Fraudulent or Wrongful Trading explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Where a corporate debtor engages in fraudulent trading during insolvency or liquidation, Section 66 empowers the Adjudicating Authority to order those involved to contribute to the debtor's assets. The 2026 Amendment inserts a statutory definition of "Fraudulent or Wrongful Trading" in Section 5, eliminating prior interpretive uncertainty.
Section 66 — contribution to assets
If a corporate debtor engages in fraudulent trading during insolvency or liquidation, the Adjudicating Authority can order those involved to contribute to the debtor's assets.
The provision also reaches directors and partners in their own right: a director or partner who knew of the insolvency risk and failed to act diligently may be liable for contributing to the debtor's assets.
The fraudulent trading limb targets those involved in trading carried on to defraud.
The wrongful trading limb is different in character: it applies to a director or partner who knew of the insolvency risk and failed to act diligently. There need be no intention to defraud — the failure is one of diligence once the risk was known.
That distinction is why the absence of a statutory definition mattered, and why the 2026 insertion into Section 5 is more than drafting hygiene.
The 2026 statutory definition
The 2026 Amendment inserts a statutory definition of "Fraudulent or Wrongful Trading" in Section 5 of the Code — the definitions chapter. The Background Material records that this:
- eliminates prior interpretive uncertainty;
- aligns with the description in Section 66; and
- places it on an explicit statutory footing, making its application in Section 66 proceedings more predictable.
The change is not intended to widen liability. It is intended to make the boundary of existing liability determinable in advance, which is exactly what a director assessing whether to continue trading needs.
Section 67 — charge over assets
The Adjudicating Authority may impose a charge on debts, obligations or assets held by a person liable under Section 66, and may make further directions to enforce such charges.
Section 67 is what makes a Section 66 order collectable. An order to contribute is only as good as the ability to reach the contributor's assets, and the charging power supplies that.
Where these sit among avoidance provisions
| Section | Nature of transaction |
|---|---|
| 43 | Preferential transactions — a transfer to a creditor, surety or guarantor putting the recipient in a beneficial position relative to other creditors |
| 45 | Undervalued transactions — gifts, or transfer of property at a value significantly lower than the consideration paid by the debtor |
| 49 | Transactions defrauding creditors — deliberately putting assets beyond reach or adversely affecting a claim |
| 50 | Extortionate credit transactions — financial or operating debt on exorbitant terms |
| 66 | Fraudulent or wrongful trading — contribution to assets by those involved, and by directors who knew of the risk |
Sections 43 to 51 concern transactions to be reversed; Section 66 concerns conduct for which a contribution is ordered. The 2026 Amendment separates these two streams, and the liquidator's post-dissolution pursuit of both requires CoC approval by 66% under Regulation 8.
Section 65 — fraudulent or malicious initiation
Penalties of between one lakh and one crore rupees may be imposed on persons who initiate insolvency or liquidation processes with fraudulent or malicious intent, including initiating voluntary liquidation or pre-packaged insolvency with intent to defraud.
The 2026 Amendment extends the fraudulent initiation penalty to proceedings initiated under the new Chapter IV-A (CIIRP) and Chapter III-A (PPIRP).
Practical implications for directors
- Knowledge of insolvency risk starts the diligence duty. Once the risk is known, continuing to trade without acting diligently is the exposure.
- Contemporaneous records are the defence. Board minutes recording the assessment, the advice taken and the steps decided are what demonstrate diligence.
- Section 67 reaches personal assets through a charge, so the consequence is not confined to the company.
- The Section 5 definition applies prospectively to conduct that must be judged against it — which is why directors should assess current conduct against the definition rather than against earlier case law alone.
Compliance checklist
- Test conduct against the Section 5 definition, not only Section 66 as previously interpreted.
- Record the point at which insolvency risk was known.
- Minute the diligent steps taken after that point.
- Anticipate a Section 67 charge over personal assets on a contribution order.
- Keep Section 66 conduct claims separate from Sections 43 to 51 transaction claims.
- Note that Section 65 now covers CIIRP and PPIRP initiation.
Common mistakes
- Treating wrongful trading as requiring intent to defraud.
- Relying on absence of dishonesty where the failure was of diligence.
- Assuming liability is limited to the company's assets.
- Bundling Section 66 claims with avoidance applications as if they were one stream.