Director Liability After a Company Goes Into Insolvency

Are directors personally liable when a company goes into insolvency?

No, not automatically. A company is a separate legal person, and its debts are its own. When the NCLT admits a petition under section 7, 9 or 10 of the Insolvency and Bankruptcy Code, the claims of banks, suppliers, employees and the tax department are made against the company, verified by the resolution professional and dealt with in the resolution plan or the liquidation. A director who signed nothing personally and behaved honestly does not pay those debts out of his own pocket.

The exposure comes from somewhere else. It comes from documents the director signed in his own name, such as a personal guarantee or an indemnity. It comes from what he did while the company was sliding towards default, which the IBC examines through section 66 and the avoidance provisions. It comes from how he deals with the resolution professional after admission, because non-cooperation and concealment are offences. And it comes from other statutes that hold directors responsible for specific company defaults, such as section 141 of the Negotiable Instruments Act for bounced cheques and the tax laws for unpaid dues of a private company.

So the useful question is not 'am I liable?' but 'which of these routes applies to me, and what can I still do about it?' The rest of this post goes through them in the order they usually arise.

What happens to the directors on the day the NCLT admits the company?

The board is suspended, not removed. Under section 17 of the IBC, from the insolvency commencement date the management of the company vests in the interim resolution professional, and the powers of the board of directors are suspended and exercised by the IRP. The directors remain directors on the ROC record. They cannot sign cheques, operate bank accounts, appoint staff, sell assets or pass board resolutions for the company. Officers and managers report to the IRP.

At the same time, the directors take on duties. Section 19 requires the personnel of the corporate debtor, its promoters and anyone associated with its management to extend all assistance and cooperation the IRP needs to manage the company. In practice the IRP will ask for the books of account, statutory registers, bank and loan statements, the list of assets and where they are, login details for accounting software and GST and MCA portals, details of pending cases, and an explanation of related-party dealings. The IBC (Amendment) Act 2026, most of which came into force on 26 May 2026, extends the duty of cooperation to past directors and personnel as well, so resigning a month before admission does not take a director outside it.

If a director does not cooperate, the IRP can apply to the NCLT under section 19(2) for directions, and the NCLT can order the director to comply. Persistent non-cooperation is also an offence under section 70 of the Code. Every one of these applications becomes part of the record that the resolution professional, the Committee of Creditors and later the NCLT read when deciding whether the director acted honestly.

The routes by which a director becomes personally exposed

These are the ways personal liability actually reaches directors once a company is in CIRP or liquidation. Most directors face one or two of them, not all.

• Personal guarantee. If you guaranteed the company's loan, the lender can proceed against you personally, under section 95 of the IBC, under SARFAESI if you mortgaged your own property, or before the DRT. The company's moratorium does not protect you.
• Fraudulent trading under section 66(1). Anyone knowingly party to carrying on the company's business with intent to defraud creditors can be ordered by the NCLT to contribute to the company's assets.
• Wrongful trading under section 66(2). A director who knew, or ought to have known, that insolvency could not be avoided and did not take due care to reduce the loss to creditors can be ordered to contribute.
• Avoidance orders. If money or property went to you or a related party through a preferential, undervalued or fraudulent transaction, the NCLT can order it brought back from the person who benefited.
• IBC offences. Concealing property, falsifying books, making false representations to creditors and not cooperating with the resolution professional are punishable with imprisonment and fine under sections 68 to 73.
• Other statutes. Cheque bounce cases under sections 138 and 141 of the NI Act, director liability for unpaid tax and GST of a private company, and wilful defaulter classification by banks all operate on individuals.

The provisions that decide a director's position

Section 66: what is the difference between fraudulent and wrongful trading?

Fraudulent trading needs intent; wrongful trading needs only a failure of care. Under section 66(1), the resolution professional (and, after the 2026 amendment, expressly the liquidator too) can ask the NCLT to find that the company's business was carried on with intent to defraud creditors or for a fraudulent purpose. Typical facts are taking advances from customers while knowing the goods would never be supplied, moving receivables into a sister concern's account, or running down stock and selling it through a related entity. Any person who was knowingly party to it, director or not, can be ordered to contribute.

