Blog on Limitations of Section 66 of the Insolvency and Bankruptcy Code and exploring Remedies Against Third Parties
Introduction: The Insolvency and Bankruptcy Code (IBC) provides a framework for the resolution of distressed entities and the recovery of outstanding debts. While the Code offers various remedies to creditors, there are certain limitations on the availability of remedies against third parties. In this blog post, we will examine Section 66 of the IBC and discuss the restrictions on seeking remedies against third parties, as well as the judicial decisions that have shaped the interpretation of this provision.
Understanding Section 66 of the IBC:
Section 66 of the IBC deals with fraudulent or wrongful trading by the corporate debtor. It allows the liquidator or the resolution professional to initiate proceedings against any person who has been involved in fraudulent or wrongful acts that have caused financial harm to the company. The section aims to hold individuals accountable for their actions and recover the losses incurred by the company.
Limitations on Remedies against Third Parties: While Section 66 allows for remedies against individuals involved in fraudulent or wrongful trading, it does not extend those remedies to third parties who may have contributed to the financial distress of the corporate debtor. This limitation arises due to the specific language and scope of Section 66, which focuses primarily on the actions of the corporate debtor and its officers.
Judicial Decisions Shaping the Interpretation: Several judicial decisions have provided insights into the interpretation of Section 66 and the limitations on remedies against third parties. Here are a few key cases that have influenced the understanding of this provision:
- Innoventive Industries Ltd. v. ICICI Bank: In this landmark judgment, the Supreme Court clarified that IBC is a code for corporate insolvency resolution and does not address individual insolvency matters. The court emphasized that Section 66 of the IBC is aimed at the corporate debtor and its officers, limiting its applicability to individuals who are directly involved in fraudulent or wrongful acts.
- Power Grid Corporation of India Ltd. v. Jyoti Structures Ltd.: The National Company Law Appellate Tribunal (NCLAT), in this case, held that Section 66 of the IBC does not confer any authority on the liquidator or the resolution professional to initiate proceedings against third parties who are not involved in fraudulent or wrongful trading. The NCLAT emphasized that the provision only applies to actions of the corporate debtor and its officers.
- Swiss Ribbons Pvt. Ltd. v. Union of India: The Supreme Court, in this crucial judgment, highlighted the need to balance the interests of the corporate debtor and the creditors while interpreting the provisions of the IBC. The court recognized that the primary objective of the IBC is to ensure the revival and resolution of distressed entities, rather than focusing solely on punishing third parties who may have contributed to the debtor’s financial distress.
Conclusion: Section 66 of the Insolvency and Bankruptcy Code provides remedies against individuals involved in fraudulent or wrongful trading by the corporate debtor. However, the limitations of this provision restrict the availability of remedies against third parties who may have contributed to the financial distress of the company. Judicial decisions have reinforced the interpretation that Section 66 primarily addresses the actions of the corporate debtor and its officers, excluding remedies against unrelated third parties.
While the IBC aims to strike a balance between the interests of the creditors and the corporate debtor, the limitations on remedies against third parties highlight the need for comprehensive legal frameworks to address their liabilities. Parties seeking remedies against such third parties must explore other legal avenues outside the scope of Section 66, such as civil litigation or other applicable laws.