Liability of Directors in Insolvency

March 19, 2026

When a company goes into insolvency, directors cannot always rely on the protection of limited liability. Under the Insolvency and Bankruptcy Code, 2016 (IBC) and the Companies Act, 2013, directors may face personal consequences if they fail to act responsibly during financial distress. In certain situations, their personal assets, professional reputation, and legal position may be affected. This newsletter summarises key legal provisions, landmark judgments, and the practical risks faced by directors during insolvency.

Director Liability Risk Spectrum

Risk Level	Trigger	Provision	Consequence & Quantum
CRITICAL	Fraudulent / Wrongful Trading	Sec.66, IBC	promoters can be personally liable for fraudulent or wrongful trading if they knowingly engaged in transactions that harmed the corporate debtor’s assets or creditor’s interests during financial distress.
CRITICAL	Defrauding Creditors	Sec.69, IBC	Imprisonment 1–5 years, or fine ₹1 lakh–₹1 crore, or both.
CRITICAL	Fraud	Sec 447, Companies Act	Fraud involving ₹10 lakh or 1% of turnover (whichever lower): Imprisonment 6 months–10 years + fine up to 3× the fraud amount. If public interest involved → minimum 3 years imprisonment. If fraud < ₹10 lakh or 1% of turnover and no public interest → imprisonment up to 5 years or fine up to ₹50 lakh or both.
HIGH	Director Disqualification	Sec 164 & 167, Companies Act	Automatic 5-year bar on all directorships — no court order required
HIGH	Preferential / Undervalued Transactions	Sec 43–45, IBC	Full transaction value clawed back; director personally investigated
HIGH	Breach of Duties	Sec 166, Companies Act	Fine ₹1L–₹5L on director personally per violation
MEDIUM	Income Tax Secondary Liability	S.179, Income Tax Act	Entire company tax demand transferred to director personally

Landmark Judgements: SC & NCLT — Holdings and Quantum

Case & Court	Key Holding	Practical Impact	Quantum / Consequence
Innoventive Industries Ltd. v. ICICI Bank Supreme Court, 2018	IBC moratorium overrides all state laws; upon admission of insolvency petition, directors lose executive control over the company immediately.	Directors cease to have authority to deal with assets, initiate transactions, or represent the company — from the date of admission, not resolution.	No personal monetary penalty, but directorial authority is extinguished with immediate, irrevocable effect.
Anuj Jain v. Axis Bank Ltd. Supreme Court, 2020	Related-party transactions made within 2 years of insolvency commencement are avoidable preferences if they deplete assets at the expense of creditors.	Directors who approved or benefitted from such transactions face reversal of those transactions and personal contribution orders to restore the depleted value.	Personal liability equals the full transaction value — the entire amount must be restored to the insolvency estate.
Lalit Kumar Jain v. Union of India Supreme Court, 2021	Personal guarantors of corporate debtors remain personally liable even after an approved resolution plan reduces the company's debt obligation.	Director-guarantors cannot shelter behind the resolution plan or the haircut accepted by financial creditors — their personal assets remain fully exposed.	Liability equals the full original guaranteed amount, unaffected by the haircut taken on corporate debt.
Mahendra Kumar Jajodia v. SBI NCLAT, 2022	NCLAT confirmed automatic disqualification of directors for non-filing of financial statements for 3 consecutive years under S.164(2), Companies Act.	Disqualification operates across all companies simultaneously — a director cannot continue any other board while disqualified, regardless of that company's financial health.	Bar on all directorships for 5 years; potential fine under S.164 Companies Act 2013.
Fraudulent Trading — NCLT Illustrative Order NCLT (Representative Matter)	Where directors extended interest-free loans to related parties and manipulated accounting records during financial distress, NCLT held them personally liable under S.66 IBC.	Demonstrates that intra-group fund transfers immediately preceding insolvency are forensically examined and treated as fraudulent depletion of creditor assets.	₹10.46 Crore ordered to be contributed personally by the director to the insolvency estate.
Improper Related-Party Payments — NCLT Illustrative Order NCLT (Representative Matter)	Payments made to related parties without commercial justification in the run-up to insolvency resulted in joint and several personal liability on approving directors.	Board minutes approving related-party transactions without documented fair-value rationale are treated as evidence of complicity in asset diversion.	₹10.54 Crore joint liability imposed on directors involved in approving the transactions.
P. Mohanraj v. Shah Brothers Ispat Pvt Ltd Supreme Court, 2021	Section 14 IBC moratorium applies to proceedings under Section 138 Negotiable Instruments Act for cheque dishonour.	Once insolvency begins, cheque bounce proceedings against the company are stayed during the moratorium period	Criminal proceedings paused during moratorium but may revive after CIRP if liability remains.

Pattern across all cases: Courts do not accept 'I was not involved in day-to-day operations' as a defence. Once a director signs board minutes or remains passive during financial distress, liability attaches.