Wrongful trading under section 66(2) applies only to directors and partners. The NCLT asks two questions. First, before the insolvency commencement date, did the director know, or ought he to have known, that there was no reasonable prospect of avoiding insolvency? Second, after that point, did he exercise the due diligence expected of a person carrying out the same functions to minimise the potential loss to creditors? A director who kept borrowing from new suppliers on credit, paid himself and relatives, or let the company's assets waste away when the end was obvious is at risk. A director who stopped taking new credit, informed the lenders, tried restructuring and kept proper records usually is not.

The NCLT does not apply hindsight loosely. Businesses fail for ordinary reasons, and continuing to trade in the honest hope of a recovery is not wrongful by itself. What hurts directors in these applications is a paper trail that shows they knew and acted for themselves: board minutes noting that the company cannot pay its bank, followed by payments to a director's relative; emails discussing 'protecting' assets; or accounts that stop being maintained at the moment things went wrong. The order, if made, is a direction to contribute an amount the NCLT considers fit to the company's assets, and under section 67 the NCLT can give further directions to make it effective.

Which liability, who pursues it, and does a resolution plan end it?

This table sets out the main forms of personal exposure in one place. The last column is the one directors most often get wrong.

Can the bank still go after a director's personal guarantee during CIRP?

Yes, and this is the exposure that hits most directors hardest. The moratorium under section 14 protects the corporate debtor. Since the 2018 amendment, section 14(3)(b) says in terms that it does not apply to a surety in a contract of guarantee. A bank that holds your personal guarantee can file against you under section 95 of the IBC, issue a SARFAESI notice if you mortgaged your own flat or shop, or file an original application before the DRT, all while the company's CIRP is running.

Approval of a resolution plan does not release the guarantor either. In Lalit Kumar Jain v Union of India (2021), the Supreme Court held that the approval of a resolution plan for the company does not discharge a personal guarantor's liability under the guarantee. The lender can recover from the guarantor the part of the debt not paid under the plan. The 2026 amendment also extinguishes a guarantor's right of subrogation against the company once a plan is approved, so a director who pays under a guarantee cannot later recover that money from the revived company.

When Advocate B.K. Singh looks at a director's papers in this situation, the first thing he reads is the guarantee deed itself, not the loan agreement: the date, the amount capped, whether it is a continuing guarantee, whether it covers later facilities, and whether the lender changed the terms without the guarantor's consent. Those details decide whether there is a defence. Our posts on personal guarantor insolvency under section 95 and on what the section 14 moratorium stops deal with this in detail.

What happens to cheque bounce cases against directors once the company is in CIRP?

The case against the company stops; the case against the directors usually continues. In P. Mohanraj v Shah Brothers Ispat (2021), the Supreme Court held that the section 14 moratorium covers section 138 proceedings against the corporate debtor itself, but that the directors and signatories who are made liable through section 141 of the Negotiable Instruments Act are not protected by it. Their trial goes on in the magistrate's court.

This catches many directors off guard, because they assume that once the company is in the NCLT, everything else freezes. It does not. A director named in a pending cheque case should keep appearing, keep his bail bonds in order and look at whether he can be discharged on the usual section 141 grounds, such as not being in charge of the business when the offence was committed. Our post on director liability when a company cheque bounces explains who can and cannot be prosecuted.

Which IBC offences can a director be prosecuted for?

The Code has its own criminal provisions, aimed mostly at officers of the company. Section 68 punishes an officer who, within twelve months before the insolvency commencement date, wilfully concealed property, removed it, or concealed or falsified records, or who does so afterwards. Section 69 covers an officer who made gifts or transfers of the company's property, or concealed or removed property, with intent to defraud creditors. Section 70 covers misconduct during the CIRP itself, including not disclosing property, not delivering books and records to the resolution professional, and not cooperating. Section 71 covers destroying or falsifying books, section 72 wilful and material omissions from statements about the company's affairs, and section 73 false representations made to creditors to get their consent.

Most of these carry imprisonment of three to five years (one to five years for section 69) and fines that can run from one lakh up to one crore rupees. Under section 236, offences under the Code are tried by the special court constituted under the Companies Act, and the court takes cognizance only on a complaint by the Insolvency and Bankruptcy Board of India, the Central Government or a person authorised by it. In practice, prosecution usually follows a finding in the resolution professional's transaction audit or an NCLT order that records the director's conduct.

Breaches of the moratorium and of an approved resolution plan were also offences earlier. The 2026 amendment moved these largely to civil penalties imposed by the adjudicating authority. Directors should not read this as a relaxation for everything: concealment, falsification and fraud remain criminal, and they can also attract cheating and breach of trust provisions under the Bharatiya Nyaya Sanhita and, in larger cases, an SFIO investigation under section 212 of the Companies Act.

