The Insolvency and Bankruptcy Code, 2016 (IBC) has fundamentally transformed India’s corporate distress landscape, shifting the focus from mere debt recovery to accountability and governance. What was once viewed as a mechanism for corporate restructuring has evolved into a framework that scrutinizes the conduct of those who controlled distressed companies.
For decades, promoters relied on one of the strongest principles of corporate law: limited liability. Business failures, loan defaults, and commercial setbacks were liabilities of the company, not of the individuals behind it. While that principle continues to protect genuine business decisions and commercial risks, the post-IBC regime has introduced a critical caveat. Where insolvency is accompanied by fraud, diversion of funds, preferential transactions, or other misconduct, the corporate veil is no longer an impenetrable shield.
Today, insolvency proceedings often become the starting point for a broader examination of promoter conduct, frequently leading to personal liability, regulatory investigations, and even enforcement actions under criminal and anti-money laundering laws.
Section 29A: The End of Backdoor Re-Entry
One of the most significant reforms introduced by the IBC was Section 29A, which prevents defaulting promoters and connected persons from regaining control of distressed companies through the resolution process, reinforcing that the principle of limited liability cannot be used to reclaim control after contributing to a company’s financial distress.
Prior to this provision, promoters could often reacquire businesses at substantially discounted values despite having contributed to the financial distress. Section 29A was designed to eliminate this possibility and restore credibility to the insolvency framework.
The Supreme Court, in ArcelorMittal India Pvt. Ltd. v. Satish Kumar Gupta, described Section 29A as a “see-through provision,” emphasizing that the law must look beyond corporate structures to identify the real persons responsible for a company’s downfall. The judgment marked a significant shift in insolvency jurisprudence by transforming promoters from participants in the process to subjects of scrutiny.
The message was clear: those responsible for financial distress should not be allowed to benefit from it.
Avoidance Transactions: Personal Liability Under the IBC
The IBC goes considerably further than merely disqualifying promoters from the resolution process. Sections 43 to 51 empower Resolution Professionals to investigate and challenge transactions that have unfairly depleted the value of the corporate debtor.
These provisions cover:
- Preferential transactions that favour select creditors over others.
- Undervalued transactions where assets are transferred below fair value.
- Extortionate credit transactions that impose unconscionable financial burdens.
- Fraudulent transactions intended to defeat creditor interests.
Most significantly, Section 66 authorizes the National Company Law Tribunal (NCLT) to hold directors and promoters personally liable where business has been carried on with the intent to defraud creditors or for any fraudulent purpose.
In practical terms, if funds have been siphoned off, related-party transactions lack genuine commercial substance, or assets have been transferred to place them beyond the reach of creditors, promoters may be directed to personally contribute towards restoring value to the corporate debtor.
The liability is no longer confined to the balance sheet of the company; it can extend directly to those who orchestrated the misconduct.
Section 32A: A Clean Slate for Companies, Not for Individuals
The introduction of Section 32A was intended to encourage genuine resolution applicants to participate in insolvency proceedings without fear of inheriting historical criminal liabilities.
Once a resolution plan is approved and management changes hands, the corporate debtor receives immunity from prosecution for offences committed before the commencement of the Corporate Insolvency Resolution Process (CIRP), subject to statutory conditions.
However, this protection is carefully limited.
In Manish Kumar v. Union of India, the Supreme Court upheld the constitutional validity of Section 32A while making it abundantly clear that the immunity applies only to the corporate debtor and not to the individuals responsible for the misconduct.
Former promoters, directors, key managerial personnel, and officers remain fully exposed to prosecution, investigation, and enforcement proceedings arising from their actions prior to the resolution process.
The company may receive a fresh start, but the individuals behind the wrongdoing do not.
When Insolvency Meets the Prevention of Money Laundering Act
The distinction between corporate immunity and personal accountability has become increasingly significant due to the growing interaction between the IBC and the Prevention of Money Laundering Act, 2002 (PMLA).
In recent years, forensic audits conducted during insolvency proceedings have become valuable sources of information for enforcement agencies. Findings relating to diversion of borrowed funds, circular transactions, fictitious entities, or misuse of financing arrangements frequently trigger investigations by the Enforcement Directorate (ED).
The ED increasingly relies upon insolvency records, forensic reports, lender findings, and transaction trails to examine whether the proceeds of crime have been generated or concealed through corporate structures.
As a result, what begins as a corporate insolvency proceeding may subsequently evolve into parallel investigations involving attachment of personal assets, money laundering allegations, and criminal prosecutions.
Several high-profile insolvency matters, including those involving Bhushan Steel, DHFL, and Amtek Auto, illustrate how financial distress can lead to simultaneous proceedings before insolvency tribunals and enforcement agencies.
The Supreme Court’s judgment in Vijay Madanlal Choudhary v. Union of India, which upheld key provisions of the PMLA, has further strengthened the investigative and attachment powers available to the Enforcement Directorate.
The Limits of Limited Liability
The IBC was enacted primarily as an economic reform designed to improve credit discipline and maximize value for stakeholders. However, its broader legacy has been the creation of a new culture of accountability within Indian corporate governance.
The insolvency process no longer examines only whether a company has defaulted. It increasingly asks why the default occurred, how company resources were utilized, whether creditors were prejudiced, and whether promoters acted in good faith. Where corporate structures have been used as instruments of misconduct, insolvency proceedings now serve as a gateway to wider regulatory and enforcement scrutiny.
For promoters, the lesson is unmistakable. Limited liability continues to protect genuine business risk-taking and entrepreneurial failure. It does not protect fraudulent conduct, diversion of assets, or abuse of the corporate form.
In the post-IBC era, limited liability has clear legal limits. Insolvency is often not the end of the story. It is the point at which the focus shifts from the company’s balance sheet to the personal accountability of those who controlled it. Promoters may face personal liability under the IBC, investigations by regulatory authorities, and enforcement proceedings under laws such as the PMLA.
Ultimately, insolvency is no longer merely about resolving corporate distress. It is also about ensuring accountability. For those who misuse the corporate structure, the protection of limited liability ends where misconduct begins.
