Transitioning from Deterrence to Negotiation: Reevaluating Section 66 Post-Piramal v/s 63 Moons

[Prakhar is a student at NALSAR University of Law.]

The Supreme Court's decision in Piramal Capital and Housing Finance Limited v. 63 Moons Technologies Limited has been a landmark in the development of India's insolvency laws. Though the ruling is a literal solution to a limited conflict in the distribution of recoveries under Section 66 of the Insolvency and Bankruptcy Code 2016 (IBC), its repercussions extend far beyond that. The point at issue is not simply the allocation of the proceeds from fraudulent and wrongful trading, but the underlying nature of insolvency enforcement itself. Whether it is a function of the deterrence regime based on accountability or a commercially negotiable system aimed at favouring certainty and expediency.

The controversy was set against the backdrop of the DHFL insolvency, the first major insolvency of a financial services provider under the IBC framework in India. During the corporate insolvency resolution process, transaction auditors found purportedly fraudulent and malpractice trading transactions worth over INR 45,000 crores. The committee of creditors (CoC), however, passed a resolution plan proposed by Piramal Capital, providing for an immediate payout of INR 37,250 crores and subsequent recoveries of pending Section 66 applications to the resolution applicant at a nominal value of INR 1. A dissenting creditor appealed against this ruling, claiming that recoveries arising from fraudulent conduct should be credited to creditors and form part of the insolvency estate.

The Supreme Court eventually supported the CoC's decision, restated the doctrine of commercial wisdom, and ruled that the distribution of the Section 66 recoveries was a matter of commercial bargain that could not be interfered with by the court. By doing so, the court made a clear doctrinal distinction between avoidance transactions under Chapter III of the IBC on the one hand and proceedings under Section 66 on the other, the latter being conduct-based and penal rather than asset-restorative. 

The Chapter III provisions that address preferential, undervalued, extortionate, and fraudulent transactions are aimed at reversing such transactions to revive the corporate debtor's estate so it can be distributed equally among creditors. In section 66, personal liability is imposed on persons who proceeded with the business of the corporate debtor with an intention to defraud the creditors or proceeded with the wrongful trading despite insolvency. It is not simply concerned with reversing a transaction, but with sanctioning wrongdoing and preventing future abuse of limited liability. 

The court effectively re-purposes Section 66 as a marketable contingent property instead of a communal enforcement mechanism by deciding that recoveries under Section 66 must not be accrued to the estate, but may be allocated to a resolution applicant, as part of a commercial solution. This step indicates an evident desire for a degree of certainty and finality regarding the speculative future litigation, a preference that will be readily apparent in IBC's time-bound resolution and value-maximisation perspective.

The judgment has clear benefits from an efficiency perspective. The incentive for applicants in the resolution to place higher bids reflects the future advantage of recoveries, whereas creditors gain the benefit of certain, quick payouts rather than the uncertain outcomes of litigation. The burden of undertaking complex, resource-intensive fraud cases is taken off the shoulders of resolution professionals, who are usually severely constrained in funding and resources to pursue such cases against private litigants who have better incentives to do so. This certainty preference in large, systemically sensitive insolvencies like DHFL is arguably aimed at achieving greater financial stability.

However, there is also a more fundamental question of the integrity of the insolvency system in the long run as a result of the judgment. The idea behind Section 66 is a deterrent measure aimed at disciplining defaulting management, that fraudulent or careless behavior will not go unpunished. When such claims are effectively priced, discounted, and assigned, they are no longer effective in deterring. Once recovery losses from fraud are viewed as negotiable commodities rather than public enforcement outcomes, the notion of accountability becomes less evident.

The structural issue is also on valuation and agency costs. The large financial institutions that usually dominate the committee of creditors may have a rational preference for immediate recoveries over long-term, uncertain gains. This can lead to the systematic undervaluation of contingent assets, as seen in cases such as DHFL, where litigation costs are externalised. The fact that alleged claims worth tens of thousands of crores on a nominal basis is raising legitimate concerns about whether the IBC is actually succeeding in its objective of value maximising in substance rather than form.

An interesting comparison is between comparative insolvency regimes. Recoveries of fraudulent and wrongful trading under the Insolvency Act 1986 in the United Kingdom flow back to the company's estate and are distributed among creditors on a pari passu basis. Likewise, the U.S. Bankruptcy Code treats recoveries on claims arising from fraudulent conveyance as estate assets, which supports the nature of collective methods in insolvency enforcement. The post-Piramal stance of India, which allows the privatisation of fraud recoveries, is not based on this strategy and relies more on market enforcement. 

Those defending the decision could argue that judicial restraint is required in this case to prevent chilling legitimate business risk-taking and the hindsight bias. Insolvency law should be careful not to confuse commercial failure with wrongful misconduct, especially in risky markets. This is not an unfounded concern. However, it does not necessarily warrant the total decoupling of the Section 66 recoveries from the creditor collective. Deterrence and efficiency need not be mutually exclusive. This tension has been resolved by jurisdictions by imposing evidence-based limits to such extent, proportional liability rules, and judicial protection against ex post moralisation.

The decision to exercise restraint by courts may be supported by arguments that they are not to deter true business risk-taking and that they are not to make decisions with the benefit of hindsight. The insolvency law should be able to draw a clear line between commercial failure and wrongful conduct, particularly in risky markets. This concern is valid. It is not, however, a sufficient reason that recoveries under Section 66 should be wholly disassociated with the interests of creditors. Efficiency and deterrence do not necessarily go hand in hand. Other jurisdictions have successfully addressed this gap by establishing an evidence-based threshold, proportional liability, and protection against retrospective judgment.

Resolution professionals are accustomed to delays at the NCLT, limited investigative authority, and severe funding limitations. In such an environment, it can be practically justified that resolution applicants be given the opportunity to claim under Section 66. The concern is not that these claims should not be pursued, but that the creditors should not be excluded from the advantages of effective enforcement. 

A clearer measure is thus required. The issue of claims being priced or valued too low can be mitigated by including an information memorandum that discloses and independently values the claims under Section 66. The nature, scope, and recovery under Section 66 claims can be clarified through clear legislation that reduces uncertainty and narrows opportunistic bargaining. There is a better way to make the recovery model more compatible with incentives that does not undermine deterrence or give the impression that creditors have no claim to the recovery: a shared recovery model in which resolution applicants retain a portion of the recovery while creditors also share in the proceeds.

Finally, it is not only Piramal v. 63 Moons, but also the direction of Indian insolvency law. The Supreme Court has indicated that its increased role in addressing fraud in insolvency will be more grounded in market logic than in corrective justice. The long-term effectiveness of this shift in strengthening the IBC will depend on how effectively regulators and legislators address the risks it poses. The thing, though, is that nowadays Section 66 cannot be perceived as a deterrent measure anymore. Piramal has become a negotiation issue, and such a change needs to be examined.