1. Legal Framework

A. IBC — Two Types of Director Liability:

1. Avoidance Transactions — Sec 43-50: RP can claw back:

• Preferential (Sec 43): Giving preference to one creditor/related party within 1 year (2 years for related) before insolvency start
• Undervalued (Sec 45): Selling asset far below value
• Extortionate (Sec 50): Exorbitant interest
• Fraudulent (Sec 49, 66): Defrauding creditors

Look-back period applies for 43-50, but NOT for Sec 66.

2. Fraudulent & Wrongful Trading — Sec 66 — Most Powerful:

Sec 66(1) Fraudulent Trading: If during CIRP or liquidation it is found business of corporate debtor carried on with intent to defraud creditors or for any fraudulent purpose, NCLT on RP's application can order any persons who were knowingly parties to contribute to assets. Must prove: Knowingly + dishonest intent to defraud.

Sec 66(2) Wrongful Trading: Liability only on Director/Partner. If director knew or ought to have known there was no reasonable prospect of avoiding insolvency and did not exercise due diligence to minimise loss to creditors. No need to prove fraud, only negligence to continue trading. This is UK-style wrongful trading imported.

Remedy: Director personally ordered to contribute money back to company estate.

B. Companies Act 2013:

• Sec 339: Fraudulent conduct of business — in winding up, Tribunal can make director personally liable without limitation
• Sec 447: Fraud — jail + personal liability

C. Banking Law:

• Sec 46A Banking Regulation Act: Director liable for bank fraud if participated
• RBI Master Direction on Fraud: Banks must report fraud by directors to RBI, file FIR, classify account as fraud

2. Landmark Case Laws

1. Anuj Jain IRP for Jaypee Infratech Ltd v. Axis Bank Ltd. (2020) — Supreme Court — Civil Appeal 8512-8517/2019 — Banking + Fraudulent Transaction
Facts: Jaypee Infratech (JIL) mortgaged its property to secure loans of its holding company Jaiprakash Associates Ltd (JAL) from Axis Bank consortium.
IRP Anuj Jain filed application under Sec 43,45,49,66 to avoid transactions.
Supreme Court held: Transfers and mortgages created by JIL for benefit of JAL lenders were made to defraud creditors of JIL and were not in ordinary course of business. Set aside mortgages worth Rs 9,000 Cr. Held transactions fall under fraudulent + preferential — to defraud creditors. Banks knowingly party — their security set aside.
Ratio: If subsidiary mortgages property for parent's debt when itself is under stress, it is fraudulent transaction under Sec 66, even if bank claims it is ordinary course. Banks cannot enforce such security.

2. NCLAT — PKS Limited — Fraud Not Barred By Time — 2024
NCLAT upheld NCLT order directing suspended director to contribute Rs 8.71 Cr with 12% interest. Held: Whether one fraudulent transaction or multiple, fraud vitiates all. Even single instance of fraud once proven is enough under Sec 66(1). Sec 66 does not provide look-back period — dishonest director liable even after years.

3. NCLT New Delhi — Opulent Infradevelopers Pvt Ltd — Rs 10.46 Cr — Donations as Fraud
Directors liable under Sec 66 for fraudulent trading via donations, interest-free loans to related parties & falsified books during financial distress. NCLT found unjustified donations of Rs 3.1 Cr to non-business entities when company was in distress = fraudulent under Sec 66(1). Directors ordered to pay Rs 10.46 Cr. Shows even charity during insolvency = fraud.

4. Gopal Kalra, Erstwhile Director of Easytech Global Pvt Ltd — Rs 3.18 Cr — LED Transactions
NCLAT affirmed NCLT order under Sec 66(1) directing former director to contribute Rs 3.18 Cr. Once transactions found fraudulent, Adjudicating Authority empowered to order restitution.

5. Thomas George v. Mathstraman Manufacturers — NCLAT Chennai — No Look-back for Sec 66
NCLAT held Sec 66 does not prescribe any look-back period but imposes duty on directors to act in best interest. Suspended director took over factory, plant & machinery of corporate debtor knowingly and dishonestly to hoodwink creditors — fraudulent act.

6. Madhusudan Khemka (2023) NCLAT — High Standard of Proof
Tribunal emphasized need for positive steps in fraudulent trading, high standard of proof, necessity of establishing dishonesty. Each commercial transaction resulting in loss cannot be labelled fraudulent — must show intent.

7. Shibu Job Cheeran v. Ashok Velamur Seshadri (2023) NCLAT — Wrongful Trading Test
For Sec 66 to apply, must show business carried out with intent to defraud creditors and directors participated despite knowing likely insolvency. For Sec 66(2) wrongful trading, must show director knew or ought to have concluded no reasonable prospect of avoiding insolvency.

8. Writing Off Stock Case — NCLAT — Rs 6.56 Cr Inventory Write-off
Promoter/director wrote off inventory of Rs 6.56 Cr in books to defraud creditors — held falls within fraudulent transactions under Sec 66.

9. Banking Fraud — Nirav Modi / PNB — Sec 66 + Bank Director Liability
Though criminal case under PMLA, IBC side: NCLT allowed RP to file Sec 66 against directors of Nirav Modi group companies for diverting PNB LC money via circular transactions. Directors held personally liable to contribute despite company under liquidation.

3. Banking Liability Specific to Directors

A. When Bank is Victim:
If director of borrowing company diverts loan money, bank can:

• File FIR for cheating + criminal breach of trust + Sec 447 Companies Act
• Classify account as Fraud under RBI Fraud Directions — director debarred from raising funds for 5 years
• File Sec 66 application in NCLT for personal contribution
• Proceed under PMLA — attachment of director personal assets

B. When Director is of Bank Itself (PMC Bank, Yes Bank):

• RBI Sec 36AA can supersede Board
• Directors of bank liable under Sec 46A Banking Regulation Act + Sec 66 IBC if bank goes into insolvency (co-op banks under IBC now)
• Personal liability without limitation

4. Liability Matrix 2026

Defense for Directors:

• Prove acted with due diligence, took independent professional advice, minutes show dissent
• Show transaction in ordinary course — e.g., mortgage for subsidiary's business, not parent's unrelated debt (Anuj Jain distinguishes)
• But once fraud proven, fraud vitiates all — limitation does not help