Directors' Personal Liability In Corporate Insolvency

Brahmeet Singh Bawa, O.P. Jindal Global University

ABSTRACT

This research paper explores the relationship between insolvency of a company and the personal liability of directors under the Insolvency and Bankruptcy Code (IBC), 2016, with specifically focusing on the effect of the interim moratorium under Section 961 of the said act. The interim moratorium, which begins once Sections 942 and 953 of the IBC are invoked, provides with temporary protection to the corporate debtor by barring the initiation of any judicial proceedings against the company. However, this protection is not automatically extended to the directors, who are considered a separate legal entity from the corporate entity in terms of personal liability.

Further it is examined whether directors can be held personally liable for the insolvency of the company despite the ongoing interim moratorium. It substantiates this argument by referring to legal precedents, such as the Delhi High Court's decision in Sandeep Gupta v. Shri Ram Steel Traders4, which highlighted that while the moratorium safeguards the company from creditor actions, it does not shield directors from their personal penal liabilities. This judgment, along with others like P. Mohanraj v. Shah Bros. Ispat (P) Ltd.5 and Ajay Kumar Radheyshyam Goenka v. Tourism Finance Corpn. of India Ltd.6, reinforces the notion that the moratorium’s protection is restricted to the corporate debtor and does not negate individual liabilities incurred by directors.

Additionally, the paper considers relevant provisions of the Companies Act, 2013, which intersect with the IBC in determining directors' liabilities. Key sections such as Section 1667 (duties of directors), Section 213 (investigation of company affairs), and Section 4479 (fraud) are analyzed to get a deep understanding on how the Companies Act frames the responsibilities and potential liabilities of directors, both during and after insolvency proceedings.