“Twilight Zone” Transactions: NCLAT Upholds Director Liability for Cheques Encashed During Moratorium And Clarifies Section 66(2) Independence

The Hon’ble National Company Law Appellate Tribunal (NCLAT), in its judgment dated November 27, 2025, addressed the liability of directors for dissipating assets during the “twilight zone”—the period immediately preceding the admission of an insolvency petition.

The Corporate Debtor (CD), Satra Properties India Ltd., was facing a Section 7 petition which had been reserved for orders on February 19, 2020. Knowing that admission was imminent, the Appellants (suspended directors) issued two cheques totaling Rs. 91,00,000/- on July 31, 2020, in favor of a third party, M/s Darshan Developers. The CIRP was admitted on August 03, 2020, imposing the moratorium. However, the cheques were encashed on August 06, 2020—during the moratorium—utilizing funds that were credited to the CD’s account after the CIRP commencement date. The Resolution Professional (RP) sought recovery of this amount under Section 66(2), which the Adjudicating Authority granted.

The Appellants argued that the transaction was a bona fide payment under a pre-existing Memorandum of Understanding (MOU). They contended that Section 66(2) cannot be invoked without establishing “fraudulent intent” as required under Section 66(1), arguing the sections are interconnected. Additionally, Appellant No. 1 argued that since a Section 95 application was pending against him, the interim moratorium under Section 96 barred the Adjudicating Authority from passing orders against him.

Dismissing the appeal, the Hon’ble NCLAT laid down the following legal principles:

1. Violation of Moratorium (Section 14): The NCLAT held that encashing cheques after the moratorium kicks in violates Section 14, regardless of when the cheques were issued or handed over. Citing SREI Equipment Finance Ltd., the Court noted that no person can recover amounts from the Corporate Debtor once the moratorium starts. The Appellants’ action of utilizing post-CIRP credits to honor these cheques was held to be a clear violation.

2. Independence of Section 66(1) and 66(2): The NCLAT rejected the argument that Section 66(1) and 66(2) must be read together. It held that the provisions are distinct and operate independently.

• • Section 66(1): requires intent to defraud creditors.

• • Section 66(2): applies where a director knew or ought to have known that CIRP was inevitable and failed to exercise due diligence to minimize loss to creditors. The Court found that the Appellants knew CIRP was imminent (as orders were reserved) and failed to exercise due diligence by dissipating assets to a related party (a cousin of the director) without legitimate commercial justification.

3. Section 96 Moratorium Does Not Bar Section 66 Proceedings: The Court clarified that the interim moratorium under Section 96 applies to debts due from the personal guarantor/debtor. However, Section 66 proceedings are for restoring the assets of the Corporate Debtor. The NCLAT held that Section 96(1)(b) does not bar the Adjudicating Authority from passing orders against suspended directors for wrongful trading during the corporate insolvency process.

4. Power to Levy Interest: The Appellants argued that Section 66 does not explicitly authorize interest. The NCLAT rejected this, holding that the power to direct a person to “make such contributions… as it may deem fit” includes the power to restore the “time value of money”.

This judgment serves as a stern warning to directors regarding their conduct when insolvency is on the horizon. It establishes that the NCLAT will not allow the “interim moratorium” of personal insolvency to shield directors from liability for wrongful trading. It further clarifies that Section 66(2) is a standalone provision that does not require the high burden of proving “fraud,” but merely a lack of due diligence when corporate death is inevitable.