Definition
Trading by a company after a director knew or ought to have known that there was no reasonable prospect of avoiding an insolvent resolution or liquidation — without taking steps to minimise potential loss to creditors — making the director personally liable under Section 66(2) of the IBC.
Wrongful trading under Section 66(2) IBC (unlike fraudulent trading — Section 66(1)) does not require intent to defraud. A director who continues trading when they know (or should know) that insolvency is inevitable, without minimising creditor loss, may be held personally liable. The key question: when did the director know or ought to have known insolvency was unavoidable? Once they had this knowledge, they had a duty to minimise losses — by stopping trading, filing for insolvency, reducing expenditure, or seeking rescue. Failure to do so makes them liable for the increase in net deficiency from that point until insolvency resolution. This provision is designed to incentivise early insolvency filings — preventing the common practice of 'zombie trading' where a company continues incurring debts long after it is clear it cannot survive.
Statutory Definition
Section 66(2), Insolvency and Bankruptcy Code, 2016: 'On an application made by a resolution professional or a liquidator, as the case may be, the Adjudicating Authority may make an order requiring such person to make such contribution to the assets of the corporate debtor as it thinks proper, if — (a) during the corporate insolvency resolution process or a liquidation process of a corporate debtor, it is found that any person has contributed to the trading of the corporate debtor knowing fully well that the corporate debtor was not going to be in a position to meet its debts; (b) such person is not a creditor of the corporate debtor.'
Etymology & Origin
From 'wrongful' (contrary to law, morally wrong) + 'trading' (conducting business). Wrongful trading is conducting business wrongly — not in the fraudulent sense, but in the sense of taking unacceptable risk with creditors’ money when one knows insolvency is coming.
Full Legal Analysis
Wrongful Trading: Continuing When You Know It’s Over
A director of a failing company faces a painful dilemma: keep trying to save the company (and risk personal liability for wrongful trading), or file for insolvency now (and lose all chance of rescue). The wrongful trading provision calibrates this dilemma by focusing on the director’s conduct after they knew insolvency was inevitable. Once you know the company cannot avoid insolvency, you must minimise losses — not continue gambling with creditors’ money.
The Timing Problem
The critical question: when did wrongful trading begin? The director’s actual knowledge (subjective) or what they ought to have known (objective) determines the starting point. Courts apply both tests: (a) Did the director actually know that insolvency was unavoidable? (b) Would a reasonably diligent director in the same position have known? The objective test catches directors who buried their heads in the sand — refusing to read the accounts, ignoring legal advice, or wilfully avoiding knowledge of the company’s true financial position.
Wrongful Trading vs. Fraudulent Trading
(a) Fraudulent trading (Section 66(1)): Requires intent to defraud — dishonest purpose; unlimited liability; criminal overtones. (b) Wrongful trading (Section 66(2)): No intent required — negligence is sufficient; liability limited to contributions that the director failed to make to minimise losses; civil liability only. Wrongful trading is a lower bar but a lower consequence — a director who genuinely tried to save the company but made wrong decisions may escape wrongful trading liability; a director who deliberately incurred debts knowing insolvency was inevitable faces full fraudulent trading exposure.
“Wrongful trading is not about dishonesty — it’s about timing. The law says: at some point, the responsible thing is to stop trading and minimise the damage. A director who keeps going past that point, accumulating losses for creditors who had no say in the decision, must answer for the incremental loss their continued trading caused.”
This Term in Indian Statutes
Insolvency and Bankruptcy Code, 2016, 2016
"On an application made by a resolution professional or liquidator, the Adjudicating Authority may make an order requiring any person to make contribution to the assets of the corporate debtor if it is found that such person contributed to the trading of the corporate debtor knowing fully well that the corporate debtor was not going to be in a position to meet its debts."
Wrongful trading: no intent to defraud required; director knew insolvency unavoidable but continued trading without minimising loss; civil personal liability for contribution
