure the order is followed. Specifically, the NCLT can:
Put a Charge on Assets or Debts: This means the NCLT can legally tie the responsibility (or liability) of the guilty person to specific assets or debts. For example:
If the company owes money to the guilty person (like a loan they gave the company), the NCLT can say that the money they’re responsible for paying back is tied to that debt.
If the guilty person has control over a property or asset of the company (like a mortgage or a legal claim on property), the NCLT can place a charge on that asset.
If someone else is holding or claiming the company’s assets on behalf of the guilty person (called an “assignee”), the NCLT can include those assets in the charge.
The NCLT can also include assets held by someone acting for the guilty person.
Give Additional Instructions: The NCLT can issue further directions to make sure the charge works. For example, it might say how the asset or debt should be handled to ensure the money is recovered.
Protecting Honest Transactions: There’s an important clarification in this part: an “assignee” (someone who receives or claims the company’s assets or debts) is included in this rule, but only if they didn’t act in good faith. If someone received an asset or debt honestly, paid a fair price for it, and didn’t know about the Section 66 order, they’re protected. This ensures that innocent people or businesses aren’t unfairly punished.
This part of Section 67 makes sure that the money or assets owed by the guilty person are secured, so the company’s creditors have a better chance of getting paid back.
Part 2: Adjusting Debt Priorities (Sub-section 2)
The second part of Section 67 of Income Tax Act deals with how debts are paid when a company is insolvent. Normally, when a company’s assets are divided up during insolvency, some creditors get paid before others based on a priority list outlined in Section 53 of the IBC. For example, secured creditors (like banks with a claim on property) and workers’ unpaid wages often come first.
Under Section 67, the NCLT can change this order for specific debts. If a creditor is owed money by the company, the NCLT can decide that this debt should be paid after:
All other debts owed by the company.
Any “first charge” on the company’s assets, as defined in Section 53.
This is important because it prevents creditors who might have benefited from fraudulent or wrongful trading from getting paid before others who were harmed. It helps ensure a fair distribution of the company’s remaining money or assets.
How Does Section 67 Work in Real Life?
To make this clearer, let’s imagine a scenario:
Suppose a company is going through insolvency because it can’t pay its debts. The Insolvency Resolution Professional (IRP), who is appointed to manage the process, discovers that one of the company’s directors was hiding money or assets to avoid paying creditors. The IRP files a case with the NCLT under Section 66, accusing the director of fraudulent trading. If the NCLT agrees and finds the director guilty, it can order the director to pay back money to the company.
Now, Section 67 comes into play. The NCLT might:
Decide that the director’s liability (the money they owe) is tied to a property they control or a debt the company owes them.
Order that any money owed to a creditor connected to the director’s actions gets paid after other creditors which ensures fairness.
This process protects the company’s assets and makes sure creditors aren’t cheated by dishonest actions.
Summary
Section 67 of the IBC, 2016 gives the National Company Law Tribunal (NCLT) the power to enforce orders against directors or officers who engage in fraudulent or wrongful trading, as identified under Section 66. The NCLT can secure the money owed by tying it to specific assets or debts and can adjust the order in which creditors are paid in order to ensure fairness. This section helps protect creditors and ensures that dishonest actions have real consequences. While it is a strong tool in theory, its success depends on how courts apply it in different cases.
Related Posts:
Section 67 of IBC: FAQs
Q1. What is Section 66 and 67 of the IBC?
Section 66 deals with fraudulent or wrongful trading, holding directors or officers personally responsible for financial harm caused by their dishonest or careless actions. Section 67 helps enforce Section 66 orders by allowing the NCLT to create charges on assets or debts and adjust the order in which creditors get paid.
Q2. What is Section 68 of the IBC?
Section 68 punishes company officers who transfer or dispose of the company’s property within one year before insolvency to cheat creditors. They can face imprisonment or fines.
Q3. What is a Moratorium under the IBC?
A moratorium is a legal pause that stops lawsuits, asset sales, or other actions against a company during insolvency proceedings. It protects the company’s assets and operations while a resolution plan is worked out.
Q4. What is Section 65 of the IBC, and are there case laws?
Section 65 punishes people who start insolvency proceedings dishonestly or with bad intentions. Case laws (court decisions) help clarify how this section is applied, focusing on proving the person’s intent to abuse the process.
Q5. How Long is the Moratorium Period?
The moratorium starts when insolvency proceedings begin and lasts until the resolution process ends (usually 180 days, but it can be extended to 330 days) or until the company is ordered to be liquidated.