Does approval of the resolution plan wipe out a director's liability?

It wipes out claims against the company, not claims against the directors. Once the NCLT approves a resolution plan under section 31, it binds the company, its creditors, guarantors and other stakeholders. In Ghanashyam Mishra and Sons v Edelweiss Asset Reconstruction Co (2021), the Supreme Court held that claims not included in the approved plan stand extinguished, including statutory dues owed to government bodies, so that the successful resolution applicant takes over a clean company. The 2026 amendment writes this clean-slate principle into the Code.

None of this protects the individuals. Section 32A ends the company's liability for past offences when control passes to unconnected persons, but its proviso preserves the prosecution of directors and officers who were involved. Guarantees survive. Section 66 and avoidance applications survive, and after the 2026 amendment the completion of the CIRP or even dissolution does not affect them. A director who negotiated hard for a resolution plan believing it would close his chapter may find that the plan has closed the company's chapter and left his own open.

Are resigned, independent and nominee directors liable?

Resignation does not end liability for what happened during your tenure. Section 168(2) of the Companies Act says so expressly, and the 2026 amendment brings past directors within the duty to cooperate with the resolution professional. If you resigned while the company was already in default, expect the resolution professional to ask why, and to look at whether any payments or transfers happened around the date you left. Make sure your resignation was actually filed with the ROC in Form DIR-11 and by the company in DIR-12; a resignation that exists only as a letter is a weak defence.

Independent and non-executive directors are in a stronger position. Section 149(12) limits their liability to acts or omissions that happened with their knowledge, attributable through board processes, and with their consent or connivance, or where they did not act diligently. Section 66(2) applies to directors generally, but a resolution professional has to show what an independent director knew and what he could have done; an independent director who raised concerns in board meetings and recorded his dissent is far less exposed than one who signed everything. Nominee directors of banks and financial institutions are usually treated on the same footing, and under section 141 of the NI Act government and financial corporation nominees are excluded from cheque bounce liability.

Promoters who were never formally directors are not outside the net. Section 66(1) applies to 'any persons' knowingly party to fraudulent trading, and section 19 covers promoters. Shadow control through relatives on the board is something resolution professionals look for.

What should a director do in the first 30 days after admission?

The first month sets the tone. Directors who cooperate and keep a clean record of it are in a much better position when the transaction audit is read.

1. Read the admission order and note the dates

   Get the certified copy of the NCLT order, note the insolvency commencement date and the name of the IRP, and diarise the 30-day limit (extendable by 15 days) for any appeal to the NCLAT under section 61. Decide quickly whether there is a real ground of appeal; an appeal filed only to delay rarely helps.

2. Hand over records and access, in writing

   Deliver the books, registers, bank statements, asset lists and portal credentials the IRP asks for, under a covering letter listing exactly what was handed over and on what date. Keep a copy signed by the IRP's team. This letter is your answer later to any allegation under section 19 or section 70.

3. Prepare an honest note on related-party dealings

   List every payment, loan, transfer or security in favour of directors, relatives and group companies in the last two years, with the reason for each. The resolution professional will find these anyway through the transaction audit; explaining them first, with documents, is far better than being confronted with them.

4. Pull out every guarantee and personal document you signed

   Collect personal guarantees, mortgage deeds over personal property, indemnities, and any cheques you signed in your own name. Work out which lenders can proceed against you and on what terms, and whether a settlement under section 12A or a personal settlement with a lender is realistic.

5. Check every pending case in which you are named

   List cheque bounce cases, criminal complaints, tax notices and DRT matters that name you personally. These continue despite the moratorium, and missing a date in a magistrate's court can lead to a warrant.

6. Take part in the process through the proper channel

   As a member of the suspended board you are entitled to notice of meetings of the Committee of Creditors under section 24(3) and can attend without a vote. Use it to give information, raise objections in writing and, where relevant, prepare a settlement or plan proposal if you are not barred by section 29A.

Papers a director should gather now

These are the documents we ask a director to bring to the first meeting. Most are already with the company; get copies before access is handed over.

Can a suspended director still take part in the CIRP or bid for the company?

