Personal Liability of Directors and Promoters under IBC

A company's insolvency does not shelter the people who ran it. The Code removes directors from control the moment a CIRP begins, requires them to cooperate with the professional who replaces them, and exposes them to civil and criminal liability for what they did before and during the process. Promoters who guaranteed the company's loans face their own insolvency proceedings. This note brings together the different heads of personal liability that the Code and related laws impose.

1. Loss of Control and the Duty to Cooperate

• Section 17. From the insolvency commencement date, the management of the corporate debtor vests in the interim resolution professional, and the powers of the board of directors are suspended and exercised by the professional (Topic 30)
• Section 19. The personnel of the corporate debtor, its promoters and any other person associated with its management must extend all assistance and cooperation required by the professional; if they fail to do so, the professional may apply to the NCLT for directions, and the 2026 Amendment applies the same duty in liquidation through section 34(3)
• Directors remain directors. Suspension does not remove them from office; they may attend meetings of the committee of creditors without a vote, and remain subject to the obligations of the Code.

Figure 1: Exposure at each stage

2. Civil Liability under the Code

• Wrongful and fraudulent trading. Directors and partners may be ordered to contribute to the estate under section 66(2) for wrongful trading, and any person knowingly party to fraudulent trading under section 66(1); their own claims may be subordinated under section 67 (Topic 51)
• Avoidance orders. Directors and promoters who received preferences or undervalued transfers can be ordered to return property or pay its value under sections 44, 48 and 49, with a two-year look-back for related parties (Topics 48 and 49)
• Civil penalties after 2026. Section 235A, as substituted in 2026, allows the NCLT, on an application by the IBBI or the Central Government, to impose a penalty of at least one lakh rupees for each day a contravention of the Code continues, up to three times the loss caused or the unlawful gain, or five crore rupees where neither can be quantified.

3. Promoters as Personal Guarantors

• Lalit Kumar Jain v Union of India, 2021. The Supreme Court upheld the notification of 15 November 2019 bringing personal guarantors to corporate debtors under Part III, and held that the approval of a resolution plan for the company does not by itself discharge the guarantor's liability.
• Dilip B Jiwrajka v Union of India, 2023. The Supreme Court upheld sections 95 to 100, holding that the resolution professional in a guarantor's insolvency acts as a facilitator and that the guarantor need not be heard before the interim moratorium begins.
• Effect. Promoters who signed guarantees for the company's loans face insolvency resolution or bankruptcy of their own before the NCLT (Topic 66)

4. Offences under the Code

Figure 2: Offences that target officers of the corporate debtor

• Sections 68 to 73. Officers who conceal or fraudulently remove property or falsify records before the CIRP, enter into transactions defrauding creditors, fail to disclose or hand over property and books during the CIRP, falsify books, make wilful and material omissions from statements of affairs, or make false representations to creditors commit offences generally punishable with imprisonment of three to five years, or a fine of one lakh to one crore rupees, or both; section 69 carries a lower minimum of one year.
• Section 77. A corporate debtor that gives false information in an application under section 10, and any person who knowingly authorises it, may be similarly punished.
• 2026 changes. The Amendment omitted section 74, which punished violation of the moratorium and contravention of an approved plan, and section 76, which punished operational creditors for concealing disputes; these are now dealt with through civil penalties, though pending prosecutions continue.
• Prosecution. Offences are tried by the Special Court, and under section 236(2) no court can take cognizance except on a complaint by the IBBI, the Central Government or a person authorised by it.

5. Liability That Survives the Company's Resolution

Figure 3: The company and the individuals compared

• P. Mohanraj v Shah Brothers Ispat, 2021. The Supreme Court held that the moratorium under section 14 covers proceedings under section 138 of the Negotiable Instruments Act against the corporate debtor, but that proceedings against its directors and signatories under sections 138 and 141 may continue.
• Ajay Kumar Radheyshyam Goenka v Tourism Finance Corporation, 2023. A director cannot escape prosecution under section 138 because the company has been resolved under an approved plan or dissolved (Topic 78)
• Second proviso to section 32A(1). Although the corporate debtor's liability for past offences ends when a plan transfers control to untainted hands, officers in default and every person involved in the offence remain liable to prosecution (Topic 46)
• Other laws. Directors may also be liable under the Companies Act, 2013, tax and labour laws, and the Prevention of Money Laundering Act, which the Code does not displace in relation to individuals.

6. Bar on Returning

Promoters and persons in management of a corporate debtor whose account is a non-performing asset, wilful defaulters, and persons convicted of specified offences are ineligible to submit resolution plans under section 29A, so the Code prevents those responsible for a failure from buying back the company at a discount (Topic 38).

7. Frequently Asked Questions

Can a director refuse to give the IRP the company's records once the board is suspended?

No. Section 19 obliges directors and other personnel to cooperate, the professional may seek directions from the NCLT, and failure to hand over property or books can be an offence under section 70.

Does a cheque case against the managing director stop when the company enters CIRP?

No. In P. Mohanraj (2021), the Supreme Court held that only proceedings against the corporate debtor are covered by the moratorium; directors and signatories may still be prosecuted.

If the company's resolution plan pays the bank 30 per cent, can the bank recover the rest from the promoter who guaranteed the loan?

Yes. Lalit Kumar Jain (2021) held that approval of the plan does not discharge the guarantor, so the bank may pursue the balance, including through insolvency proceedings against the guarantor under Part III.

Who can prosecute a director for an offence under the Code?

Only the Special Court, on a complaint by the IBBI, the Central Government or a person authorised by it, under section 236.

8. Related Topics

• Topic 46: Section 32A. Immunity for the corporate debtor.
• Topic 51: Fraudulent and Wrongful Trading. Section 66.
• Topic 66: Personal Guarantors. Insolvency of promoters who gave guarantees.