Introduction
Section 66 of the Insolvency and Bankruptcy Code, 2016 was designed to deter fraudulent trading and wrongful conduct as a company approaches insolvency , and to restore value to the estate where persons knowingly participate in fraud. However, despite this broad purpose, the provision was long read narrowly. Liability was treated as if it extended only to insiders: directors and persons formally connected with management who ‘knowingly’ participated in defrauding the creditors. Fraud in insolvency does not always remain confined within the boardroom. Assets may be diverted through shell entities, friendly vendors, or other third parties who knowingly assist the wrongdoing. Therefore, if the law stops at insiders, the real beneficiaries of the fraud can escape consequences entirely.
This is where the NCLAT’s 2026 ruling in Worldwide Online Services Pvt Ltd v Nandkishor Deshpande marks an important turning point. The decision suggests that Section 66 should not be read as a closed insider-only provision. Instead, it should be understood as a recovery-oriented mechanism capable of reaching third parties who knowingly participate in fraudulent conduct. This article argues that the ruling strengthens creditor protection, aligns Indian insolvency law with comparative common-law principles, and gives real practical force to the restorative purpose behind Section 66.
I. The Pre-2026 Position: A Narrow Understanding of Liability
Before Worldwide Online Services, the jurisprudence around Section 66 remained constrained by ideas inherited from the older fraudulent trading provisions under the Companies Act, particularly Section 339. That legacy mattered because courts often carried over the older mindset into the IBC framework.
One major limitation was the historic association of fraudulent trading with the winding-up stage. Under the Companies Act regime, liability was usually considered in the context of winding up, which meant the company had to be effectively at the end of its life before action could be taken. The IBC changed that landscape by facilitating the Resolution Professional to act during the CIRP itself, but the doctrinal caution around fraud remained.
A second and more important limitation was the tendency to treat liability as largely internal to the company. In several decisions, courts adopted an interpretation that made it difficult to proceed against third parties who were not formal insiders, even if they had knowingly benefited from or participated in the fraudulent transaction. The result was an artificial distinction: directors and managers could be targeted, but recipients of the diverted value often remained outside the immediate reach of the insolvency process.
A third limitation was the high threshold applied to fraudulent intent. Courts frequently demanded strong proof of mens rea, which made it difficult for Resolution Professionals to succeed unless they could show clear, deliberate dishonesty. That standard may be suitable in criminal law, but in insolvency proceedings, it can frustrate the Code’s restorative purpose. The practical consequence was that even when fraud was apparent in substance, legal recovery remained fragmented and slow.
This older approach left the insolvency process incomplete. It allowed punishment of some wrongdoers, but not necessarily recovery from those who actually received the diverted benefit.
II. The Turning Point: Worldwide Online Services and Third-Party Liability
The NCLAT’s ruling in Worldwide Online Services Pvt Ltd v Nandkishor Deshpande changes that picture in a meaningful way. The dispute involved massive receivables worth Rs. 98.97 Crores being wiped out through unilateral journal entries shortly before insolvency. The appellant argued that it was merely a third party and therefore outside the reach of Section 66.
The Tribunal rejected that position. By focusing on the phrase “any persons” in Section 66(1), it is made clear that liability is not confined to directors or internal management. If a third party is a knowing participant in a transaction intended to defraud creditors, that party can fall within the provision’s reach.
That matters for two reasons. First, it prevents the law from stopping at the formal boundaries of corporate personality. Second, it allows the adjudicating authority to focus on substance rather than labels. A party cannot avoid liability merely by claiming to stand outside the company if it knowingly helped strip value from the corporate debtor.
This is a significant doctrinal shift. Section 66 is no longer being read as a provision directed only at internal mismanagement. It is being read as a practical recovery tool.
III. The Doctrinal Shift: From Insider Liability to Knowing Participation
What makes the 2026 ruling especially important is that it does not merely expand the circle of liability. It also changes the way Section 66 is understood.
The first change is conceptual. Liability now appears to turn on conduct, not formal role. The relevant question is not only whether a person is a director, officer, or insider, but whether that person knowingly participated in conduct designed to defraud creditors.
