The Insolvency and Bankruptcy Code 2016 reshaped India's credit recovery landscape — and with it, the personal liability exposure of company directors. Since IBC's enactment, the NCLT and NCLAT have increasingly held directors personally accountable. Here is what directors must understand.
The NCLT's role under IBC
The National Company Law Tribunal (NCLT) is the adjudicating authority for Corporate Insolvency Resolution Process (CIRP) applications. Creditors — financial or operational — can file an insolvency application against a company when it has defaulted on a debt of INR 1 crore or more.
Once CIRP is admitted, the Board of Directors loses control of the company — an Interim Resolution Professional (IRP) takes over. The CIRP process runs for 180 days (extendable to 330 days) to find a resolution plan. If none is approved, the company goes into liquidation.
Director liability: the triggers
Directors face personal liability exposure under IBC in several scenarios:
- Fraudulent trading (Section 66) — if a director knew the company was incurring debts it could not repay, the NCLT can hold that director personally liable for those debts
- Wrongful trading (Section 66) — contributing to the deepening of insolvency after knowing that the company cannot avoid insolvency
- Preferential transactions (Section 43) — a transaction that favours one creditor over others within a look-back period (2 years for related parties, 1 year for others) can be reversed by the RP, and the director may face personal liability for causing it
- Undervalued transactions (Section 45) — disposing of assets below fair value in the look-back period
- Extortionate credit transactions (Section 50) — entering credit transactions with unreasonably surcharged interest
The NCLT has pierced the corporate veil in multiple IBC cases where directors were found to have diverted funds, made payments to related parties, or artificially inflated liabilities before CIRP was filed.
Disqualification of directors
Section 164 of the Companies Act 2013 disqualifies a person from being appointed or reappointed as director if they are a director of a company that has failed to file financial statements or annual returns for 3 consecutive years, or if the company has defaulted on loan repayment for 1 year.
This has significant practical consequences — ROC strikes off companies under Section 248, and disqualified directors become ineligible across all companies they direct, not just the defaulting one.
The role of the Resolution Professional and NCLT in investigating directors
The RP has wide powers to examine the conduct of promoters, directors, and related parties. The RP can:
- Apply to NCLT for examination of any officer or employee of the corporate debtor
- Seek access to accounts, records, correspondence, and digital data
- Report suspected fraud to IBBI and refer the matter to SFIO or CBI
The IBBI (Insolvency and Bankruptcy Board of India) Regulations require the RP to file a report on antecedent transactions — meaning all significant transactions in the look-back period are scrutinised as a matter of course.
Practical protective steps for directors
Directors of companies facing financial stress should take the following steps proactively:
- Document all major decisions — board resolutions for loans, asset sales, and related-party transactions must be properly minuted with commercial rationale on record
- Seek early legal advice — once a company is within 12 months of potential insolvency, director decisions are examined retrospectively
- Avoid preferential payments — do not pay specific creditors (especially related parties) in priority during a period of financial stress
- Consider voluntary insolvency — in some situations, a voluntary CIRP application is better than waiting for a creditor to file
- Resign only with advice — a director cannot eliminate IBC liability simply by resigning before CIRP is filed, if they made decisions that caused the default
Section 138 NI Act and dishonour of cheques
Independent of IBC, company directors can face criminal prosecution under Section 138 of the Negotiable Instruments Act when a company cheque is dishonoured. The Supreme Court has held that every director who was "in charge of and responsible for" the company's day-to-day affairs at the time of the cheque issuance can be prosecuted.
Our criminal law and corporate teams work together on Section 138 matters — coordinating the criminal defence with the civil recovery proceedings.
DeccanBridge guidance
Our dispute resolution and corporate law teams advise directors facing NCLT proceedings, RP investigations, and director disqualification challenges from our Hyderabad HQ and Bhongir centre. We also prepare directors proactively — through board governance audits and insolvency readiness reviews — before a creditor files.
Contact: connect@deccanbridge.com or +91 94922 01497.