Independent Directors Cannot Automatically Escape Liability For Fraud Under IBC: NCLT Mumbai
Independent directors cannot automatically escape liability for a company's alleged fraudulent transactions under Insolvency and Bankruptcy Code, the National Company Law Tribunal (NCLT), Mumbai has ruled.The tribunal said that simply holding the title of an independent or non-executive director does not protect a person from scrutiny under insolvency law without examining their culpability...
Independent directors cannot automatically escape liability for a company's alleged fraudulent transactions under Insolvency and Bankruptcy Code, the National Company Law Tribunal (NCLT), Mumbai has ruled.
The tribunal said that simply holding the title of an independent or non-executive director does not protect a person from scrutiny under insolvency law without examining their culpability in the alleged fraudulent affairs of the company.
In an order passed on October 31 by a coram of Judicial Member Sushil Mahadeorao Kochey and Technical Member Prabhat Kumar observed,
“Accordingly, we do not find any merit in the contention of the applicants that they, being independent director, can not be alleged to have knowledge of what was transpiring in the Corporate Debtor during the period they held the office the Independent/Non-executive director. The question before us is whether they could have with reasonable diligence flagged the wrong doings in the Corporate Debtor, which they have failed to.”
The case arose from insolvency proceedings against Metalyst Forgings Limited, a listed auto components manufacturer. The company was admitted for insolvency resolution in 2017 on a petition by the State Bank of India.
Later, the resolution professional alleged that several former directors were responsible for financial irregularities, including loans to related parties, dubious adjustments in accounts, unsubstantiated capital work, large write-offs, and misuse of bank funds.
He sought contributions from them under Section 66 of the Insolvency and Bankruptcy Code (IBC), which deals with fraudulent trad
A group of former directors , including independent and non-executive members of the board , approached the NCLT seeking deletion of their names from the case. They argued that they were not involved in the day-to-day management of the company and had no knowledge of the alleged misconduct.
They also cited a government circular issued by the Ministry of Corporate Affairs (MCA) on March 2, 2020, which says that independent and non-executive directors should not be prosecuted under the Companies Act, 2013 unless there is strong evidence of their involvement in fraud.
The circular clarifies that such directors can be held liable only for acts that occurred with their knowledge, consent, or failure to act diligently.
The resolution professional opposed the plea, arguing that Section 66 of the IBC does not distinguish between executive and non-executive directors. He said directors could be held responsible if they had knowledge of the company's affairs or failed to prevent wrongdoing when they should have known about it.
The tribunal rejected the directors' plea for deletion. It said the MCA circular, which was issued under the Companies Act, could not override the provisions of the IBC, which is a separate and complete law.
“In our considered view, the said circular is not applicable to the case made out in Section 66 of the Code, which requires existence of knowledge on part of Directors and makes them liable if it is proved that such knowledge on their part existed.”
The tribunal noted that Metalyst Forgings' financial statements and audit reports were regularly placed before the board for approval, and that the independent directors could have identified problems with reasonable diligence.
It said, “At this stage, we can not conclude that the Applicants either were not knowing parties or could not have known the imminent admission of Corporate Debtor into insolvency on the basis of quarterly financial results and annual financial reports provided to them.”
The tribunal said it could not allow the names of the directors to be removed at this preliminary stage. It added that the directors were free to defend themselves when the case is examined in full.
“In view of aforesaid, we are of considered view that the applicant's prayer for deletion cannot be considered at this stage without examination of pleadings in IA 2839 of 2024 in full with respect to the culpability of the applicants in the affairs of the Corporate Debtor. Needless to say, the Applicant(s) shall be at liberty to argue their case on merit with respect to their role and no observation made in this order shall prejudice their case on this aspect.”, it concluded.
Case Name: Anuradha Kapur v. Dinkar T. Venkatasubramanian, erstwhile Resolution Professional, Metalyst Forgings Limited
Case Number: Company Petition No 1555 of 2017
Appearances:
For Applicant: Advocate Raishabh Jaisani along with Advocate Siddhant Marathe.
For Respondents: Advocates Alok Dhir along with Advocate Kanishk Khetan, Janhavi and Princi Jaiswal.