Section 66 of the Insolvency and Bankruptcy Code is intended to be a powerful mechanism for holding directors and promoters personally liable for fraudulent, reckless, or value-destroying actions that push a company into insolvency. In practice, however, Section 66 is rarely used effectively due to compressed CIRP timelines, weak or delayed forensic audits, personal litigation risks for Resolution Professionals, hesitation from Committees of Creditors, and prolonged NCLT proceedings. These gaps undermine accountability, reduce negotiation leverage, and weaken investor confidence, often pushing companies toward liquidation rather than resolution. To make Section 66 meaningful, the ecosystem needs reforms such as dedicated avoidance-transaction benches, stronger forensic infrastructure, safe-harbour protections for RPs, clear CoC voting rules, standardized data access, defined recovery-distribution rules, and early detection technologies. Strengthening these processes in 2025 and beyond can transform Section 66 from a theoretically potent tool into a practical engine for accountability and value recovery.
Filing & What Needs to Change
Section 66 of the Insolvency and Bankruptcy Code (IBC) was designed as one of the strongest tools available to Resolution Professionals (RPs). Its purpose is clear: hold directors and promoters personally liable for fraudulent or wrongful transaction that contributed to the company’s financial distress.
In theory, Section 66 should deter misconduct, recover lost value, and strengthen creditor confidence. But in practice, very few RPs file Section 66 applications, and even fewer succeed.
Here’s an honest look at why Section 66 is underutilized—plus what the ecosystem needs to fix.
1. Why Section 66 Exists — And Why It Matters
Section 66 is meant to address actions such as:
- diversion of funds
- fraudulent transactions
- sham entities
- siphoning of assets
- reckless decisions taken
- misuse of corporate structure
If proven, NCLT can order promoters, directors, or key managerial personnel to personally contribute to the assets of the corporate debtor. For creditors and public-sector banks, it’s one of the few avenues for accountability beyond asset security.
So why isn’t it used effectively?
2. Reason 1: Lack of Time & Overloaded CIRP Timelines
CIRP provides only 180–330 days. Within this period, the RP must:
- take control of operations
- verify claims
- conduct valuation
- run CoC meetings
- handle litigation
- prepare IM and RFRP
- manage e-voting
- coordinate with bidders
- and supervise business continuation
A Section 66 application requires:
√ forensic analysis
√ transaction testing
√ document reconstruction
√ legal review
√ drafting + evidence
√ hearings
Simply put RPs do not have the time.
3. Reason 2: Lack of Proper Forensic Reports
Section 66 cases rely heavily on:
- forensic audits
- transactional audits
- related-party mapping
- email trails
- bank trail reconstruction
But forensic reports often arrive:
- too late
- incomplete
- without clear conclusions
- lacking admissible evidence
Without strong forensic backing, Section 66 applications are weak—and RPs avoid filing to protect themselves from liability.
4. Reason 3: Fear of Litigation & Personal Exposure
Promoters aggressively challenge Section 66 filings. They file:
- defamation complaints
- criminal counter-complaints
- writ petitions
- allegations of bias
- disciplinary complaints before IBBI
RPs face significant personal risk, while the Code does not clearly shield them for good-faith actions. Many RPs understandably err on the side of caution.
5. Reason 4: CoC Hesitation
CoCs often discourage Section 66 filings because:
- they believe the recovery will take years
- litigation costs may outweigh benefits
- unclear distribution rules for any recovery
- they prefer to focus on resolution plan negotiations
If the CoC does not formally approve, RPs hesitate to initiate aggressive action.
6. Reason 5: NCLT Delays Reduce Practical Utility
Section 66 matters routinely take:
- months to be listed
- years for evidence
- further delays for cross-examination and final orders
By the time an order comes, the resolution plan may already be approved or the company may be in liquidation. The deterrence value is lost, and financial recovery becomes uncertain.
7. The Impact of Weak Section 66 Enforcement
Under-enforcement of Section 66 creates several ecosystem problems:
i. Promoters feel insulated
Misconduct becomes easier because consequences are delayed or unclear.
ii. CoC loses leverage during negotiations
Buyers and lenders cannot rely on avoidance recoveries.
iii. Bidders reduce valuation
Unknown liabilities (pending fraud claims) discourage serious investors.
iv. More companies slip into liquidation
Accountability void = reduced value maximization.
v. Public faith in IBC weakens
Stakeholders expect justice, not procedural dead-ends.
8. What Needs to Change — Reforms for 2025 and Beyond
i. Dedicated “Avoidance Transaction Benches” at NCLT
Fast-track disposal within 6 months, separate from CIRP proceedings.
ii. Government-backed Forensic Infrastructure
Standard templates, timelines, and digital access to MCA, GST, banks.
iii. Clear Safe-Harbour Protection for RPs
If the RP files Section 66 in good faith, they must not face personal liability.
iv. CoC Voting Clarity
Mandatory CoC decision on Section 66 within the first 60 days.
v. Automatic Data Handover Mechanisms
ERP, bank, GST, and ROC data available through a central portal.
vi. Distribution Clarity for Avoidance Recoveries
Who gets the recovered money? Clear rules will incentivise CoC to act.
vii. Early-Stage Red-Flag Detection Using Technology
AI-assisted tools can detect unusual transactions quickly—before forensic delays set in.
Conclusion: Section 66 Is Powerful — But Underused
Section 66 can transform accountability in Indian insolvency resolution.
But without:
- faster processes,
- better evidence,
- stronger protections for RPs,
- and clearer CoC participation,
it will remain a theoretically powerful but practically underutilized tool.
The 2025 reform cycle is a critical opportunity to strengthen Section 66 enforcement, improve recovery outcomes, and restore fairness to the insolvency ecosystem.
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Author Note: The author is an Insolvency Resolution Professional with extensive experience in managing multiple CIRP and liquidation assignments. For queries or professional discussions related to the Insolvency and Bankruptcy Code (IBC), you may reach out to: Krit Narayan Mishra at kritmassociates@gmail.com | +91 99108 59116.
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