Tracing Director Liability Framework During Borderline Insolvency and Corporate Failure in India

IIMA Working Paper August 2021

33 Pages Posted: 2 Sep 2021

See all articles by M. P. Ram Mohan

M. P. Ram Mohan

Indian Institute of Management Ahmedabad

Urmil shah

Auro University

Date Written: August 31, 2021

Abstract

The life of a company depends upon the fine balance between its management led by Board of Directors and shareholder, and non-shareholder constituencies acting as the risk bearers. The Board of Directors therefore are subjected to fiduciary duties towards both these constituencies at all financial phase of the company – solvency, insolvency and borderline insolvency. The director liability framework in India is currently split with obligations enshrined under the Companies Act, 2013 during solvency and Insolvency and Bankruptcy Code, 2016 during insolvency and borderline stage. The lack of judicial interpretation and scholarly discourse on the insolvent and borderline insolvent director liability framework in India has resulted in several practical challenges. To understand parallels, the paper comparatively analyzes the liability framework as existing under the corporate and insolvency laws of the United States and the United Kingdom with Indian insolvency law. The paper suggests that there is a need to align the Indian corporate and insolvency law through statutory measures to increase the remedial protections available to creditors during borderline insolvency. The paper also highlights mitigation measures which can be undertaken by the management to reduce the scope for director liability, until legislative or judicial clarity is provided on the framework.

Keywords: Director liability framework; borderline insolvency; wrongful trading liability; derivative actions; out-of-court restructuring; Insolvency and Bankruptcy Code, 2016

JEL Classification: K21, K10, K2, F23

Suggested Citation

M. P., Ram Mohan and shah, Urmil, Tracing Director Liability Framework During Borderline Insolvency and Corporate Failure in India (August 31, 2021). IIMA Working Paper August 2021, Available at SSRN: https://ssrn.com/abstract=3914977 or http://dx.doi.org/10.2139/ssrn.3914977

Ram Mohan M. P. (Contact Author)

Indian Institute of Management Ahmedabad ( email )

Vastrapur
Ahmedabad, Gujarat 380015
India

Urmil Shah

Auro University ( email )

Hazira Road, Opp. ONGC
Surat
Surat, Gujarat 394510
India

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