Expanding the Reach of Section 66 IBC: NCLAT’s Recognition of Third-Party Liability

Introduction

Section 66 of the Insolvency and Bankruptcy Code, 2016 was enacted to curb fraudulent trading and wrongful conduct in the lead-up to insolvency and during the corporate insolvency resolution process (CIRP). Its central aim is to restore value to the corporate debtor’s estate where individuals have knowingly taken part in schemes to defraud creditors.

For several years, however, this provision was interpreted in a narrow, insider-centric manner. Liability was usually confined to directors, key managerial personnel, and other internal officers directly involved in the operations of the corporate debtor. As a result, the practical use of Section 66 was often restricted to targeting people within the company, without effectively reaching those outside entities or individuals who benefited from or actively assisted the fraudulent conduct.

Yet, modern insolvency fraud rarely remains inside the company’s formal management structure. Funds and assets can be siphoned off via:

  • Layered shell companies
  • “Friendly” suppliers or service providers
  • Collusive group entities
  • Other third parties who knowingly facilitate value diversion

If the law only looks at corporate insiders, the real economic beneficiaries of the fraud often remain beyond the reach of insolvency recovery actions.

Against this backdrop, the ruling of the National Company Law Appellate Tribunal (NCLAT) in Worldwide Online Services Pvt Ltd v Nandkishor Deshpande in 2026 represents a critical development. The NCLAT interpreted Section 66 as not limited to insiders and acknowledged that third parties can also be fixed with liability when they knowingly participate in fraudulent conduct intended to defeat creditors.

This article analyses how this ruling:

  • Reorients Section 66 as a recovery-focused mechanism,
  • Strengthens creditor protection,
  • Brings Indian insolvency jurisprudence closer to established common-law principles, and
  • Reinforces the remedial and restorative goals of the IBC.

I. The Earlier Position: A Constricted View of Section 66 Liability

Legacy of Company Law and Section 339

Before the decision in Worldwide Online Services Pvt Ltd v Nandkishor Deshpande, the interpretative approach to Section 66 was heavily influenced by earlier company law provisions, particularly Section 339 of the Companies Act. Historical thinking about fraudulent trading under the old regime created a mindset that persisted into IBC practice.

1. Linkage with Winding Up Stage

Under the Companies Act framework, fraudulent trading actions were generally associated with winding up proceedings. The perception was that such liability was to be examined primarily when the company was already on the path to liquidation, not while it was still attempting resolution or rehabilitation.

Although the IBC changed the timing by empowering the Resolution Professional (RP) to act during the CIRP itself, courts often remained cautious in using fraud-based provisions aggressively during the resolution phase.

2. Focus on Internal Management Only

A second structural limitation in earlier decisions was the implicit assumption that fraudulent trading is essentially an internal wrong. Courts tended to read Section 66 as addressing:

  • Directors
  • Officers
  • Persons in management or control

This meant that external actors—such as suppliers, financiers, or related entities—were often deemed outside the direct scope of Section 66, even where they had:

  • Received diverted assets, or
  • Consciously participated in transactions that stripped value from the corporate debtor.

The result was a clear dichotomy:

Insiders could be pursued under Section 66, but third-party recipients or facilitators of fraudulent transactions frequently escaped targeted insolvency remedies.

3. Stringent Standard on Fraudulent Intent

A third restrictive feature was the high evidentiary threshold for establishing fraudulent intent. Courts frequently demanded strong proof akin to a criminal standard, insisting on clear and direct evidence of dishonesty or deliberate intent to defraud.

While such a standard may be justified in criminal prosecutions, its transplant into an insolvency context had adverse consequences:

  • It hampered the RP’s ability to act swiftly.
  • It undermined the IBC’s objective of value maximisation and timely recovery.
  • It left many schemes effectively unremedied despite clear economic harm to creditors.

Consequence: An Incomplete Insolvency Remedy

Collectively, these limitations meant that:

  • Wrongdoing by insiders might lead to some accountability, but
  • The actual beneficiaries of fraudulent transfers—often third parties—frequently remained untouched.

The insolvency framework, therefore, looked punitive but not fully restorative, failing to ensure that misappropriated assets were effectively clawed back into the estate.

II.