Section 66 deals with Fraudulent trading or wrongful trading
Extension of Sec 66. Now where order is passed under Sec 66(1) or (2) , then NCLT can pass three more orders. 1) the liability to pay can be called as Charge or whatever the amount is due to them from the corporate debtor.
2)They have huge powers of enforcing the charge
3) Sec 66 (2) clearly mentions that Adjudicating Authority has powers, to rank the debt of that person lower in the order in case the company goes into liquidation and according to Sec 56 even a Secured creditor can be paid after unsecured creditor
Two more aspects, this is civil liability under Sec 66. The limitation doesn't apply. It is not criminal liability for the directors
There is no time limit under Sec 66. IP can go for longer period. However there is restrictions under Sec 43 wherein IP has to look back to last two years for the related transactions which are exist. For the transactions with other parties, time period is only 1 year. So as an IP, getting the information from Corporate debtor and the directors of the company is not easy task. Suspected transactions has to be looked upon smartly. The basic documents to be looked upon to detect are Balance Sheet, list of debtors, accounting data in a software base, irregular types of transactions.
Over the period of time, like 5 years, you can see the each asset and transactions, bad debts provisions, and there are so many transactions which can predict fictitious sales. So be vigilant on each transaction on the balance sheet.
It is duty of IPs, how can you make Directors be personally liable for these aspects. IP has the been cast the duty to detect the transactions particularly the type of transactions where the elements of fraud exists. Even if the forensic auditor has submitted the report, IP has to be extra cautious while submitting the report. IP is requested not to keep the forensic report as base whereas review the report including the forensic report and the allegations needs to be specific. Also it must be submitted with clear evidences. And the data must be credible. In case you are presenting digital evidences like in form CD, Hard disk, or clone hard disk of PC, then, it must be submitted in accordance of IT Act and Indian Evidence Act.
Related sec 43, 45, 50
Sec 43 talks about preferential transactions and relevant time
Sec 45 talks about avoidance of undervalued transactions
Sec 50 for the Extortionate credit transactions
Judgement of Mumbai NCLT, the case "Prag Distillery"dated 21st Feb 2019, the application was made under Sec 43, 49, 60(5) and 66 of IBC Code. Sec 43, Sec 49 the contentional and allegation of RP was rejected. The opposite party agreed to transfer back the part of machinery/ plant that is why this order was passed otherwise there was no substance in the case.
Another case Orchid Pharma with NCLT Chennai under Sec 43 and 66 of IBC Code. The application lacks particulars. It says transactions mentioned are beyond 2 years. Since these transactions are older than 2 years, no order was passed.
(1) 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.
(2) On an application made by a
resolution professional during the 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 insolvency
commencement date, such director or partner knew or ought to have known that
the 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.
Explanation.—For the purposes of
this section a director or partner of the corporate debtor, as the case may be,
shall be deemed to have exercised due diligence if such diligence was reasonably
expected of a person carrying out the same functions as are carried out by such
director or partner, as the case may be, in relation to the corporate debtor.
Extension of Sec 66. Now where order is passed under Sec 66(1) or (2) , then NCLT can pass three more orders. 1) the liability to pay can be called as Charge or whatever the amount is due to them from the corporate debtor.
2)They have huge powers of enforcing the charge
3) Sec 66 (2) clearly mentions that Adjudicating Authority has powers, to rank the debt of that person lower in the order in case the company goes into liquidation and according to Sec 56 even a Secured creditor can be paid after unsecured creditor
Two more aspects, this is civil liability under Sec 66. The limitation doesn't apply. It is not criminal liability for the directors
There is no time limit under Sec 66. IP can go for longer period. However there is restrictions under Sec 43 wherein IP has to look back to last two years for the related transactions which are exist. For the transactions with other parties, time period is only 1 year. So as an IP, getting the information from Corporate debtor and the directors of the company is not easy task. Suspected transactions has to be looked upon smartly. The basic documents to be looked upon to detect are Balance Sheet, list of debtors, accounting data in a software base, irregular types of transactions.
Over the period of time, like 5 years, you can see the each asset and transactions, bad debts provisions, and there are so many transactions which can predict fictitious sales. So be vigilant on each transaction on the balance sheet.
It is duty of IPs, how can you make Directors be personally liable for these aspects. IP has the been cast the duty to detect the transactions particularly the type of transactions where the elements of fraud exists. Even if the forensic auditor has submitted the report, IP has to be extra cautious while submitting the report. IP is requested not to keep the forensic report as base whereas review the report including the forensic report and the allegations needs to be specific. Also it must be submitted with clear evidences. And the data must be credible. In case you are presenting digital evidences like in form CD, Hard disk, or clone hard disk of PC, then, it must be submitted in accordance of IT Act and Indian Evidence Act.
Related sec 43, 45, 50
Sec 43 talks about preferential transactions and relevant time
Sec 45 talks about avoidance of undervalued transactions
Sec 50 for the Extortionate credit transactions
Judgement of Mumbai NCLT, the case "Prag Distillery"dated 21st Feb 2019, the application was made under Sec 43, 49, 60(5) and 66 of IBC Code. Sec 43, Sec 49 the contentional and allegation of RP was rejected. The opposite party agreed to transfer back the part of machinery/ plant that is why this order was passed otherwise there was no substance in the case.
Another case Orchid Pharma with NCLT Chennai under Sec 43 and 66 of IBC Code. The application lacks particulars. It says transactions mentioned are beyond 2 years. Since these transactions are older than 2 years, no order was passed.
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