Fraudulent trading or wrongful trading [ Section 66 ] - Insolvency Resolution And Liquidation For Corporate Persons - IBC

Fraudulent trading or wrongful trading [ Section 66 of the IBC, 2016 ] The IBC also provides for contributions to be made in case of fraudulent or wrongful trading by the CD. The provision relating to fraudulent or wrongful trading is divided into two parts. Section 66(1) of the IBC deals with fraudulent trading and section 66(2) of the IBC deals with wrongful trading. Business of Corporate Debtor carried to defraud creditors [ Section 66(1) of the IBC, 2016 ] If during the corporate insolvency resolution process 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 Adjudicating Authority may on the application of the resolution professional pass an order 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. There is no look-back period provided in section 66(1) of the IBC. NCLT can order contribution to assets by defrauding director or partner [ Section 66(2) of the IBC, 2016 ] On an application made by a resolution professional during the corporate insolvency resolution process, the Adjudicating Authority may by an order direct that a director or partner of the corporate debtor, as the case may be, shall be liable to make such contribution to the assets of the corporate debtor as it may deem fit, if- (a) before the insolvency commencement date, such director or partner knew or ought to have known that the there was no reasonable prospect of avoiding the commencement of a corporate insolvency resolution process in respect of such corporate debtor; and (b) such director or partner did not exercise due diligence in minimising the potential loss to the creditors of the corporate debtor. Suspended CIRP [ Section 66(3) of the IBC, 2016 ] The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020, has introduced sub-section (3) in section 66, Notwithstanding anything contained in this section, no application shall be filed by a resolution professional under sub-section (2), in respect of such default against which initiation of corporate insolvency resolution process is suspended as per section 10A . in cases where default has arisen in the specified period on or after March 25, 2020, the RP cannot file any application against wrongful trading under section 66(2) of the IBC. Explanation .-For the purposes of this section a director or partner of the corporate debtor, as the case may be, shall be deemed to have exercised due diligence if such diligence was reasonably expected of a person carrying out the same functions as are carried out by such director or partner, as the case may be, in relation to the corporate debtor. Relevant Case Laws Axis Bank Ltd. Vs. Anuj Jain 2019 (8) TMI 140 - NCLAT Dated 01.08.2019 The AA had allowed the application under sections 66, 43 and 45 of the Code and ordered that the mortgaged properties be vested with the CD. On appeal, the NCLAT noted that the mortgages were made in favour of the banks and financial institutions by the CD in the ordinary course of business. Further, in absence of any contrary evidence to show that they were made to defraud the creditors of the CD or for any fraudulent purpose, it set aside the order of the AA.