A suspended director can take part, but within limits. Section 24(3) requires the resolution professional to give notice of each Committee of Creditors meeting to the members of the suspended board, who may attend but cannot vote. In Vijay Kumar Jain v Standard Chartered Bank (2019), the Supreme Court held that members of the suspended board are entitled to receive copies of the resolution plans placed before the committee, subject to confidentiality undertakings, because they are entitled to participate and may have something useful to say. A suspended director can also, in appropriate cases, appeal against the admission order on behalf of the company, since the board's powers are with the IRP.

Bidding is a different matter. Section 29A bars certain persons from submitting a resolution plan, including a promoter or person in management or control of a company whose account has been a non-performing asset for a year or more (unless the overdue amounts are cleared first), wilful defaulters, and persons connected with a company in which the NCLT has found preferential, undervalued, extortionate or fraudulent transactions. There is a relaxation for MSMEs under section 240A. If the promoters want the company back, the realistic route is often a settlement with the creditors and withdrawal under section 12A, which needs 90% of the committee's voting share; our post on settling through section 12A explains the timing, which the 2026 amendment has tightened.

What changes for directors if the company goes into liquidation?

If no resolution plan is approved, the NCLT orders liquidation, the board stays out of the picture and the liquidator takes over. The liquidator can carry on avoidance and section 66 proceedings started by the resolution professional or start them on the basis of the resolution professional's investigations, and the 2026 amendment says expressly that the liquidator need not investigate afresh. Directors have the same duty to cooperate and to hand over records.

Liquidation also means the company will eventually be dissolved. That does not end proceedings against directors: the 2026 amendment provides that completion of the liquidation or dissolution does not affect avoidance or fraudulent and wrongful trading proceedings. Guarantees are enforced against the director's own assets as before. Our post on liquidation under the IBC explains what happens to the company's assets and the order of payment to creditors.

Tax, GST and wilful defaulter exposure

Some statutes reach directors of private companies directly. Under section 179 of the Income-tax Act 1961, now section 323 of the Income-tax Act 2025, directors of a private company can be held jointly and severally liable for its tax dues that cannot be recovered from the company, unless they show the non-recovery is not due to their gross neglect, misfeasance or breach of duty. Section 89 of the CGST Act has a similar rule for GST dues of a private company. How these provisions interact with an approved resolution plan that extinguishes the company's dues is not always straightforward, so a director who receives such a notice after the plan should get it read carefully before replying.

Banks can also classify a borrower and its directors as wilful defaulters under the RBI's directions on wilful defaulters, issued in their current form in 2024. Classification follows a show cause notice and a hearing before a committee, and it carries serious consequences: no further bank finance, and ineligibility to submit a resolution plan under section 29A. A director facing this process should respond to the show cause notice in full and on time; our post on challenging a wilful defaulter declaration covers the procedure.

Mistakes that turn a company failure into a personal problem

• Paying yourself or family first. Repaying a director's loan, a relative's deposit or a group company in the months before default is the clearest red flag in any transaction audit.
• Delaying the handover. Holding back records or passwords to 'keep control' leads to a section 19 application, and the NCLT's order becomes evidence of non-cooperation.
• Assuming the moratorium protects you. It protects the company. Your guarantees, cheque cases and personal property are outside it.
• Resigning on paper only. A resignation letter not filed with the ROC is weak protection, and even a filed one does not cover what happened during your tenure.
• Shifting assets after admission. Transferring your own house to a spouse after the company is admitted, when a guarantee is about to be invoked, can be challenged and looks bad in every forum.
• Ignoring the CoC. A suspended director who stays silent loses the chance to explain transactions and to propose a settlement while it is still possible.

When should a director get advice, and from whom?

The best time is before admission, when a director can still decide how the company stops trading, what to say to lenders and whether a settlement or a pre-pack is realistic. The next best time is the first week after admission, before the handover and before the first meeting of the Committee of Creditors. A point Advocate B.K. Singh often makes to directors at that stage is that the transaction audit is written from bank statements, not from explanations, so the explanation has to be on paper and supported by documents before the auditor reaches his conclusions.

Director liability work usually involves more than one forum at the same time: the NCLT for the CIRP and section 66, the DRT or SARFAESI for guarantees, the magistrate's court for cheque cases, and sometimes the special court or an investigating agency. Our page on the NCLT benches in New Delhi explains how matters are listed there, and if the company is in Uttar Pradesh or Haryana the bench will be different. If you want an advocate to read the admission order, your guarantees and the IRP's correspondence and tell you where you stand, the team of Advocate B.K. Singh at B.K. Singh & Associates can look at the papers through our online enquiry.