Director Liability in India: When the Companies Act, IBC, and SEBI Can Pierce the Corporate Veil

The board seat is a coveted position. For promoter-directors of Indian companies, it is the command centre of the business. For independent directors, it is a reputational credential. What both categories of directors frequently underestimate is the extent to which Indian law — the Companies Act 2013, the Insolvency and Bankruptcy Code 2016, and SEBI regulations — can pierce the corporate form and attach personal liability to directors for decisions made in their capacity as board members. This post maps the primary liability regimes, identifies the circumstances in which directors are protected, and outlines the circumstances in which they are squarely exposed. ## Companies Act 2013: The Baseline Liability Framework The Companies Act 2013 establishes liability for directors across several provisions: **Section 166 (Duties of Directors)** is the foundational liability provision. Directors owe duties to act in good faith in the best interests of the company, exercise powers for proper purposes, not assign their directorial responsibilities, avoid conflicts of interest, and not seek undue advantage at the company's expense. Breach of Section 166 is a civil wrong actionable by the company (and in certain circumstances by shareholders through a derivative action). **Section 149(12) (Independent Director Liability)** narrows but does not eliminate liability for independent directors. An independent director is not liable for acts of omission or commission by the company that occurred without their knowledge (due to the negligence of the company or attributable to any other director), that they had not consented to or colluded in, and that were not facilitated by them. This is not a blanket immunity — it requires the independent director to demonstrate active non-involvement. **Section 167 (Vacation of Office)** automatically vacates a director's office in circumstances including disqualification under Section 164, conviction of an offence with imprisonment exceeding six months, or absence from board meetings for 12 consecutive months without leave. **Section 447 (Fraud)** is the most severe provision — it criminalises fraud in relation to the company's affairs with imprisonment from six months to ten years and an unlimited fine. "Fraud" under Section 447 has a wide definition: any act, omission, concealment, or abuse of position committed with intent to deceive or to gain unfair advantage. Directors involved in fraudulent financial reporting, siphoning of funds, or misrepresentation to investors are directly exposed. ## Director Liability Under IBC 2016 The Insolvency and Bankruptcy Code introduced director liability mechanisms that operate independently of the Companies Act: **Section 66 (Fraudulent Trading)** empowers the Resolution Professional (RP) or liquidator to apply to the NCLT to make directors who knowingly carried on the business to defraud creditors, or for any fraudulent purpose, personally liable without limitation for all or any of the debts or liabilities of the company. **Section 67 (Wrongful Trading)** — introduced by the IBC Amendment 2019 — allows the RP to apply to the NCLT to make a director personally liable if they continued to incur debt after it became clear that there was no reasonable prospect of avoiding insolvency, or if they failed to take every step to minimise potential loss to creditors. This mirrors the UK wrongful trading concept and is particularly significant for promoter-directors of companies approaching financial distress. **Section 69 (Offences Before and During Insolvency)** imposes imprisonment up to five years on officers (including directors) who conceal, destroy, or mutilate company books, create false charges, or fraudulently remove company assets in the 12 months before or during a CIRP. NCLT Delhi has handled a significant volume of fraudulent trading applications — directors of large listed companies in CIRP have faced personal liability orders that have been affirmed by the NCLAT. ## SEBI: The Listed Company Liability Layer For listed companies, the SEBI Act 1992 and regulations made thereunder add a further liability layer: **SEBI (Prohibition of Insider Trading) Regulations 2015 (PIT Regulations)** — directors are "insiders" who possess unpublished price sensitive information (UPSI). Trading in the company's securities or communicating UPSI to others while in possession of UPSI attracts penalties up to ₹25 crore or three times the profit made, plus imprisonment up to ten years under Section 24 of the SEBI Act. **SEBI (LODR) Regulations 2015** — directors of listed companies face personal liability for failure to ensure material disclosures, for related party transactions not approved by the audit committee, and for failures in corporate governance compliance. SEBI has used its powers under Section 11B of the SEBI Act to debar directors from the securities market. **SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011** — promoter-directors who fail to make disclosures required under Regulations 29 and 30 face penalties and potential open offer obligations. ## When Directors Are Protected The law does provide protections, and understanding them is as important as understanding the liabilities: **Business Judgment Rule (implicit)** — while not explicitly codified in the Companies Act 2013 (unlike US corporate law), Indian courts have increasingly recognised that directors acting on reasonable information, in good faith, without personal interest, and within their authority should not be second-guessed by courts on commercial decisions. The standard is not perfection — it is reasonable conduct. **Reliance on expert advice** — directors who relied in good faith on information, reports, or advice from auditors, legal counsel, or management, and who had no reason to doubt the accuracy of such advice, have a strong defence to liability claims. This defence requires that the reliance was documented — board minutes should reflect the basis of significant decisions. **Independent Director safe harbour (Section 149(12))** — as noted above, independent directors who demonstrate that they had no knowledge of, did not consent to, and did not facilitate the relevant act have statutory protection. This safe harbour is eroded when the independent director was present at relevant board meetings and the minutes do not record any dissent or abstention. **D&O Insurance** — Directors and Officers liability insurance does not eliminate legal liability but absorbs the financial burden of defence costs and judgments in many cases. Companies Act 2013 (Section 197) and SEBI LODR permit D&O insurance at company expense. For independent directors of listed companies, D&O coverage is effectively essential. ## Practical Risk Management for Directors **Board minutes are your primary protection.** A director who voted against a transaction, asked questions that management could not answer, or obtained an expert opinion before approving a related party transaction is far better protected than one whose only footprint is a signature on a resolution. Minutes should record not just decisions but deliberations. **Declaration of interest under Section 184** — every director must declare their interest in contracts and arrangements at the first board meeting of every year, and must disclose any new interest at the first board meeting after the interest arises. A director with an undisclosed conflict of interest who participates in an approval resolution has no good faith defence. **Resignation mechanics** — a director who resigns to distance themselves from a transaction after having participated in approving it does not escape liability. Conversely, a director who proactively resigns upon learning of a proposed illegal transaction, documents their objections, and notifies the ROC (Form DIR-11) is in a significantly stronger position. The personal liability exposure of directors — particularly of promoter-directors of stressed companies — has increased materially under the IBC and SEBI enforcement framework. Corpus Juris Legal advises boards and individual directors on governance frameworks, independent director mandates, and liability risk management from our Connaught Place office. If your board is navigating a distress situation, a regulatory inquiry, or a CIRP, early legal advice is not optional.