Insolvency and Bankruptcy Board of India chairman MS Sahoo warned that directors of companies facing insolvency process and financial creditors cannot go unscathed while the companies are put under insolvency resolution process.

The regulator has warned of action under the Insolvency and Bankruptcy Code (IBC) against those directors who failed to discharge their duties in the interest of the creditors during the ‘twilight zone’ period.

The ‘twilight zone’ refers to a ‘look-back period’, which can be a few months to a few years before commencement of the insolvency process, although the IBC has not defined the twilight period.

He said directors of a company cannot escape responsibility merely because the powers of the board are suspended once the insolvency process is initiated, adding that it does not follow that the directors would be absolved of their actions in the run-up to the commencement of the insolvency process.

If directors are found not to have exercised due diligence in “minimising the potential loss to the creditors” of the corporate debtor during the twilight period, they would have to contribute to the assets of the company in question, he said.

Sahoo said that directors have an additional responsibility to protect the interest of creditors, especially during the twilight period.

“Once a director has reasonable grounds to believe that insolvency resolution of the company may commence, he has an additional responsibility towards creditors,” Sahoo said at a conference on insolvency law in the capital.

Sahoo indicated that IBC’s Section 66, which provides for directors to compensate the assets of the ‘debtor company’ in certain situations, may be soon invoked days.

He said financial creditors should also guard the privilege granted to them. They should realise the ground-level situation and strive for resolution of the issues and avoid focus on recoveries or liquidation.

They should justify the role assigned to them by the Bankruptcy Law Reforms Committee (BLRC).

Since financial creditors have the capability and the means to assess the viability of entities, BLRC had suggested that the creditors committee should be restricted to only the financial creditors so as to speed up the process. #casansaar