Wrongful Trading and Director Liability Under the IBC

Wrongful trading under section 66(2) of the Insolvency and Bankruptcy Code, 2016, can now expose a director to a personal contribution order without any proof of dishonesty, where the director knew or ought to have known a corporate insolvency resolution process could not reasonably be avoided and failed to exercise due diligence to minimise creditor loss. The Insolvency and Bankruptcy Code (Amendment) Act, 2026 gave the concept its first statutory definition, extended standing to the liquidator, and ensured such proceedings survive the closing of the insolvency process. This post examines when a director's duty under section 66(2) crystallises and what evidence distinguishes a defensible commercial judgment from a contribution order.

What the Code Now Calls Wrongful Trading, and Where Fraud Sits

Both concepts have always lived in section 66. What the 2026 Amendment adds is definitional weight. A new section 5(2A) defines avoidance transaction by reference to sections 43, 45, 49 and 50, and a new section 5(9A) defines fraudulent or wrongful trading by reference to section 66. The marginal heading of section 66 itself was recast on 26 May 2026 from "Fraudulent trading or wrongful trading" to "Fraudulent or wrongful trading". These look cosmetic. They are not, because a defined term carries through the whole statute, and it is what lets sections 26 and 47 attach consequences to the entire category.

What Is the Difference Between Section 66(1) and Section 66(2)?

Section 66(1) is the fraud limb. It applies where the business of the corporate debtor has been carried on with intent to defraud creditors or for any fraudulent purpose, and it reaches any person knowingly a party to that conduct, not only directors. Intent has to be proved.

Section 66(2) is the wrongful trading limb and requires no dishonesty at all. Two conditions must both be met: that before the insolvency commencement date the director or partner knew or ought to have known there was no reasonable prospect of avoiding the commencement of a corporate insolvency resolution process (CIRP), and that the director or partner did not exercise due diligence in minimising the potential loss to creditors. The Explanation supplies the yardstick, being the diligence reasonably expected of a person carrying out the same functions in relation to that corporate debtor.

The two limbs operate independently, and the appellate tribunal has said so. In Nalinesh Kumar Paurush v. Arvind Mittal [Company Appeal (AT) (Insolvency) No. 346 of 2024, decided 25 September 2025], the National Company Law Appellate Tribunal set aside a contribution order of Rs. 28.5 lakh against suspended directors who had bought shares in thinly traded companies. It held that the two ingredients of section 66(2) are cumulative, that neither was established, and that a transaction audit report cannot by itself carry the burden. Commercial risk-taking that ends in a loss is not wrongful trading.

What Actually Changed on 26 May 2026

Liquidators Now Have Standing

Before the amendment, both limbs of section 66 could be invoked only by a resolution professional. That produced a gap that defendants exploited. The person best placed to investigate historic conduct was often the liquidator, appointed after the CIRP had failed, while the only person with standing had already demitted office. Section 66(1) now reads on the application of the resolution professional or the liquidator, and section 66(2) permits an application by a resolution professional during the CIRP or by a liquidator. Both insertions took effect on 26 May 2026.

Section 47 was reworked alongside it, so a creditor, member or partner may apply where an avoidance transaction or wrongful trading occurred but was not reported, with disciplinary consequences available against a professional who failed to report. That removes a single point of failure which had quietly defeated many of these applications: an insolvency professional working without funding, without cooperation from the erstwhile management, and against a tight regulatory deadline.

Proceedings No Longer Die With the Process

The more consequential change sits in section 26, which previously provided only that an application for avoidance of transactions would not affect the CIRP. It now extends to fraudulent or wrongful trading, and carries an explanation confirming that completion of the corporate insolvency resolution process or of the liquidation process does not affect the continuation of proceedings in respect of an avoidance transaction, fraudulent or wrongful trading, or under section 47.

For a director, that is the sentence that matters most. The working assumption in many boardrooms was that once a resolution plan was approved and the corporate debtor emerged, everything associated with the old regime went with it. The assumption was always shaky; it is now plainly wrong. The clean slate codified in section 31(6) protects the corporate debtor and its assets. It does not protect the individuals who ran it. Liability under section 66 attaches personally and survives the closing of the file.

When the Duty Crystallises, and What Should Be on the Record

Section 66(2) fixes the relevant moment as the point at which a director knew or ought to have known that there was no reasonable prospect of avoiding a CIRP. That is not the date of default, and it is not the date a section 7 application is filed. It is earlier, it is a question of fact, and it will be decided with hindsight by a tribunal reading the board's own papers.

What Evidence Protects a Director From a Wrongful Trading Claim?

