Section 67: Proceedings Under Section 66 of the Insolvency and Bankruptcy Code 2016
Section 67 of the Insolvency and Bankruptcy Code, 2016 provides the mechanism for giving effect to an order passed under Section 66 concerning fraudulent trading or wrongful trading. It enables the Adjudicating Authority to create and enforce a charge and, in specified cases, subordinate a creditor's debt in the priority of payment under Section 53.
Section 67 - Proceedings under Section 66
(1) Where the Adjudicating Authority has passed an order under sub-section (1) or sub-section (2) of Section 66, as the case may be, it may give such further directions as it may deem appropriate for giving effect to the order, and in particular, the Adjudicating Authority may:
(a) provide for the liability of any person under the order to be a charge on any debt or obligation due from the corporate debtor to him, or on any mortgage or charge or any interest in a mortgage or charge on assets of the corporate debtor held by or vested in him, or any person on his behalf, or any person claiming as assignee from or through the person liable or any person acting on his behalf; and
(b) from time to time, make such further directions as may be necessary for enforcing any charge imposed under this section.
Explanation. For the purposes of this section, "assignee" includes a person to whom or in whose favour, by the directions of the person held liable under clause (a), the debt, obligation, mortgage or charge was created, issued or transferred or the interest created, but does not include an assignee for valuable consideration given in good faith and without notice of any of the grounds on which the directions have been made.
(2) Where the Adjudicating Authority has passed an order under sub-section (1) or sub-section (2) of Section 66, as the case may be, in relation to a person who is a creditor of the corporate debtor, it may, by an order, direct that the whole or any part of any debt owed by the corporate debtor to that person and any interest thereon shall rank in the order of priority of payment under Section 53 after all other debts owed by the corporate debtor.
Purpose and scope of Section 67
Section 67 operates after the Adjudicating Authority has passed an order under Section 66(1) or Section 66(2). Section 66 deals with fraudulent trading and wrongful trading, while Section 67 provides consequential powers intended to give practical effect to such an order.
Charge over debt, mortgage or other interest
Under Section 67(1)(a), the liability arising from an order under Section 66 may be made a charge on a debt or obligation due from the corporate debtor to the person held liable. The charge may also extend to a mortgage, charge or an interest in a mortgage or charge over assets of the corporate debtor in the circumstances specified by the provision.
Power to enforce the charge
Section 67(1)(b) authorises the Adjudicating Authority to issue further directions from time to time where necessary to enforce a charge imposed under Section 67. This supplements the contribution liability determined under Section 66.
Meaning of assignee under Section 67
The Explanation gives "assignee" an extended meaning for the purposes of Section 67. It covers a person in whose favour the relevant debt, obligation, mortgage, charge or interest was created, issued or transferred at the direction of the person held liable. However, an assignee who gave valuable consideration in good faith and without notice of the grounds on which the directions were made is excluded.
Subordination of debt under Section 67(2)
If an order under Section 66 concerns a person who is also a creditor of the corporate debtor, Section 67(2) permits the Adjudicating Authority to direct that all or part of the debt owed to that creditor, together with interest, rank after all other debts of the corporate debtor in the order of priority under Section 53.
Meaning of Adjudicating Authority
For corporate persons under Part II of the Code, Section 5(1) identifies the National Company Law Tribunal constituted under Section 408 of the Companies Act, 2013 as the Adjudicating Authority. Section 60 contains the jurisdictional provisions applicable to corporate persons.
Connection with Section 66 and Section 53
Section 66 - Fraudulent trading or wrongful trading is the substantive provision under which the underlying contribution order is made. Section 67 deals with consequential directions. Section 53 governs the waterfall for distribution of assets in liquidation and is expressly referred to in Section 67(2).