IBC Section 66: Directors Made Personally Liable for Illiquid Share Investments During Imminent Insolvency
- REEDLAW
- Sep 27
- 3 min read
REEDLAW Legal News Network reports: In a pivotal ruling, the National Company Law Appellate Tribunal (NCLAT), New Delhi Bench, held that directors who deployed corporate funds into illiquid, non-traded shares despite the company’s imminent insolvency and without reasonable due diligence were liable for wrongful trading under Section 66(2) of the Insolvency and Bankruptcy Code. The Tribunal ruled that such directors could be directed to personally contribute to the liquidation estate to compensate for the loss caused to creditors.
The National Company Law Appellate Tribunal (NCLAT), New Delhi Bench, comprising Justice Mohd. Faiz Alam Khan (Judicial Member) and Mr. Arun Baroka (Technical Member), while adjudicating a Company Appeal and connected Interlocutory Application, held that the directors who invested corporate funds in illiquid, non-traded shares despite the corporate debtor’s imminent insolvency and without exercising reasonable due diligence were guilty of wrongful trading under Section 66(2) of the Insolvency and Bankruptcy Code. The Bench directed that such directors could be made personally liable to contribute to the liquidation estate to safeguard the interests of creditors.
The National Company Law Appellate Tribunal (NCLAT), examined an appeal filed by the suspended directors of a corporate debtor challenging the order of the adjudicating authority which had declared certain share purchase transactions as fraudulent and directed them to contribute Rs. 28,50,000 to the liquidation estate. The corporate debtor had entered the corporate insolvency resolution process (CIRP) by order dated 25 June 2021, and a resolution professional was appointed and later confirmed as liquidator. A transaction auditor, appointed by the liquidator, reviewed the company’s financial records from April 2016 to June 2021 and reported that funds of the corporate debtor were used in August 2019 to purchase large quantities of equity shares of two companies whose shares had not been actively traded for several years and for which no demat account or formal sale agreements were produced.
The suspended directors contended that the investments were made in the ordinary course of business after exercising due diligence, anticipating appreciation in share value, and that mere loss-making investments could not be categorised as fraudulent. They argued that there was no evidence of intent to defraud creditors and that the transactions remained assets of the corporate debtor, even fetching a liquidation offer of Rs. 15,00,000. They asserted that the transaction audit report lacked conclusive proof and that Section 66 of the Insolvency and Bankruptcy Code, 2016 (IBC) required dishonest intent, which had not been established.
The respondent liquidator and assignee of the liquidation proceeds maintained that the transactions were carried out without due diligence, involved unlisted and illiquid shares, and violated regulatory norms. They argued that the directors were aware of the imminent insolvency and still chose to invest in non-traded shares, thereby failing to minimise potential losses to creditors. The transaction audit report, supported by financial statements and bank records, was relied upon to establish a lack of diligence and fraudulent conduct.
The tribunal, after reviewing the statutory requirements of Section 66 of the IBC and relevant precedents, concluded that the directors had invested in non-traded shares within seven months of the insolvency commencement application and could not reasonably have expected to avoid insolvency. The tribunal held that due diligence had not been exercised and that the transactions created illiquidity, satisfying the criteria of wrongful trading under Section 66(2). It found that proof of intent to commit a culpable fraud under the Penal Code was not necessary; rather, failure to exercise reasonable diligence when insolvency was imminent was sufficient. Accordingly, the order directing the suspended directors to contribute Rs. 28,50,000 to the assets of the corporate debtor was upheld.
Mr. Adit S. Pujari, Mr. Avinash Bhati and Mr. Vanya Chhabra, Advocates, represented the Appellants.
Mr. Animesh Pandey, Advocate, appeared for the Respondents.
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