NCLT Guwahati Holds No Straightjacket Definition For Fraudulent Trading Under Section 66 IBC

In a significant ruling on the scope of Section 66 of the Insolvency and Bankruptcy Code, 2016, the Guwahati National Company Law Tribunal (NCLT) on 30 April held that there is no exhaustive or straightjacket test to determine what constitutes fraudulent or wrongful trading.

Judicial Member Justice Rammurti Kushawaha and Technical Member Yogendra Kumar Singh were hearing an application filed by the Resolution Professional of JSB Entrade Pvt. Ltd. against the suspended directors, promoter, and related parties of the corporate debtor. They relied on principles drawn from English insolvency jurisprudence while interpreting the provision and held:

“At this juncture, it would be pertinent to establish that there is no exhaustive list of what constitutes as “Fraudulent” or “Wrongful” Trading under Section 66 of the Code. As the IBC has taken inspiration for these provisions from the UK Insolvency Act, 1986, hence instances of trading that would be caught by the provisions of Section 66 of the code can be derived from some of the decisions of the English Courts.”

The Resolution Professional alleged that the corporate debtor's affairs were conducted with intent to defraud creditors through a series of questionable transactions. These included large cash withdrawals during the COVID-19 lockdown, interest-free advances to promoters and related entities, alleged fictitious sale and purchase entries, and diversion of funds without proper documentation.

What gives the ruling broader significance is the Tribunal's reliance on English insolvency principles while interpreting Section 66. It underscored that fraudulent or wrongful trading cannot be identified through a fixed list of acts, but must be assessed by examining the overall conduct of those in control of the company and the commercial substance of transactions.

The Tribunal noted that fraudulent intent is often revealed through a continuing pattern of conduct rather than isolated transactions, especially where business is carried on in disregard of creditors' interests.

Importantly, the Bench rejected the argument that Section 66 can be invoked only when a specific transaction is conclusively proved to be fraudulent. It held that liability under the provision must be assessed holistically, based on whether the management consciously continued business despite knowledge of likely prejudice to creditors.