Directors of companies facing the insolvency process cannot go unscathed while the companies they ran are hauled over the coals.

For the first time ever, insolvency regulator IBBI has warned of action under the Insolvency and Bankruptcy Code (IBC) against those directors who failed to discharge their duties in the interest of the creditors during the ‘twilight zone’ period.

The ‘twilight zone’ refers to a ‘look-back period’: it can be a few months to a few years before commencement of the insolvency process. The twilight period is not defined in the IBC.

Solely because the powers of a company’s board are suspended once the insolvency process is initiated, it does not follow that the directors would be absolved of their actions in the run-up to the commencement of the insolvency process.

If directors are found not to have exercised due diligence in “minimising the potential loss to the creditors” of the corporate debtor during the twilight period, they would have to contribute to the assets of the company in question.

Sending this cautionary note to directors of Corporate India, Insolvency and Bankruptcy Board of India (IBBI) Chairman MS Sahoo said on Wednesday that directors had an additional responsibility to protect the interest of creditors, especially during the twilight period.

“Once a director has reasonable grounds to believe that insolvency resolution of the company may commence, he has an additional responsibility towards creditors,” Sahoo said at a conference on insolvency law in the capital.

Sahoo indicated that IBC’s Section 66, which provides for directors to compensate the assets of the ‘debtor company’ in certain situations, may be invoked in the coming days.

Financial creditors

The IBBI chief also said financial creditors should guard the privilege granted to them. They should strive for resolution of companies and avoid focus on recoveries or liquidation, he said, referring to the ground-level situation.

He highlighted that financial creditors should justify the role assigned to them by the Bankruptcy Law Reforms Committee (BLRC).

It may be recalled that BLRC had seen logic in the capability of financial creditors — and not operational creditors — to assess viability of entities. For the insolvency process to be rapid and efficient, the BLRC had suggested that Creditors Committee should be restricted to only the financial creditors.