A Comparative Analysis between Section 339(1) of the Companies Act, 2013, and Section 66 of the Insolvency and Bankruptcy Code, 2016 – Deepesh Ramrakhiani & Palaksh Kachan

A Comparative Analysis between Section 339(1) of the Companies Act, 2013, and Section 66 of the Insolvency and Bankruptcy Code, 2016

Deepesh Ramrakhiani
Final Year, LL.B., Kishinchand Chellaram Law College, Mumbai
&
Palaksh Kachan
Final Year, LL.B., Government law college, Mumbai

Abstract

This paper examines the comparative legal frameworks governing fraudulent and wrongful trading in India under Section 339(1) of the Companies Act, 2013, and Section 66 of the Insolvency and Bankruptcy Code, 2016. Both provisions are aimed at penalizing wrongful conduct of directors and company management, but they operate in distinct legal contexts. The paper analyses the scope, intent, and application of these sections and discusses judicial precedents, similarities, and differences between the two.

Introduction

Only during the company’s winding up may an application under Section 339(1) or Section 542, as applicable, be made under the Companies Act of 2013 or 1956. Nonetheless, an application under Section 66(1) of the IBC may be submitted during a liquidation or corporate insolvency resolution procedure. Since the IBC established the Corporate bankruptcy Resolution Process (CIRP), the legislature has purposefully expanded the application of the rules to include matters during the corporate bankruptcy resolution process rather than limiting them during the liquidation process.

The common prerequisite satisfaction in all three articles is that any business conducted by the company or corporate debtor must also be satisfied. The common necessary pre-requisite satisfaction in all three articles is that any business conducted by the company or corporate debtor must either

• Be conducted with the intent to cheat the company’s or corporate debtor’s creditors or
• Be conducted for any fraudulent purpose.

Applications submitted by the official liquidator, the liquidator, or any company’s creditors or contributors may be considered under the Companies Act. Nevertheless, NCLT can only consider an application submitted by a resolution professional by section 66(1) of the IBC. All three clauses are intended to hold those accountable for the company’s or corporate debtor’s business practices that are motivated by fraud and need mens rea.

Before limiting liability for all or part of the company’s obligations or any other liability that the court may specify, the Companies Act gives the court or tribunal the authority to make such individuals personally liable. But under Section 66(1) of the IBC, the NCLT has the authority to issue an order requiring that person to contribute to the corporate debtor’s assets, if it sees proper.

In Section 66(1) of the IBC, the legislature has created a clear difference that this section need not only be applied during liquidation but may also be applied during the corporate insolvency resolution process. The corporate debtor would be subject to liquidation and its assets would be divided among the creditors in accordance with the IBC’s provisions if no resolution plan was received under the IBC or if one had been presented in any case.

The objectives of Section 339 of the Companies Act, 2013 and Section 66(1) of the IBC 2016 are to:

• Limit liability: Restrict liability to those responsible for fraudulent transactions
• Relieve the company: Relieve the company of liabilities incurred by fraudulent trading
• Recoup losses: Recoup losses incurred by fraudulent trading
• Scope: Focus on legal implications for directors and management in both the pre-insolvency (Companies Act) and insolvency (IBC) phases.

Overview of Section 339(1) of the Companies Act, 2013

• Triggering the Provisions

Companies Act, 2013: Section 339(1) is triggered during the winding-up process of a company, focusing on activities carried out with fraudulent intent before or during winding up.

IBC, 2016: Section 66 applies specifically when a company is undergoing CIRP. It can be invoked if the Resolution Professional (RP) believes that directors or other stakeholders engaged in fraudulent or wrongful trading during insolvency proceedings.

• Provision Text:

• • Section 339(1) deals with liability for fraudulent conduct in the winding-up of a company.
  • This section allows the tribunal to declare individuals, including directors and officers, personally liable for debts and liabilities if they were knowingly involved in fraudulent business practices.

• Key Elements:

• • Fraudulent trading: Operating with intent to defraud creditors.
  • Director Liability: Personal liability for those who conducted fraudulent activities.
• Objective: Protecting creditors from fraudulent business activities carried out during the company’s operation and winding-up process.

