Fraudulent Transaction and Insolvency Proceedings under IBC, 2016

The Term “Fraud” is an involvement of intentional deception or deceitful motives to gain of an unfair advantage or cause harm, encompassing both civil and criminal offenses. It includes false statements, concealment of facts, and actions intended to deceive others, often with the intent to induce someone into a contract or action they wouldn’t otherwise have taken.

Fraud has been defined under Bharatiya Nyaya Sanhita, 2023, Companies Act, 2013, Insolvency and Bankruptcy Code, 2016 and Indian Contract Act, 1872 under the applicable laws of India.

Applicable Legislations	Bharatiya Nyaya Sanhita, 2023	Insolvency and Bankruptcy Code, 2016	Companies Act, 2013	Indian Contract Act, 1872
Applicable Sections	320 – 323	66 & 69	447	17
Punishment	Upto 3 years or fine or both	Upto 3 years or fine upto ₹ 1,00,00,000/- or both	Upto 10 years and three times the amount involved in the fraud	Damages and losses incurred
Legal Recourse	Sessions Court	For civil remedies NCLT and for criminal offences under Special Courts established under Section 435 of the Companies Act, 2013	Special Courts established under Section 435 of the Companies Act, 2013	Civil Suits/Arbitration depending upon the nature of fraud

Any fraudulent or undervalued transaction which are done in a company, comes to the knowledge when there is change in management such as commencement of insolvency proceedings under IBC, 2016, ( “ the Code”), where the company’s management moves into the control of Committee of Creditors ( CoC), however, any such change in the management of the company does not absolve the erstwhile board of directors of their actions committed prior to liquidation. Section 339 -341 of the Companies Act, 2013 ( “the Act”).

Section 339 of the Act:- In the course of winding up, if it appears that any business of the company has been carried on with intent to defraud creditors of the company or for any fraudulent purpose, the Tribunal may order that such persons will be personally responsible, without any limitation of liability, for all and any of the debts or liabilities as the Tribunal may direct. The Tribunal may also make provisions for the liability of such person to be charge on any debt, obligation, mortgage or on any interest in any mortgage or charge on any assets. And, the persons who knowingly carries on business in fraudulent manner shall be liable for action under Section 447 of the Act.
Section 340 of the Act:- The tribunal may inquire into and further order for repayment or contribution to the assets by any promoter, director, manager, company liquidator, or officer of the company, who:
has misapplied, retained, become liable or accountable for money or property; or
has been guilty of misfeasance or breach of trust
Section 341 of the Act:- It extends the liability under Section 339 and 340 of the Act to partners and directors who held such positions at the time of such fraudulent transactions of the company.

Section 66 of the Code which governs the fraudulent trading or wrongful trading which comes into light post commencement of insolvency proceedings or liquidation process, where such transactions may have occurred during pre-insolvency or pre- liquidation, where the liability can be imposed not only on the director or partners but also includes any outsiders who has played a critical role in conduit of such fraudulent transactions.

Section 49 of the Code deals with undervalued transactions entered into with the purpose of defrauding and affecting the interests of creditors.

Particulars	Section 49 of the Code	Section 66 of the Code
Applicability	On the internal people of the company such as promoters, directors, officers in default, etc.	On the internal as well as outsiders
Intent	Mandatory	Not mandatory, even negligent acts can also be brought under it.
Cause of Action	Any time post occurrence of such transactions	Can be claimed only during the corporate insolvency resolution process or liquidation process.
Nature	Only criminal action can be pursued	Both Civil and/or criminal action can be pursued.

In its matter of Piramal Capital & Housing Finance Ltd. v. 63 Moons Technologies Ltd., 2025 SCC OnLine SC 690, the hon’ble Supreme Court have reviewed the following issues:

Whether the Resolution Plan approved by the Committee of Creditors could permit the Successful Resolution Applicant -Piramal Capital (SRA), to appropriate recoveries from fraudulent transactions under Section 66 of the Insolvency and Bankruptcy Code (IBC).
To determine the implications of fraudulent trading under Section 66 of the IBC and how recoveries from such applications should be treated in the resolution process.

While upholding the commercial wisdom of CoC, the hon’ble Supreme Court held the followings:

That Section 66 (fraudulent/wrongful trading) operates differently from avoidance transactions as provided under Section 43-51 of the Code.
Recoveries from avoidance applications under Section 43-51 of the Code, must benefit creditors, while recoveries under Section 66 can be assigned to the Successful Resolution Applicant if the Resolution Plan explicitly provides for it.
The nature of fraudulent trading applications under Section 66 are distinct from fraudulent transactions under Section 44 of the Code, which are designed to protect creditors’ interests.
The recoveries from fraudulent trading actions must not unjustly enrich the resolution applicant at the expense of creditors.
This principle aligns with the overarching intent of the IBC, which is to maximize the value of the corporate debtor’s assets for the benefit of all creditors.
The recoveries from avoidance actions must benefit the creditors rather than the resolution applicant, reinforcing the legislative intent of protecting creditor interests.

This article is for information purpose only and should not be taken as legal advice. To know further details, clarification, assistance or any advice on fraudulent transactions or any action committed by the companies to defraud its creditors or any legal issues on insolvency, claims against fraudulent transactions or any disputes among the shareholders/promoters/ investors etc., you may connect with us at admin@equicorplegal.com / 08448824659 and visit www.equicorplegal.com