Definition
Carrying on business of a corporate debtor with intent to defraud creditors or for any fraudulent purpose — an offence under Section 66 of the IBC that creates personal liability for directors and others who knowingly participated.
Section 66 of the IBC deals with two distinct categories: (a) Fraudulent trading — where the corporate debtor's business was carried on with intent to defraud creditors; and (b) Wrongful trading — where directors knew the company would be unable to avoid insolvency but did not minimise potential loss. For fraudulent trading (Section 66(1)), the NCLT may declare that any persons who knowingly participated are personally liable for the company's debts. This is a significant provision — it can pierce the corporate veil and make individuals personally liable for corporate debts where fraud is involved. For wrongful trading (Section 66(2)), directors who failed to take steps to minimise potential loss when insolvency was inevitable may be held responsible.
Statutory Definition
Section 66(1), Insolvency and Bankruptcy Code, 2016: 'If during the corporate insolvency resolution process or a liquidation process, it is found that any business of the corporate debtor has been carried on with intent to defraud creditors of the corporate debtor or for any fraudulent purpose, the Adjudicating Authority may on the application of the resolution professional or liquidator pass an order that any persons who were knowingly parties to the carrying on of the business in such manner shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the corporate debtor as the Adjudicating Authority may direct.' Section 66(2): wrongful trading — director contributed to insolvency by failure to take steps to minimise loss.
Etymology & Origin
From 'fraudulent' (involving fraud, deceptive, from Latin 'fraudulentus' — from 'fraus' — fraud) + 'trading' (conducting business). Fraudulent trading is business conducted dishonestly with intent to deceive creditors — using the company as a vehicle for fraud.
Full Legal Analysis
Fraudulent Trading: Piercing the Corporate Veil for Fraud
The corporate structure usually protects shareholders and directors from personal liability for company debts. Fraudulent trading is one of the narrow exceptions — where the company was used as an instrument of fraud against creditors, the perpetrators lose the protection of limited liability and become personally liable. This is the law saying: the corporate form is not a shield for deliberate dishonesty.
Elements of Fraudulent Trading
(a) Business carried on with intent to defraud: The company’s business was conducted with the deliberate purpose of cheating creditors — accepting orders knowing the company couldn’t pay, accumulating debts with no genuine intention to repay, creating fictitious transactions. (b) Knowledge and participation: The person must have 'knowingly' been a party — actual knowledge of the fraudulent purpose is required; willful blindness may be equated with knowledge. (c) Causal link: The fraud must relate to the specific debts for which personal liability is imposed.
Wrongful Trading: Section 66(2)
Wrongful trading (Section 66(2)) is distinct from fraudulent trading — no intent to defraud is required. A director who, at a time when they knew or ought to have concluded that the corporate debtor had no reasonable prospect of avoiding an insolvent resolution or liquidation, did not take every step to minimise potential loss to creditors — may be personally held responsible for losses suffered. The wrongful trading provision is intended to prevent directors from 'gambling on resurrection' — continuing to incur debts when they know the company is terminally insolvent, hoping that a reversal of fortune saves them at the creditors’ expense.
“Fraudulent trading is the corporate law’s harshest sanction: unlimited personal liability for company debts. It is reserved for those who deliberately used the corporate form to cheat creditors. The protection of limited liability exists for honest business risk-taking — not for fraud.”
This Term in Indian Statutes
Insolvency and Bankruptcy Code, 2016, 2016
"If during the insolvency resolution process or liquidation, it is found that any business of the corporate debtor has been carried on with intent to defraud creditors, the Adjudicating Authority may pass an order that any persons who were knowingly parties to such business shall be personally responsible, without any limitation of liability, for all or any of the debts of the corporate debtor."
Fraudulent trading: unlimited personal liability for knowing participants; wrongful trading (Section 66(2)): director failed to minimise loss when insolvency inevitable