Overview of Section 66 of the Insolvency and Bankruptcy Code, 2016

• Provision Text:

• • Section 66(1) pertains to “fraudulent trading” or wrongful trading, allowing the Resolution Professional (RP) to hold directors liable if they carried on the business with an intent to defraud creditors.
  • Section 66(2) introduces the concept of “wrongful trading,” where directors can be held liable if they failed to minimize potential losses to creditors during insolvency.

• Key Elements:

• • Wrongful trading: Not just fraud but also reckless or negligent trading that worsens the financial condition during insolvency.
  • Director’s Duty: Obligation to avoid worsening the financial position once insolvency is apparent.

Comparative Analysis

Scope of Applicability

• Section 339(1):
  • Primarily applicable during winding-up proceedings and is related to fraudulent activities in the general course of the company’s life, not necessarily during insolvency.
  • Jurisdiction: National Company Law Tribunal (NCLT).
• Section 66:
  • Applicable during the insolvency process, with the focus on actions that deteriorate the financial health of a company or defraud creditors.
  • Jurisdiction: National Company Law Tribunal (NCLT) under the IBC regime.

Director’s Liability

• Section 339(1): Targets fraudulent conduct that leads to the company’s liabilities, regardless of whether insolvency is present.
• Section 66: Focuses on conduct during insolvency or just prior to it. Directors are liable for both fraudulent and wrongful trading (failure to mitigate losses).

Intent and Burden of Proof

• Section 339(1): Requires proof of intent to defraud creditors. The burden lies on proving fraudulent trading.
• Section 66(2): Does not require a fraudulent intent but imposes liability for failure to mitigate losses. The threshold of proof is lower compared to Section 339(1).

Requirements for making Director accountable:

Requirements for affixing liability to the Directors of the Company for fraudulent conduct of business during winding up proceedings under the Companies Act, 2013

 Directors face liability during company winding-up proceedings when several conditions are met. First, evidence must exist showing the company conducted business with the purpose of deceiving its creditors. This claim must reach the Tribunal through proper channels – either via the Official Liquidator, a creditor, or a company contributor. The Director must be shown to have known about and participated in the deceptive business practices, making them subject to penalties under Section 447. Additionally, these activities must have occurred while the Director held responsibility for company operations.

Requirements for making Directors liable for fraudulent trading under Insolvency & Bankruptcy Code, 2016

Directors may be held responsible if clear evidence shows they operated the business to deceive creditors or for other dishonest aims. The law considers whether Directors knew, or should have reasonably known, that Corporate Insolvency Resolution Process was unavoidable – a period informally known as the ‘twilight zone’ in business circles. During this time, Directors must carefully protect company assets since their decisions significantly impact insolvency outcomes. They must show they took reasonable steps to minimize creditor losses. The law targets Directors who continue business operations while knowing they cannot pay debts, showing reckless disregard for creditor interests. However, Directors who sincerely believe in future recovery may still seek credit. For charges of fraudulent trading to stick, the Resolution Professional must prove the transactions went beyond normal business operations. The Supreme Court, in Anuj Jain vs. Axis Bank Limited, emphasized that regular business dealings cannot be deemed fraudulent without solid proof of deceptive intent.

Powers of the Tribunal

Authority of the Tribunal Under Companies Act 2013: The tribunal’s jurisdictional scope encompasses:

• Pronouncement of Responsibility: Under Section 339 of Companies Act 2013, when stipulated conditions are satisfied, the tribunal holds authority to determine personal accountability of Directors, Managers, or other involved parties. This accountability extends to all company debts and obligations, as the tribunal deems appropriate, without imposing liability limits.
• Implementation Measures: To enforce its determinations, the tribunal can issue specific directives, including establishing security interests, obligations, or encumbrances against company property under the responsible party’s control.
• Punitive Actions for Fiduciary Breaches: Through Section 340, the tribunal exercises power to conduct investigations and mandate asset restitution from Directors, Managers, Liquidators, or Officers found guilty of mismanagement or fund misuse. The provision establishes criminal consequences for trust violations. Additionally, Section 341 authorizes the tribunal to extend these measures to both firm partners and company directors.