What protects a director is evidence that the question was asked and answered on a proper basis at the time. Board minutes should record the solvency assessment itself rather than the conclusion: the cash position, the assumptions behind the projections, the headroom under existing facilities, and the specific reasons for believing the company could trade through. Rolling short-term cash-flow forecasts prepared before the decision, rather than reconstructed for the litigation, are the single most valuable document on the file.

The record should also show what was done to limit creditor exposure once the position deteriorated: professional advice taken and then acted on, credit terms tightened, discretionary spending stopped, refinancing or restructuring conversations opened, and any decision to keep incurring credit justified by reference to something concrete rather than optimism. A director who dissented should ensure the dissent is minuted. Section 166 of the Companies Act, 2013 already requires a director to exercise due and reasonable care, skill and diligence and to exercise independent judgment. The section 66(2) inquiry is, in substance, a test of whether that happened when it was hardest to do.

Does Indian Law Have an Equivalent to the UK's Every Step Defence?

Section 214(3) of the UK Insolvency Act 1986 gives directors an express statutory defence. The court will not make a declaration if satisfied that, after the director first knew or ought to have concluded that insolvent liquidation was unavoidable, that person took every step with a view to minimising the potential loss to creditors that he ought to have taken. Section 66(2) of the Code contains no separately drafted defence at all.

Indian law reaches a comparable destination by a different route. Because the two ingredients are cumulative, a director who did exercise due diligence in minimising potential loss falls outside the sub-section entirely, and the applicant carries the burden of establishing both limbs on cogent material. Counsel should nonetheless resist treating the two formulations as equivalent. "Did not exercise due diligence" is a softer test to answer than "took every step", which imposes a positive and demanding standard. The Explanation also calibrates the benchmark to the functions actually performed, so a finance director and a marketing director are not measured against the same expectations.

Where Non-Executive and Independent Directors Sit

Section 66(2) speaks of a director or partner of the corporate debtor without qualification. It draws no distinction between executive, non-executive and independent directors, and none should be assumed. What varies is the content of the standard, because the Explanation ties diligence to the functions actually carried out.

The realistic exposure for a non-executive is therefore not that she failed to run the company but that she failed to ask. A non-executive who received deteriorating management accounts, raised nothing, and went on approving the incurring of fresh credit is in a materially worse position than one whose questions, and the answers given to them, appear in the minutes. Boards should ensure that requests for information and the management responses are recorded rather than merely resolved.

There is an outer limit to all of this. In Usha Ananthasubramanian v. Union of India [(2020) 4 SCC 122] the Supreme Court set aside an order freezing the assets of a person who had never been a director of the company whose affairs were under examination, treating section 339 of the Companies Act, 2013 as pari materia with section 66 and holding that both fasten on the business of that company, not on the business of some other entity. Section 66 is not a general remedy against everyone in the vicinity of a failed group. That reading fits the approach taken in Swiss Ribbons Pvt. Ltd. v. Union of India [(2019) 4 SCC 17], where the Court upheld the constitutional validity of the Code as economic legislation entitled to considerable deference and directed at resolution rather than recovery. These are targeted restitutionary provisions, not a punitive net.

Frequently Asked Questions

Does a director have to be dishonest to be liable for wrongful trading?

No. Dishonesty belongs to section 66(1), which requires intent to defraud creditors or a fraudulent purpose. Section 66(2) is satisfied without any dishonesty, on proof that the director knew or ought to have known a CIRP could not reasonably be avoided and failed to exercise due diligence in minimising creditor loss.

When exactly does the duty crystallise?

At the point before the insolvency commencement date when the director knew or ought to have known that a CIRP could not reasonably be avoided. There is no fixed trigger in the statute. In practice it sits somewhere between the first serious liquidity warning and the filing, and it is decided on the documents the board generated at the time.

Can a liquidator now bring section 66 proceedings?

Yes. Since 26 May 2026 both section 66(1) and section 66(2) permit an application by a liquidator as well as a resolution professional. Section 47 additionally allows a creditor, member or partner to apply where the conduct occurred but went unreported.

Does an approved resolution plan end the risk for former directors?

No. Section 26 now confirms that completion of the CIRP or the liquidation process does not affect the continuation of avoidance or wrongful trading proceedings. The clean slate under section 31(6) runs in favour of the corporate debtor and its assets, not in favour of the individuals who managed it.

Are independent directors within the scope of section 66(2)?

Yes. The sub-section applies to a director or partner without distinguishing by category. The Explanation calibrates the expected diligence to the functions actually carried out, so the standard applied to an independent director differs in content from that applied to a managing director, but the provision itself is not disapplied.

How does section 66 of the Code relate to section 339 of the Companies Act, 2013?

