Fraudulent transaction under the Insolvency and Bankruptcy Code, 2016 refers to any business of a corporate debtor that has been carried on with intent to defraud creditors or for any fraudulent purpose, as well as situations where officers of the corporate debtor knew or ought to have known that there was no reasonable prospect of avoiding insolvency yet continued to incur debts. Under Indian law, Section 66 of the IBC addresses both fraudulent trading and wrongful trading, and uniquely carries no lookback period limitation — it can reach back to any point in the corporate debtor's history.
Legal definition
Section 66 of the Insolvency and Bankruptcy Code, 2016 contains two distinct provisions:
Section 66(1) — Fraudulent trading:
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.
Section 66(2) — Wrongful trading:
On an application made by a resolution professional during 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 corporate insolvency resolution process commenced, such director or partner knew or ought to have known that 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.
Section 66(2) provides a safe harbour: a director or partner is not liable if they exercised due diligence to minimise potential loss to creditors.
How courts have interpreted this term
IDBI Bank Ltd. v. Jaypee Infratech Ltd. (NCLAT, 2019)
The NCLAT examined the scope of Section 66 in the context of the Jaypee Infratech insolvency. The Tribunal held that fraudulent trading under Section 66(1) requires proof of actual intent to defraud, which is a higher evidentiary threshold than the objective test applicable to preferential or undervalued transactions. The burden lies on the resolution professional to demonstrate that the business was conducted with the specific purpose of defrauding creditors.
Ravi Shankar Srivastava v. K. Ramesh (NCLT, Chennai, 2020)
The NCLT held that Section 66(2) (wrongful trading) is analytically distinct from Section 66(1) (fraudulent trading). Wrongful trading does not require proof of fraudulent intent — it is sufficient to show that the director knew or ought to have known that insolvency was unavoidable and failed to take steps to minimise loss. This is an objective standard assessed from the perspective of a reasonably diligent person occupying the same position.
Manoj Kumar Agarwal v. S. Rajendran (NCLT, Hyderabad, 2021)
The NCLT clarified that Section 66 can be invoked against any person who was "knowingly party" to the fraudulent trading, not merely directors. This can include shadow directors, controlling shareholders, professional advisors, and other persons who actively participated in or facilitated the fraudulent conduct.
Why this matters
Section 66 occupies a unique position in the IBC's avoidance framework because it is the only provision that imposes personal liability on directors and officers, creating a direct obligation to contribute to the corporate debtor's assets from their personal wealth. This makes it the sharpest deterrent against promoter misconduct available under the Code.
For practitioners, the distinction between fraudulent trading (Section 66(1)) and wrongful trading (Section 66(2)) is critical. Fraudulent trading requires proof of subjective intent to defraud — a high evidentiary burden. Wrongful trading, by contrast, applies an objective standard: did the director know or ought to have known that insolvency was unavoidable? This objective test makes wrongful trading claims more viable in practice, though they still require evidence of the director's knowledge of the company's financial position at the relevant time.
The absence of a lookback period makes Section 66 the most far-reaching avoidance tool. While preferential, undervalued, and extortionate transactions are limited to one-to-two-year lookback windows, fraudulent transactions can be challenged regardless of when they occurred, provided the business was carried on with fraudulent intent.
Related terms
Broader concept:
Sibling categories:
Liable parties:
Frequently asked questions
Is there a lookback period for fraudulent transactions under IBC?
No. Section 66 does not prescribe any lookback period. Fraudulent trading and wrongful trading can be challenged regardless of when the conduct occurred, making it the broadest avoidance tool under the IBC. This contrasts with preferential transactions (1-2 years) and extortionate credit transactions (2 years).
Can directors be held personally liable for fraudulent transactions?
Yes. Under Section 66(1), any person knowingly party to fraudulent trading can be ordered to make personal contributions to the corporate debtor's assets. Under Section 66(2), directors or partners who engaged in wrongful trading face similar personal liability. This is one of the few provisions in the IBC that pierces the corporate veil.
What is the defence available to directors against wrongful trading claims?
Section 66(2) provides a due diligence defence. A director is not liable if they can demonstrate that they exercised due diligence in minimising the potential loss to creditors. This requires the director to show active steps taken to address the financial distress, such as seeking professional advice, exploring restructuring options, or ceasing to incur further debts.
This entry is part of the Veritect Indian Legal Glossary, a comprehensive reference of Indian legal terminology grounded in statutory text and judicial interpretation.
Last updated: 2026-03-27. Veritect provides this content for informational purposes and does not constitute legal advice.