Under IBC 2016: The legislation grants authority to pursue compensation for losses stemming from improper or deceitful business practices. Section 67 grants the Adjudicating Authority two key powers:

• Establishing Liability Claims: The authority can impose obligations on responsible parties through debts, duties, or property interests held by the corporate debtor. These measures specifically protect creditors who suffered from fraudulent activities.
• Enforcement Mechanisms: The authority may implement necessary measures to execute its orders, potentially elevating defrauded creditors’ claims in priority according to Section 53‘s distribution hierarchy.

Judicial Precedents

The Hon’ble High Court of Tripura, in the matter of “Smt. Sudipa Nath Vs Union of India, MCA,” (2023) ibclaw.in 22 HC, analyzed about the Liability for fraudulent conduct of business, u/s- 542 of Companies Act, 1956, Liability for fraudulent conduct of business, u/s- 339(1) of Companies Act, 2013 and fraudulent trading or wrongful trading, u/s- 66(1) of the Code. Further pointed out that in all these Acts and provisions, common mandatory pre-requisite factors are that if any business of the Company/ CD has been carried on an intent to defraud the Creditors of the Company or for any other fraudulent purpose with “Men’s rea.”

Further in the matter of Smt. Sudipa Nath (Supra), The High Court of Tripura held that it is clear from Sec-66(1) of the Code that NCLT is not having jurisdictions in declaring any transaction as void even if fraudulent but confers jurisdiction on NCLT to fix the liabilities on the persons responsible for conducting business of CD which is fraudulent or wrongful. And such application u/s 66(1) of the Code shall be filed by the RP / Lr only. Finally Sec 66 (1) also restricts the power of NCLT subject to being satisfy with pre- requisite that any business of the CD has been carried on with intent to defraud creditors or the corporate debtors or for any fraudulent purpose and if satisfied it has powers to pass an order is only against such person who are responsible for the conduct of such fraudulent business of the CD with mens rea to make them personally liable to make such contributions to the assets of the CD as it may deem fit.

While passing orders in the Smt. Sudipa Nath (Supra) matter, The High Court of Tripura has relied on the following judgements: The Hon’ble Apex Court in the matter of “Usha Anantha Subramanian vs. Union of India” (2020 4 SCC 122) held that u/s 337 and 339 of the CA, 2013 that any business of the company which has been carried on with the intent to defraud creditors of that company, the penalty may be imposed for such frauds on an officer of the company in which mis-management has taken place, however not on third/ another parties / another Companies.

The Hon’ble Calcutta High Court observed in the matter of “Prashant Properties Limited Vs. SPS Steels Rolling Mills Ltd” in the context of Section 66 of IBC, the NCLT cannot avoid past transactions, even if fraudulent, but under Section 66(2) can only direct the Director/partner of the Corporate Debtor, and no other parties to the transaction, to make contribution to assets of the Corporate Debtor.

The Hon’ble High Court of Kerala held in the matter of “South India Paper Mills Pvt. Ltd. Vs Sree Rama Vilasam Press & Publications” (1982 52 Comp Cas 145) dealt in detail about the Fraudulent Preference u/s 531, Liability for Fraudulent conduct of Business u/s 542 and Powers of Court to assess damages against delinquent Directors etc., under the CA 1956. The common ingredients of these sections are that no escape for the fiduciary persons who conducted the businesses of the Company in the fraudulent manner by order passed by the Court to contribute of the losses to the Company.

The Hon’ble NCLAT in the matter of “Deepak Parasuraman Vs. Sripriya Kumar” upheld the order passed by NCLT allowing the prayers of the RP filed u/s 43, 46 and 60(5) of the Code. While dealing with this matter, NCLAT observed that the Sec-339 of the CA, 2013 andSec-542 of CA, 1956 was aimed at conferring jurisdiction in the course of winding up of the company to proceed against the persons responsible for fraudulent conduct of the business of the Company and makings such persons personally liable for such fraudulent trading to recouping losses incurred to the Company as a relief. Further held that the Sec-66(1) of the Code which is the pair Materia of Sec-542 of CA, 1956 and Sec-339 of CA, 2013 also directed towards making such persons personally liable for such fraudulent trading to recouping losses incurred and thereby that the NCLT can pass order holding such persons liable to make such contributions to the assets of the CD as it may deem fit.

