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Director and parent company liability

Liability

Under what circumstances can a director or parent company be held liable for a company’s insolvency?

During the corporate insolvency resolution process, if it is found that any business of the corporate debtor has been conducted with the intent of defrauding its creditors or for any other fraudulent purpose, persons who were knowingly party to such business may be obliged by the National Company Law Tribunal to make such contributions to the assets of the corporate debtor as it deems fit.

Further, if it is ascertained during the insolvency resolution process or liquidation process that, before the commencement of insolvency, a director of the corporate debtor knew or ought to have known that there was no reasonable prospect that the debtor could avoid insolvency and failed to undertake due diligence to minimise potential loss to creditors, such director may be obliged by the tribunal to make such contributions to the assets of the corporate debtor as the tribunal deems fit.

Certain provisions under the Insolvency and Bankruptcy Code also prescribe penalties for erring officers, directors and company members for offences including:

  • failure to comply with the resolution plan approved at the completion of the corporate insolvency resolution process;
  • wilfully concealing information; or
  • fraudulently removing property of the corporate debtor during the insolvency resolution process.

Defences

What defences are available to a liable director or parent company?

Defences include that there was no intent to defraud creditors or defeat the law, and that the director, in the discharge of his or her duties, exercised diligence that was reasonably expected of a person carrying out the functions of a director.

Due diligence

What due diligence should be conducted to limit liability?

The Insolvency and Bankruptcy Code is new and necessary precautions would be better highlighted in some of the instances of fiduciary delinquencies (on the part of directors and other officers of the company) once it is tested by the courts.

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