Impact on Directors: Key Areas of Exposure

Impact Area	Possible Outcome	Strategic Implication for the Director
Financial Exposure	NCLT contribution orders without a monetary cap — personal assets including property attachable	Directors may be personally bankrupted; company insolvency triggers individual insolvency
Criminal Liability	Prosecution under S.447 Companies Act and S.69 IBC	A criminal record bars future corporate roles and professional licences permanently
Professional Disqualification	Automatic 5-year bar on directorships in all companies — self-executing, no court order needed	Affects every current board seat simultaneously; damage is immediate and irreversible for the period
Reputational Damage	Public NCLT proceedings, SEBI orders, forensic audit disclosures in the public domain	Loss of professional credibility extends far beyond the insolvent company into future ventures
Tax & GST Secondary Liability	S.179 Income Tax Act and GST provisions transfer company's entire tax default to director personally	Director cannot escape by arguing ignorance — burden of proving the default was not due to their neglect falls on the director

Directors & Officers (D&O) Indemnity Insurance

D&O insurance is no longer optional. Once insolvency is admitted, the company cannot indemnify directors — the insolvency estate's priority is creditors, not directors. Side-A D&O coverage pays directly to the individual director even when the company is insolvent and unable to reimburse.

Company Size	Typical Sum Insured	Premium Range (Annual)	Key Notes & Examples
Small	₹50 lakh – ₹2 crore	₹12,000 – ₹2.5 lakh	Affordable for startups, e.g., ₹50 lakh cover at ₹12k–₹25k for low-risk firms. Higher for tech startups.
Mid-Sized	₹2 – ₹10 crore	₹1 – ₹5 lakh	Standard for growing firms, e.g., ₹5 crore cover at ₹2.5–5 lakh (0.5–1% rate). Bundling with EPLI adds 10–20%.
Large	> ₹10 crore	₹5 lakh – ₹20 lakh+	Scalable for corporates, e.g., ₹10 crore cover at ₹5–10 lakh, rising to ₹20–50 lakh for ₹50 crore+ limits in high-risk sectors.

Note: Premium ranges are indicative and may vary by industry, risk profile, and insurer terms.

D&O Policy — Key Specifications

Policy Type	Side-A (individual) + Side-B (company reimbursement) + Side-C (entity cover for listed companies)
Claim Trigger	Written demand, regulatory notice, civil suit, or formal investigation — not a final court finding
Key Advantage	Covers legal defence costs even where no final liability is established — defence-first coverage
Indian Providers	ICICI Lombard, Tata AIG, Bajaj Allianz, New India Assurance — all IRDAI-regulated

✔ Typically Covered	✘ Typically Excluded
Legal defence costs in civil and regulatory proceedings Regulatory investigation expenses (SEBI, ROC, ED inquiries) Settlement amounts or damages in creditor / shareholder claims Crisis management and PR costs triggered by insolvency proceedings	Fraud or intentional misconduct — once proven, coverage withdrawn Criminal fines, penalties, or punitive damages Claims arising from personal profit obtained illegally Bodily injury or property damage claims

Key takeaway: Director liability during insolvency is no longer theoretical. Indian courts increasingly impose personal financial contribution, criminal prosecution, and professional disqualification where directors fail to protect creditor interests.

Director's Compliance Checklist

Action Required	Statutory Basis
Monitor solvency at every board meeting — conduct both cashflow and balance-sheet solvency tests and record results in minutes	S.66, IBC
Seek independent legal and financial advice the moment insolvency risk becomes apparent — document this formally	Business Judgment Rule; S.66 IBC defence
Resign formally with ROC notification (Form DIR-11) if unable to fulfil duties — passive directorship is not neutral	S.168, Companies Act; S.167 disqualification risk
Ensure all statutory filings are current — financial statements, annual returns, deposit repayments — at all times	S.164(2), Companies Act 2013
Document board rationale for all related-party transactions with independent fair-value evidence	S.43–45, IBC; S.188, Companies Act
Procure D&O insurance with Side-A coverage — verify the insurer is not the same entity as the company's main insurer	SEBI LODR Reg. 34; IRDAI guidelines

Conclusion

The Insolvency and Bankruptcy Code, 2016 has fundamentally changed the risk landscape for directors. Courts now closely examine board decisions taken during financial distress and are willing to impose personal liability where directors act negligently or permit asset diversion.

Directors must therefore actively monitor solvency, document board decisions, and ensure strict regulatory compliance. Robust governance practices, combined with appropriate safeguards such as Directors & Officers (D&O) insurance, are essential to mitigate exposure and maintain professional credibility in an increasingly enforcement-driven insolvency regime.

Author:
Pallavi

Prepared On:
19/03/26

Please Share:

Liability of Directors in Insolvency

Director Liability Risk Spectrum

Landmark Judgements: SC & NCLT — Holdings and Quantum

Impact on Directors: Key Areas of Exposure

Directors & Officers (D&O) Indemnity Insurance

D&O Policy — Key Specifications

Director's Compliance Checklist

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