Section 339 addresses fraudulent conduct of business in a winding up and allows the Tribunal to declare persons personally responsible without limitation of liability, with further exposure under section 447. The Supreme Court has treated it as broadly parallel to section 66, and both are confined to the business of the company under examination.

What is the difference between an avoidance transaction and wrongful trading under the amended Code?

An avoidance transaction, defined at section 5(2A) of the Insolvency and Bankruptcy Code, 2016 by reference to sections 43, 45, 49 and 50, concerns specific transactions, preferential, undervalued, extortionate, or intended to defraud creditors, that can be reversed by the Adjudicating Authority. Fraudulent or wrongful trading, defined at section 5(9A) by reference to section 66, concerns the conduct of the persons who ran the business, either dishonestly under section 66(1) or without due diligence once insolvency could not reasonably be avoided under section 66(2), and results in a personal contribution order against that individual rather than a reversal of a transaction.

What remedy follows if a director is found liable for wrongful trading under section 66(2)?

Where a director is found liable under section 66(2) of the Insolvency and Bankruptcy Code, 2016, the Adjudicating Authority can order that director to make such contribution to the assets of the corporate debtor as it considers proper, reflecting the loss caused to creditors by the failure to exercise due diligence once a corporate insolvency resolution process could not reasonably be avoided. The order operates personally against the director, distinct from any claim against the corporate debtor itself, and is separate from reversing any specific transaction under the avoidance provisions.

Can reliance on professional advice help a director defend a wrongful trading claim?

Documented reliance on professional advice, such as a solvency opinion, an auditor's assessment, or restructuring advice taken and genuinely acted upon, is relevant evidence that a director exercised the diligence the Explanation to section 66(2) requires, being the diligence reasonably expected of a person carrying out the same functions. It is not an automatic defence; a director who obtained advice but ignored its substance, or who sought advice only after the position had already deteriorated significantly, is unlikely to be assisted by having a report on file. What matters is whether the advice was genuinely acted upon at the time.

Who faces the disciplinary consequence under the reworked section 47, the director or the insolvency professional?

The reworked section 47 of the Insolvency and Bankruptcy Code, 2016 creates two separate consequences. A creditor, member or partner who discovers that an avoidance transaction or wrongful trading occurred but was never reported can apply to the Adjudicating Authority for relief against those responsible, and separately, disciplinary consequences become available against the insolvency professional, the resolution professional or liquidator, who failed to identify and report the conduct in the first place. The director who engaged in the conduct remains exposed under section 66 itself; section 47's disciplinary limb targets the professional's own reporting failure.

What standard of due diligence must a director meet under section 66(2)?

The Explanation to section 66(2) of the Insolvency and Bankruptcy Code, 2016 ties the required diligence to what would reasonably be expected of a person carrying out the same functions in relation to that particular corporate debtor. This is a functional, not a uniform, standard, so a finance director responsible for cash management is measured against a different benchmark than a non-executive director whose role was oversight rather than day-to-day management. The test looks at whether the director asked the right questions and acted on the answers, given the role that director actually performed.

Is a director's contribution order under section 66(2) capped at a fixed amount?

Section 66(2) of the Insolvency and Bankruptcy Code, 2016 does not fix a statutory ceiling on the amount of a contribution order. The Adjudicating Authority assesses the appropriate contribution based on the loss attributable to the director's failure to exercise due diligence, with the order intended to restore value to the pool available to creditors rather than to punish the director beyond that loss. In practice this means the amount claimed is tied to the evidence of loss actually put before the tribunal, which is why applications built only on a generic transaction audit report, without more, have failed to sustain large contribution orders.

Can section 66 proceedings be brought against a director before the company enters a formal insolvency process?

Section 66(2) proceedings can only be brought by a resolution professional during the corporate insolvency resolution process, or by a liquidator, so the application itself presupposes that the corporate debtor is already within a formal insolvency process. The conduct being examined, whether a director knew or ought to have known a CIRP could not reasonably be avoided, necessarily concerns the period before that process began, but the proceeding to establish liability cannot be initiated before the company has actually entered the CIRP or liquidation.

Vikrant D. Shetty | Vikrant D. Shetty leads the Insolvency and Arbitration Practice and the Corporate and Commercial Law Practice at the law firm Vikrant D. Shetty & Associates, Advocates & Solicitors which advises boards, directors, financial creditors and corporate debtors on directors' duties, misfeasance and avoidance proceedings before the National Company Law Tribunal (NCLT), Mumbai Bench, and appears before the Bombay High Court in matters involving companies, insolvency and contractual enforcement.

Related reading: Legal and Practical Difficulties Faced by Insolvency Professionals in India.

This article is for general informational purposes only and does not constitute legal advice. For advice specific to your situation, please seek direct consultation with an advocate.