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Once a company enters into resolution process under the Insolvency and Bankruptcy Code (IBC), the insolvency professional (IP) takes over the reins of the business and the powers of the board are suspended.
However, this does not absolve the directors from actions taken prior to the commencement of the resolution process. An aspect that has received little attention is the new liability regime introduced for directors of companies that enter into the resolution process under IBC. Under Section 66 of IBC, the director of a company could be held liable for fraudulent or wrongful trading.
“The law always deals with fraud. What is innovative in section 66 is the failure to exercise due diligence,” MS Sahoo, Chairperson of the Insolvency and Bankruptcy Board of India. He was speaking at the launch of www.Ibccases.com at an event, AKM Insights 2018. AK Mylsamy (AKM) and Associates, a corporate law firm is behind the portal.
“Under the Companies Act, 2013, the directors have a fiduciary duty towards the company. They are in charge of the company in normal circumstances. The company moves to the control of committee of creditors (CoC) when it enters into resolution process. There is a twilight zone between these two stages,” explained Sahoo.
Twilight zones
He said that the twilight zone begins from the time when the director knew or ought to have known that there was no reasonable prospect of avoiding the commencement of resolution of the company till the company actually enters into resolution process. “During this period, a director has an additional responsibility to exercise due diligence to minimise the potential loss to the creditors of the company and he is liable to make such contribution to the assets of the company as the Adjudicating Authority may direct.”
On concerns raised by bankers on the low threshold of mere ₹1 lakh default for triggering the insolvency process by an operational creditor, other experts at the event felt that it was necessary to ensure that mitigating action was taken at the first onset of any financial distress. “An early initiation always helps the cause as it prevents the ballooning of insolvency to an un-resolvable proportion,” said Sahoo. He also reiterated that the soul of the Code is resolution of a firm for maximisation of value of its assets. It motivates and facilitates the stakeholders to strive for resolution of failing, but viable businesses.
“Resolution makes the stakeholders share the fate of the firm and thereby balances the interests of all stakeholders. When creditors recover their dues — one after another or simultaneously — from the available assets of the firm, nothing may be left in due course. Thus, resolution endeavours to keep the firm alive, while recovery may bleed it to death,” said Sahoo.
Time for resolution
With the time for resolution — 180 days with 90 days extension — of many large cases under IBC drawing to a close, many bankers and resolution professionals also argued for a longer duration to resolve cases. But Sahoo insisted that the essence of the Code is time-bound closure of the process. “Insolvency resolution of every firm may not entail the same level of complexity and some could be resolved earlier.”
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