The Hon’ble Apex court in the matter of “Deepak Parasuraman & Anr. Vs. Sripriya Kumar & Anr.,” upheld the order of the NCLAT in Deepak Parasuraman Vs. Sripriya Kumar” (supra) to contribute to the assets of CD who are related parties conducted the fraudulent business and observed that even though the Appellant argues that the transactions have been in the ordinary course of business and no element of fraud was involved therein but, the fatal shortcomings noticed by the NCLT and NCLAT leave nothing doubt that the transactions are hit by the mischief of Sec-66 of the Code.

The Hon’ble Apex court in the matter of “Gluckrich Capital Pvt. Ltd., Vs the State of West Bengal & Ors.,” while dismissing the appeal, upheld the order of the High Court of Tripura passed in the matter of Smt. Sudipa Nath (Supra). Further the Apex Court held that remedy against third party is not available u/s 66 of the IBC and the Civil remedies which may be available in law are independent of the said Section that can be perused by the RP or the Successful Resolution Applicant for recovery of dues payable to the CD. Accordingly, order u/s-66(1) of the IBC can be passed only on to the Directors, Promoters, Advisors, Employees, Related parties, Contributories those who involved in the Fraudulent Trading to contribute to the assets of the CD, However, order u/s 66(2) may be passed on to the Directors/Promoters who indulged in the Wrongful trading to make good such losses incurred by the CD.

Further that the “Bankruptcy Law Reforms Committee Report” – November 2015 dealt with the Treating of recoveries from vulnerable transactions. While detailing the avoidance transactions which may result in reversing transactions by the application of RP / Lr to AA and Fraudulent or Wrongful trading would result in contribution to the CD to make such losses Good by those are responsible for such fraudulent or wrongful conduct of the CD business before CIRP. The report also stressed that there should be stricter scrutiny for transactions of fraudulent preference or transfer to related parties, for which the “look back period” should be specified in regulations to be longer.

Similarities and Differences

• Similarities:
  • Both provisions aim to protect creditors and hold directors accountable.
  • The NCLT plays a central role in adjudicating claims under both provisions.
• Differences:
  • Temporal aspect: Section 339(1) applies generally throughout a company’s lifecycle, while Section 66 is limited to the insolvency period.
  • Burden of proof: Section 66(2) requires proof of wrongful conduct even in the absence of fraudulent intent, making it broader in scope.

 Key Differences

Conclusion

The examination of Section 339(1) of Companies Act 2013 and Section 66 of IBC 2016 reveals their complementary yet distinct approaches to director accountability. While both laws target fraudulent business conduct, they serve different phases of corporate difficulty. The Companies Act provision mainly operates during winding-up, focusing on broad fraud prevention throughout a company’s life. The IBC provision specifically addresses misconduct during insolvency, introducing the concept of wrongful trading alongside fraud.

Recent court decisions, particularly in Smt. Sudipa Nath’s case and the Deepak Parasuraman matter, have shaped how these provisions work in practice. The courts have established that Section 66 of IBC limits recovery to company insiders like directors and promoters, while leaving third-party claims to civil remedies. This interpretation balances creditor protection with practical enforcement.

Looking ahead, these dual frameworks provide necessary tools for maintaining corporate accountability. The Companies Act offers broader protection during normal operations and winding-up, while the IBC creates specific obligations during financial distress. Together, they form a comprehensive shield against director misconduct, though their effectiveness ultimately depends on proper enforcement and judicial interpretation. The evolving case law continues to refine their application, suggesting these provisions will remain crucial in Indian corporate governance.

This framework draws from courts’ practical experience while acknowledging how both laws work together to protect creditor interests. The ongoing development of precedents indicates these provisions’ enduring importance in addressing corporate misconduct.