A handbook on Insolvency and Bankruptcy Code: A condensed guidebook for directors by Institute Of Directors India & Ashish Makhija

Author:Institute Of Directors India & Ashish Makhija [India, Institute Of Directors]
Language: eng
Format: mobi
Publisher: Institute of Directors
Published: 2019-09-18T16:00:00+00:00

6.1 Directors and their Fiduciary Duties

The term “director” is defined under Section 2(34) of the Companies Act, 2013 as “a director appointed to the Board of a company”, wherein the Board of Directors means the collective body of the directors of the company. These directors are the decision-makers in the company, and their actions are attributable to the company itself and its best interests; they are responsible for the promotion of the success of the company. The company being an artificial juridical person, cannot act on its own. It requires someone to act on its behalf. Each company requires having a Board of Directors comprising of individual directors. The Board enjoys all powers of the company. The 2013 Act also provides that “the Board of Directors of a Company shall be entitled to exercise all such powers and to do all such acts and things, as the company is authorised to exercise and do.”

The company is run under the supervision and control of the Board and to manage the company; it can exercise all powers. In order to balance exercise of power by the directors, duties have been carved out in the statute now, which hitherto were based on judicial precedents. The duties of directors emerge out of the position they occupy and the role they have to perform in the company. The directors owe a fiduciary duty to the company, and the nature and extent of the duty depend on the business of the company along with the knowledge and experience of the directors.

With the rise in non-performing assets and credit repayments, there arose a need to make the directors more diligent, prudent and aware of decision making. The Insolvency and Bankruptcy Code, 2016 introduced specific duties that are owed by directors towards the creditors of their companies which are in financial distress. In the period of distress, which is referred to as the twilight period, the directors have a duty to minimize the losses to the creditors and protect the assets of the company. The directors are expected to act in a bona fide interest of the company's creditors and not indulge in any fraudulent or wrongful trading.

6.2 Twilight period

The twilight period begins from the time when the director knew or ought to have known that there was no reasonable prospect of avoiding the commencement of corporate insolvency resolution process under the Code of the company till the company actually enters into the resolution process. During this period, a director has an additional responsibility to exercise due diligence to minimize the potential loss to the creditors of the company, and he is liable to make such contribution to the assets of the company as the Adjudicating Authority may direct.

In both the United Kingdom and the United States of America, the twilight period is considered to be “the period between the point of knowledge or awareness of no real prospect of avoiding an insolvency proceeding against the company, and its actual commencement.” During this period, the transactions that are

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