Director Liability During Insolvency And Winding Up: Emerging Standards Under The Insolvency And Bankruptcy Code, 2016 And The Companies Act, 2013

I.  Introduction

The evolution of India’s insolvency framework from a fragmented and largely creditor-unfriendly regime to the consolidated structure under the Insolvency and Bankruptcy Code, 2016 (“IBC”) has significantly reshaped the risk landscape for company directors, particularly in periods of financial distress. The IBC does not operate in isolation; rather, it overlays and interacts with the broader corporate governance framework established under the Companies Act, 2013 (“Companies Act”), with specific duties and liabilities that crystallize once financial distress reaches the “twilight zone” the period when directors know or ought to know that commencement of a corporate insolvency resolution process (“CIRP”) is reasonably likely.

This article examines the emerging doctrinal standards on director liability in this twilight zone and during insolvency/winding up, with particular emphasis on section 66 IBC (fraudulent and wrongful trading) and their interaction with misfeasance and fraud provisions under the Companies Act, 2013. It draws on statutory text, National Company Law Tribunal (“NCLT”) and National Company Law Appellate Tribunal (“NCLAT”) jurisprudence, High Court decisions, and leading commentary.

II.  Statutory Framework: IBC and Companies Act

 A. Section 66 IBC: Fraudulent and Wrongful Trading

Section 66 of the IBC creates a two‑tier regime of director liability: fraudulent trading under section 66(1) and wrongful trading under section 66(2). The provision, as reproduced and applied by the NCLAT in M/s Commune Properties India Pvt Ltd vs Smt. Ramanathan Bhuvaneshwari & Ors., Company Appeal (AT) (Insolvency) Nos. 574 & 592 of 2019, order dated 20-09-2019 (NCLAT, New Delhi) reads:

• Fraudulent trading (s 66(1)): If during 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 Adjudicating Authority may, on the resolution professional’s application, order “any persons who were knowingly parties” to such conduct to contribute to the assets of the corporate debtor. The provision is thus aimed at addressing deliberate misconduct and fraud.
• Wrongful trading (s 66(2)): It addresses wrongful trading, which does not require fraudulent intent. Liability may be imposed where, prior to the insolvency commencement date, a director or partner knew, or ought reasonably to have known, that there was no reasonable prospect of avoiding the commencement of CIRP, and failed to exercise due diligence in minimizing potential losses to creditors.

This provision captures situations of negligent or reckless conduct in the period leading up to insolvency. The Explanation deems due diligence to have been exercised if the diligence is that reasonably expected of a person carrying out the same functions as that director. This is a functional, not merely formal, test and accommodates de facto and shadow directors.

Importantly, section 66 is remedial in nature, as it seeks to augment the assets of the corporate debtor for the benefit of creditors, rather than to punish wrongdoing. It is therefore distinct from section 69 of the IBC, which deals with transactions defrauding creditors and imposes criminal liability.

B.  Related Avoidance and Offence Provisions under IBC

The liability framework under section 66 is reinforced by the broader avoidance and enforcement architecture of the Insolvency and Bankruptcy Code, 2016 (“IBC”), which collectively seeks to preserve asset value and deter misconduct in the period preceding insolvency.

• Preferences and undervalued transactions: Sections 43, 45, 47, 49, and 50 confer powers on the resolution professional to examine transactions undertaken prior to the commencement of insolvency and to identify instances of preferential, undervalued, or otherwise suspect dealings. These provisions enable the resolution professional to apply to the adjudicating authority for appropriate relief in cases where such transactions have prejudicially impacted the interests of creditors. In practice, findings from forensic audits or transaction reviews under these provisions often form the factual basis for invoking section 66, particularly where patterns of value diversion, asset stripping, or inequitable treatment of creditors emerge.
• Offences by officers: Part II, Chapter VII (sections 68–77) criminalizes concealment of property, falsification of books, and fraudulent transactions. The NCLAT has emphasized that officers, including promoters, can be punished for concealment and fraud within twelve months prior to commencement. The statutory framework thus extends beyond civil liability to penal consequences, particularly in cases involving deliberate misconduct in the period leading up to

C.  Companies Act, 2013: Misfeasance, Fraud and Investigation

The Companies Act remains the general framework for director’s duties and remedies, many of which are now invoked in the context of insolvency. These provisions increasingly intersect with insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (“IBC”), particularly in cases involving misconduct or value diversion.

