PUFE Recoveries 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.
Preferential, undervalued, fraudulent and extortionate transactions are pursued for a reason — to bring value back. Each avoidance section directs its recovery to a defined recipient, and Section 36(3)(f) then places it in the liquidation estate.
Section 66 — fraudulent and wrongful trading
Section 66 addresses fraudulent and wrongful trading during a CIRP or liquidation, empowering the Adjudicating Authority to impose liability on directors or partners of a corporate debtor where the business was conducted with intent to defraud creditors or for any fraudulent purpose.
- Intent to defraud. Where it is determined that the business was carried out with intent to defraud creditors, the Adjudicating Authority can order those involved to contribute to the debtor's assets.
- Liability of directors and partners. A director or partner may be liable if they knew or should have known that there was no reasonable prospect of avoiding insolvency and failed to exercise due diligence to minimise potential losses to creditors.
- Scope. Fraudulent transactions include conducting business with the intention of defrauding creditors, and engaging in transactions without any intention of repayment.
The two halves of section 66 are frequently conflated, and the difference matters when framing an application.
Fraudulent trading requires intent to defraud — a state of mind that must be established. Wrongful trading requires only that the director knew or should have known that insolvency was unavoidable and then failed to exercise due diligence to limit creditor losses. No dishonesty is needed.
In practice the second is far easier to prove and far more commonly available. The evidence is the board's own records — the point at which the losses became irreversible, and what the directors did about it afterwards.
The three types of order under Section 66
- Directing individuals involved in fraudulent activities to make contributions to the corporate debtor's assets.
- Ranking debts owed by the corporate debtor in a specific order of priority for payment, particularly concerning debts arising from fraudulent activities.
- Imposing liabilities on directors or partners who did not take necessary actions to prevent losses when aware of impending insolvency.
What fraudulent transactions look like
- Any transaction with the objective of keeping the asset or property of the corporate debtor away from creditors.
- Manipulation in the books of account or other records to deceive creditors.
- Use of forged documents and records to obtain sanction and disbursement of credit facilities — bogus exchange bills, sale bills for discounting, export and import bills for discounting.
- Falsification of books by recording fake sale and purchase transactions to obtain increased credit facilities from banks and financial institutions.
- Falsification by entering bogus expenditure to divert the corporate debtor's funds for the management's personal gain.
Where each recovery goes
The Code directs PUFE recoveries section by section, and the destinations are not identical:
| Provision | Destination of the recovery |
|---|---|
| Section 36(3)(f) | Any asset or value recovered through proceedings for avoidable transactions forms part of the liquidation estate |
| Section 44 (for section 43 transactions) | Property to be vested in the corporate debtor; an order may also vest it with another party, the resolution professional or the liquidator |
| Sections 47 and 49 | Restoring the position as it existed before the transaction — that is, to the corporate debtor |
| Section 48 | Property vested in the corporate debtor; and release or discharge of any security interest granted by it, so the benefit goes to the corporate debtor |
| Section 51 | Restore the position as it existed, set aside the transaction, and require any person to repay |
| Section 66 | Those liable make contributions to the assets of the corporate debtor |
The common destination
Every route ends in the same place. PUFE recoveries are not paid to the creditor who identified the transaction, to the applicant, or to the class most obviously prejudiced. They go back to the corporate debtor or the liquidation estate, and are then distributed through the ordinary machinery — the resolution plan, or the section 53 waterfall.
That is the collective principle in operation. Avoidance exists to undo an individual advantage taken at the expense of the general body; returning the recovery to an individual would reproduce the very problem the provisions address.
Practical points
- Plead wrongful trading in the alternative to fraudulent trading; the evidential burden is materially lower.
- Identify the date from which there was no reasonable prospect of avoiding insolvency — the liability runs from there.
- Ask expressly for the order the relevant section provides; the destinations differ between sections 44, 48 and 51.
- Remember that PUFE recoveries after dissolution are now preserved by sections 54(1A) and (1B), with distribution determined by the committee under Regulation 44A.
Common mistakes
- Framing every section 66 application as fraudulent trading and having to prove intent.
- Expecting PUFE recoveries to be paid to the applicant creditor.
- Overlooking the release of security interests available under section 48.
- Treating book manipulation as an audit issue rather than a section 66 transaction.