Fraudulent and Wrongful Trading under Section 66 IBC: What Directors Need to Know

Directors need to know that section 66 of the Insolvency and Bankruptcy Code 2016 can make them personally contribute to an insolvent company's assets. Fraudulent trading under section 66(1) catches anyone knowingly party to carrying on business to defraud creditors. Wrongful trading under section 66(2) catches directors who knew or ought to have known that insolvency could not reasonably be avoided and did not exercise due diligence to minimise creditors' losses. Since the IBC (Amendment) Act 2026, more people can bring these claims, and the claims outlive the insolvency process itself.

This article explains the tests, the 2026 changes and the practical steps directors can take when a company is in financial difficulty.

What does section 66 actually say?

Fraudulent trading: section 66(1)

If, during the corporate insolvency resolution process (CIRP) or liquidation, it is found that any business of the corporate debtor was carried on with intent to defraud creditors or for any fraudulent purpose, the NCLT may, on application, order that any persons who were knowingly parties to it make such contributions to the corporate debtor's assets as it thinks fit.

Two features stand out. First, it is not limited to directors: promoters, shadow controllers, group companies and third parties who knowingly participated can be caught. Second, it requires intent to defraud, which must be proved with evidence.

Wrongful trading: section 66(2)

The NCLT may direct a director or partner to contribute if:

• before the insolvency commencement date, they knew or ought to have known that there was no reasonable prospect of avoiding the commencement of a CIRP; and
• they did not exercise due diligence in minimising the potential loss to creditors.

The Explanation provides that a director is deemed to have exercised due diligence if it was the diligence reasonably expected of a person carrying out the same functions in relation to the corporate debtor. The test is objective. Ignorance is not a defence if a reasonably diligent director in the same role would have known.

The COVID-era carve-out: section 66(3)

Section 66(3), inserted in 2020, bars wrongful trading applications in respect of defaults for which initiation of CIRP was suspended under section 10A, which covered defaults arising from 25 March 2020 for up to a year.

Consequences: section 67

Where an order is made, section 67 allows the NCLT to make the liability a charge on any debt or obligation owed by the corporate debtor to that person, and to direct that debts owed to a person held liable rank after all other debts in the section 53 waterfall. For a promoter who is also a creditor, subordination can be significant.

What changed in 2026?

The IBC (Amendment) Act 2026 (Act 6 of 2026), with its avoidance-related provisions in force from 26 May 2026, made several changes that directly affect directors.

The survival point confirms in statute the approach of the Delhi High Court in Tata Steel BSL Ltd. v. Venus Recruiter Pvt. Ltd. (2023), which held that such applications are independent proceedings that survive the CIRP.

For directors, the practical message is that the window of exposure has widened. A claim not pursued by the resolution professional may still be brought by a creditor, and the conclusion of the process no longer ends the risk. The Supreme Court's 2025 decision in Piramal Capital & Housing Finance Ltd. v. 63 Moons Technologies Ltd. also shows that section 66 recoveries can be dealt with in a resolution plan, including by assignment to the resolution applicant, which can put the claim in the hands of a motivated new owner.

What kind of conduct leads to section 66 claims?

Section 66 claims usually emerge from the transaction audit that resolution professionals commission to discharge their regulation 35A duties (see our post on forensic audits in CIRP). Common patterns include:

• taking customer advances or supplier credit when the directors knew the company could not deliver or pay;
• moving business, staff or contracts to a related entity while leaving liabilities behind;
• continuing to draw remuneration, pay related-party creditors or repay promoter loans while trade creditors went unpaid;
• obtaining fresh bank finance on optimistic projections that management knew were unrealistic;
• diverting funds through related parties, which may also amount to avoidance transactions or wilful default.

Payments preferring related creditors in the two years before the initiation date can separately be challenged as preferential transactions under section 43, so the same facts may support several claims.

What evidence will an applicant rely on?

Section 66 cases are built on documents. A resolution professional, liquidator or creditor will typically look at:

• Board and committee minutes, to establish what directors were told about liquidity and when;
• management accounts, cash-flow forecasts and lender correspondence, including covenant breach notices and restructuring proposals;
• bank statements and ledgers, to show payments made after the point at which insolvency was foreseeable, and to whom;
• related-party records, to identify transfers to promoter entities or relatives;
• emails and messages, which often reveal what directors actually knew, as opposed to what was formally reported.

The applicant has to connect this evidence to a date: the point at which a reasonable director would have concluded that CIRP could not be avoided. Losses incurred by creditors after that point are the focus of any contribution order. Directors who cannot produce their own record of that period are at a disadvantage.

How can directors protect themselves?

Wrongful trading is judged with hindsight, so the best protection is a contemporaneous record showing that the board recognised the risk and acted reasonably.

Monitor solvency actively

Boards of companies under strain should review rolling cash-flow forecasts, debt maturities, covenant compliance and creditor ageing regularly, and minute those discussions. Strong internal controls over treasury and payments make it easier to show what the board knew and when.

Take and record professional advice

When insolvency becomes a realistic prospect, directors should take restructuring and legal advice and record what was advised and how the board responded. Decisions to continue trading should be supported by a reasoned basis, such as a credible funding plan.

Focus on creditors' interests

As insolvency approaches, decisions should be tested against their effect on creditors as a whole. That generally means avoiding new credit the company cannot repay, avoiding payments that favour related parties or particular creditors, and preserving assets.

Ask questions and record dissent

Non-executive and independent directors should ask for the information they need, challenge assumptions and ensure concerns are minuted. A director whose questions were ignored should consider whether to escalate or resign, and record why.

Consider timely insolvency or restructuring

Delaying an inevitable insolvency often deepens creditor losses, which is precisely what section 66(2) penalises. Timely engagement with lenders, a restructuring or an application to initiate CIRP may be the course that best demonstrates due diligence. Each situation needs specific legal advice.

How does section 66 interact with other liabilities?

Section 66 sits alongside other exposures. Lenders may examine diversion of funds for fraud classification or wilful defaulter proceedings under RBI directions. Section 69 IBC makes transactions defrauding creditors a criminal offence carrying imprisonment of one to five years or a fine of INR 1 lakh to INR 1 crore, or both. Companies Act and Bharatiya Nyaya Sanhita offences may also apply. A director facing a section 66 application should assume that the same evidence may be used in other forums.

How Spectra Forensics can help

Our stressed asset and insolvency forensics supports resolution professionals, liquidators and creditors in investigating section 66 conduct, and supports directors and their counsel in reconstructing the decision record and testing the evidence against them. Our stressed asset and insolvency forensics service covers fund-flow tracing, related-party analysis and diversion reviews in distressed companies.

Spectra Forensics has 19+ years of investigation experience and has completed more than 1,250 investigations. To discuss a matter, contact us.