The second change is remedial. Section 66 is functioning less like a purely punitive device and more like a restitutionary mechanism. Its object is not simply to identify wrongdoing in the abstract. It is to restore value to the corporate debtor’s estate so that creditors are not left empty-handed.
The third shift is in how Section 66(1) and Section 66(2) relate to each other. Earlier, there was a tendency to read them together, almost as if one depended on the other. But recent decisions move away from that approach and support a more disjunctive reading. This is clearly reflected in Swapan Kumar Saha v Ashok Kumar Agarwal (RP), where the NCLAT clarified that the two provisions operate independently and are not interconnected.This distinction actually matters more than it seems at first glance. Section 66(1) deals with fraudulent conduct, while Section 66(2) is narrower and focuses on wrongful trading by those in management who fail to act with due diligence. If both provisions are read together, there is a risk of importing the limitations of Section 66(2) into Section 66(1), which would unnecessarily narrow its scope. Seen this way, keeping the two provisions separate allows Section 66(1) to function the way it was intended as a tool to address deliberate and coordinated fraud, without being restricted by the more limited framework of Section 66(2).
IV. Comparative Insight: Why Bilta Matters
The value of the NCLAT’s reasoning becomes even clearer when read in conjunction with Bilta (UK) Ltd (in liquidation) and others v Tradition Financial Services Ltd [2025] UKSC 18. The comparison is a useful one because both provisions use broad language and both confront the same basic issue: can a third party who knowingly assists fraudulent conduct escape liability simply by pointing to formal separateness?
In Bilta, the UK Supreme Court rejected that kind of role-based immunity. The focus was on conduct and participation. A third party could not hide behind a separate legal personality if it knowingly engaged in the fraud.
That logic is highly relevant to Section 66. The Indian provision, like its UK counterpart, is aimed at preventing abuse of the corporate structure. Once that purpose is accepted, the argument for treating third-party collaborators differently becomes weak. The real issue is not whether a party is inside or outside the company, but whether it knowingly assisted a fraudulent diversion of value.
The comparison also supports a more victim-centred understanding of insolvency law. The corporate debtor should be seen as the victim of the fraudulent conduct, not as the wrongdoer whose identity defeats recovery. This serves as a crucial counterbalance to excessively literal interpretations of how responsibility is assigned within a corporation.
V. Practical Consequences: Why the Ruling Matters
The practical effect of the 2026 ruling is substantial. First, it strengthens the hand of the Resolution Professional. Instead of having to pursue separate civil litigation against third parties, the RP can now seek meaningful relief within the insolvency framework itself. That is faster, more efficient, and far more consistent with the objective of value maximisation.
Second, the ruling increases the deterrent effect of Section 66. Third-party vendors, shell entities, and collusive beneficiaries can no longer assume that the insolvency process only targets insiders. If they knowingly assist the diversion of assets, they risk direct liability.
Third, the ruling improves the quality of insolvency adjudication by shifting attention to commercial substance. Documentary entries alone will not necessarily protect a transaction if the surrounding facts show that there was no real commercial substance. That is an important signal in a system where paper structures are often used to disguise economic reality.
Finally, the judgment helps align the insolvency process with the broader philosophy of the IBC. The Code is not meant to reward fraud or allow wrongful beneficiaries to retain the proceeds of misconduct. It is meant to preserve the estate, protect creditors, and support honest business failure while sanctioning dishonest conduct.
Conclusion
The evolution of Section 66 reflects a broader maturity in Indian insolvency law. The old insider-focused approach was too narrow to deal with modern fraud, where value is often transferred through third parties who knowingly assist the wrongdoing. The NCLAT’s 2026 ruling in Worldwide Online Services Pvt Ltd v Nandkishor Deshpande responds to that reality by reading “any persons” in a meaningful and purposive way.
The result is a stronger, more restitution-oriented insolvency regime. Section 66 is no longer just about identifying misconduct within the company. It is about recovering value from everyone who knowingly participated in stripping the corporate debtor’s assets. Going forward, Resolution Professionals and adjudicating authorities will need to grapple with the evidential standards for “knowing participation” by outsiders, and courts will have the opportunity to give that standard real content. The trajectory set by this ruling points toward an insolvency law that is harder to game and more faithful to its creditor-protective purpose.
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