• To begin with, the Companies Act contains a robust regime addressing misfeasance and fraud. Sections 241 and 242 empowers stakeholders to initiate proceedings in cases of oppression and mismanagement, while section 213 enables the Tribunal to order an investigation into the affairs of a company where there is reason to believe that its business has been conducted with intent to defraud creditors or for a fraudulent or unlawful purpose. Where such misconduct is established, officers in default may be held liable for fraud under section 447, which prescribes stringent penalties. In practice, these provisions operate alongside the IBC framework, and findings of fraudulent conduct in insolvency proceedings may also trigger investigation and prosecution under the Companies Act.

• Further, section 339 of the Companies Act which succeeds section 542 of the Companies Act, 1956 contemplates the imposition of personal liability on directors and other responsible persons for fraudulent conduct in the course of winding up. Although the provision is yet to be fully operationalised, it reflects a legislative intent consistent with the principles underlying section 66 of the IBC. In the interim, section 66 has emerged as the primary mechanism for addressing wrongful or fraudulent trading and facilitating recovery in insolvency scenarios.

• Finally, the Companies Act has been structurally aligned with the IBC through amendments introduced by the Eleventh Schedule to the These amendments are inter alia, expanded and the definition of “winding up” to include liquidation under the IBC and harmonise various provisions such as sections 230, 249, and 270–271 with the insolvency framework. This legislative integration underscores the complementary operation of the two regimes in addressing corporate distress and director accountability.

III.  The “Twilight Zone” and the Shift of Duties to Creditors

Indian legal discourse recognises a “twilight zone” in which directors’ duties shift from shareholders to creditors as a company approaches insolvency. This aligns with the wrongful trading framework under the UK Insolvency Act, 1986, where liability arises once insolvency becomes unavoidable.

Section 66(2) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) codifies this principle by triggering liability when a director “knew, or ought to have known, that there was no reasonable prospect of avoiding” the commencement of the Corporate Insolvency Resolution Process (“CIRP”). As explained in detailed Indian analysis of director duties in distress, this imposes a positive duty to:

• closely monitor solvency and liquidity;
• take informed, documented decisions to minimize loss to creditors; and
• avoid value-destructive transactions, including preferences, undervalued transfers, and opaque related-party dealings.

IV.  Judicial Elaboration of Section 66: Emerging Standards

A. Scope and Purpose: NCLAT in Commune Properties

In M/s Commune Properties India Pvt Ltd vs Smt. Ramanathan Bhuvaneshwari & Ors., Company Appeal (AT) (Insolvency) Nos. 574 & 592 of 2019, order dated 20-09-2019 (NCLAT, New Delhi), the National Company Law Appellate Tribunal (“NCLAT”) elucidated the scope and structural framework of section 66 of the Insolvency and Bankruptcy Code, 2016 (“IBC”), along with its interaction with the fraud and investigation provisions under the Companies Act, 2013. The Tribunal observed that:

• Objective of section 66: The provision is designed to secure contributions to the assets of the corporate debtor where its business has been carried on with fraudulent intent, or where directors have failed to exercise due diligence once insolvency becomes reasonably
• Interplay with Companies Act provisions: In circumstances indicating that the business was conducted with an intent to defraud creditors, the Adjudicating Authority may, in addition to invoking section 66, exercise powers under section 213 of the Companies Act to direct an investigation, potentially culminating in prosecution for fraud under section 447.
• Integrated enforcement mechanism: Offences under the IBC (including section 68) are triable by Special Courts designated under section 435 of the Companies Act read with section 236 of the IBC, underscoring the coordinated and integrated nature of the statutory regime.

This judgment situates section 66 as part of a broader toolkit, with civil contribution orders under IBC complemented by criminal and investigative routes under the Companies Act.

B.  Personal Accountability in Practice

Adjudicating Authorities under the Insolvency and Bankruptcy Code, 2016 (“IBC”) have demonstrated an increasing readiness to impose personal liability on directors under section 66 where fraudulent intent or reckless conduct is established:

Tribunals have emphasised that where transactions indicate value diversion, lack of commercial rationale, or opacity particularly in relation to guarantees, asset transfers, or related-party dealings directors may be called upon to personally contribute to the assets of the corporate debtor. A failure to adequately explain or rebut such conduct often results in adverse inferences, reinforcing the evidentiary burden on those in control of the company’s affairs.

Importantly, section 66 has been consistently characterised as remedial in nature, aimed at augmenting the insolvency estate rather than punishing wrongdoing. At the same time, tribunals have clarified that it is not constrained by rigid temporal limitations in cases involving fraudulent conduct, thereby allowing scrutiny of transactions beyond conventional look-back periods where circumstances warrant.

