INDIA Law and Practice Contributed by: Shardul Shroff, Misha, Kritika Poddar and Aishwarya Satija, Shardul Amarchand Mangaldas & Co
Duties and Liabilities Under the Code Directors’ liability under the Code may be classified into two broad categories: civil liability and criminal liability. Civil liability The directors of the CD are duty-bound to exercise due diligence to minimise potential losses to creditors in the period before the insolvency commencement date when the directors or partners knew or ought to have known that there was no reasonable prospect of avoiding the commencement of a CIRP or PPIRP against the CD. Failure to exercise such diligence may result in the NCLT requiring the director or partner of the CD to make appropriate contributions to the assets of the CD. Contribution orders may also be passed against per - sons who knowingly carried on the business of the CD during a CIRP, PPIRP or liquidation with an intent to defraud creditors or for any fraudulent purpose. During the CIRP, the primary duty of the management of the company is to extend all assistance and co- operation to the IRP or RP as required by them to manage the affairs of the CD. In case of noncoopera - tion, the NCLT may direct such personnel to comply with the instructions of the RP and to co-operate with them. Under the PPIRP, the CD generally remains under the control of its management, which is responsible for protecting and preserving its value and managing its affairs as a going concern. If the affairs of the CD are conducted in a fraudulent manner or grossly misman - aged, the NCLT may pass orders vesting the man - agement of the CD with the RP. The NCLT may also impose a penalty against any officer who manages the affairs of the CD with the intent to defraud creditors of the CD or for any fraudulent purpose during the PPIRP. Criminal liability The directors or officers of the CD may be punished for certain actions committed by them if such actions fall within the scope of criminal provisions under the Code. For instance, directors or officers may be liable for a fine or imprisonment or both if they have commit -
ted certain actions prior to the insolvency commence - ment date, such as the following: • concealing property or debt of the CD or fraudu - lently removing any part thereof; • concealing, destroying, mutilating or falsifying the books of the CD; • wilfully creating a security interest over property of the CD that has been obtained on credit and has not been paid for; • making false representations to creditors of the CD; or • committing fraud to obtain consent of the creditors to an agreement with reference to the affairs of the CD. Additionally, under various Indian laws, directors or officers may be vicariously liable for offences commit - ted by the company outside an insolvency scenario. This liability typically arises when they: • have knowledge of the offence; • were involved in the offence; or • did not undertake due diligence in preventing the offence. Furthermore, the persons who were in charge or responsible for the conduct of the CD’s business or associated with the CD in any manner and were involved in the commission of offences by the CD prior to the commencement of the CIRP will continue to be liable to be prosecuted and punished for such offences even after a new management takes over the CD pursuant to approval of a resolution plan. 7.2 Personal Liability of Directors See 7.1 Duties of Directors . Claims regarding wrong - ful or fraudulent trading under the Code may only be brought by the RP or the liquidator. Action under criminal provisions of the Code may be initiated on the basis of a complaint made by: • the IBBI; • the central government; or • any person authorised by the central government in this respect.
209 CHAMBERS.COM
Powered by FlippingBook