This evolving approach reflects a broader judicial willingness to enforce substantive accountability within the insolvency framework. In effect, section 66 functions as a powerful tool to pierce the corporate veil in appropriate cases, particularly where directors or controlling entities are found to have been knowingly involved in fraudulent or wrongful trading.

These decisions signal a willingness to “pierce the veil” within the insolvency forum itself, consistent with commentary that section 66 necessarily carries with it an implicit power to disregard separate corporate personality where directors or parent entities have been “knowingly parties” to fraudulent trading.

C.  Limits of Section 66: Proceedings against Creditors

While section 66 is a powerful accountability mechanism, tribunals have clarified its boundaries. It is not intended to implicate every party connected with the corporate debtor.

It is important to note that, financial creditors acting in the ordinary course of lending are generally outside its scope, even where their actions may have indirectly enabled the debtor’s conduct. The provision is designed as a remedy for creditors, not against them.

Accordingly, section 66 primarily targets directors, officers, related parties, and other persons who were knowingly involved in or benefited from fraudulent or value-diverting transactions, thereby preserving its focus on culpable conduct without discouraging legitimate commercial activity

D.  Procedural Dimensions and Timelines

Regulation 35A of the CIRP Regulations prescribes timelines for filing avoidance and section 66 applications. However, tribunals have treated these timelines as directory rather than mandatory, adopting a pragmatic approach where delays are justified.

Recognising that such proceedings serve a public interest in maximising creditor recoveries, adjudicating authorities have been willing to condone delays and allow claims to proceed on merits. Similarly, liquidation timelines may be extended where section 66 applications are pending, given their importance to the realisation of the liquidation estate.

V.  The Role of Civil Courts and the Displacement of Earlier Regimes

The advent of the Insolvency and Bankruptcy Code, 2016 (“IBC”) has significantly reshaped not only the substantive basis of director liability but also the forum in which such claims are pursued.

Courts have increasingly recognised that allegations of fund diversion or misconduct by directors, which were earlier framed as civil or misfeasance claims under company law, are now more appropriately addressed within the insolvency framework. In particular, the IBC empowers resolution professionals to pursue such claims under section 66, thereby reducing the scope for standalone civil suits based on broad or tort-like allegations.

Further, by virtue of section 63 of the IBC, the jurisdiction of civil courts is expressly barred in matters falling within the domain of the National Company Law Tribunal (“NCLT”) and the National Company Law Appellate Tribunal (“NCLAT”). This has reinforced the position that claims relating to insolvency, including director misconduct connected with the affairs of the corporate debtor, must be adjudicated within the specialised insolvency forum.

Taken together, these developments reflect a clear shift: director-liability litigation in the context of financial distress has moved away from fragmented civil proceedings towards targeted, insolvency-specific remedies under the IBC, with the NCLT/NCLAT emerging as the central forum for enforcement.

VI.  Conclusion

The Insolvency and Bankruptcy Code, 2016, read in conjunction with the Companies Act, 2013, has transformed director liability in the context of insolvency and winding up from a largely exceptional remedy into a central pillar of the insolvency framework. Section 66, in particular, operates across three key dimensions:

• Temporal: Liability is not confined to conduct during the corporate insolvency resolution process (CIRP) or liquidation. In cases of wrongful trading, it extends to decisions taken in the “twilight zone” preceding the commencement of insolvency, when directors knew or ought reasonably to have known that the initiation of insolvency proceedings was unavoidable.
• Personal: Contribution orders may be imposed not only on directors but also on partners, shadow controllers, and any other persons who were knowingly parties to fraudulent trading. This civil exposure may be accompanied by parallel criminal liability under the IBC and the Companies Act.
• Remedial: The primary objective is restorative securing contributions to the insolvency or liquidation estate. This operates alongside the avoidance of specific transactions and may, where warranted, trigger statutory investigations and prosecutions.

At the same time, the National Company Law Tribunal and the National Company Law Appellate Tribunal have articulated principled limits on the use of Section 66. They have declined to extend its scope to bona fide financial creditors and have recognised that civil remedies rooted in superseded provisions such as Section 542 of the Companies Act, 1956 have, in large measure, been displaced by the IBC regime.

The emerging jurisprudence reflects a calibrated but firm elevation of director accountability. Directors who, in the face of impending insolvency, act with diligence, transparency, and a genuine intent to minimise creditor losses may avail themselves of the due diligence safe harbour. Conversely, those who engage in reckless trading, dissipate corporate value, or participate in fraudulent conduct face a tangible risk of personal financial liability and, in appropriate cases, criminal sanction.

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