Introduction
The question of director liability in the context of Indian corporate groups is one where legal doctrine, regulatory expectation, and commercial reality have diverged most visibly. India’s largest enterprises are structured as complex groups of companies with intricate cross-holding arrangements, shared management teams, intragroup service arrangements, and a centralised strategic decision-making authority that may reside in a holding company or even in the founding family rather than in the board of any individual subsidiary. When a company within such a group fails, engages in regulatory violations, or causes loss to third parties, determining which directors, of which group entities, bear legal responsibility requires navigating a set of questions that the Companies Act 2013 addresses incompletely.
The problem is at its sharpest in insolvency proceedings, where Section 66 of the Insolvency and Bankruptcy Code 2016 on fraudulent and wrongful trading creates potential personal liability for directors. It also arises in Serious Fraud Investigation Office investigations under Section 212 of the Companies Act, where nominee directors appointed by holding companies have faced personal liability claims for the acts of subsidiaries they nominally oversaw. And it arises in the governance context where independent directors on subsidiary boards claim to have been unaware of transactions that, on the group’s consolidated financial statements, appear as significant related party exposures. The law’s challenge is to assign liability in a manner that meaningfully deters governance failures without creating personal liability so broad that qualified individuals refuse board appointments.
Legal Framework
The Companies Act 2013 establishes the foundational duty framework for directors in Section 166. Directors owe fiduciary duties to the company, not to any particular shareholder, including the controlling shareholder that appointed them. Section 166(2) requires directors to act in good faith and in the best interests of the company, its employees, shareholders, community, and the environment. Section 166(4) explicitly prohibits directors from placing themselves in situations where their interests conflict directly or indirectly with the interests of the company.
Section 149 on independent directors and Schedule IV, the Code for Independent Directors, require independent directors to safeguard the interests of all stakeholders, including minority shareholders, and to bring objectivity to board deliberations. Section 177 requires the audit committee, on which independent directors must form a majority, to review related party transactions and ensure the integrity of financial reporting.
The concept of a nominee director, a director appointed by a particular shareholder (typically the holding company or a financial institution) to represent that shareholder’s interests on the board of a company, creates an immediate tension with the duties under Section 166. The nominee director is appointed to represent one shareholder’s interests but is legally obligated to act in the interests of the company and all its shareholders. The Companies Act does not resolve this tension directly, and the result is a structural ambiguity at the heart of group company governance.
Section 212 empowers the SFIO to investigate serious fraud in a company and extends the investigation to associated companies within the group where the SFIO has reason to believe that the fraud affects the associated company or that the fraud was committed with the connivance of the associated company. The SFIO has used this power extensively in major insolvency cases, including Bhushan Steel, IL&FS, and DHFL, extending personal liability claims to directors of holding companies for conduct in subsidiaries and vice versa.
Section 66 of the Insolvency and Bankruptcy Code allows the resolution professional or liquidator to apply to the NCLT for an order that a person who is or was a director of the corporate debtor make a contribution to its assets where that person knew or ought to have known that there was no reasonable prospect of the company avoiding insolvency and failed to take every step to minimise the potential loss to creditors. This wrongful trading provision was modelled on UK insolvency law but has been interpreted cautiously by Indian courts, with the NCLT and NCLAT generally requiring a high threshold of knowledge and action before imposing personal liability.
Judicial Developments
The JSW-Bhushan Steel saga produced some of the most important judicial observations on director liability in group companies. The SFIO’s investigation into Bhushan Steel identified a pattern of transactions between Bhushan Steel and related entities controlled by its promoters, in which funds were siphoned from Bhushan Steel through inflated procurement transactions and fictitious service agreements. The investigation raised questions about the culpability of independent directors who sat on the Bhushan Steel board during the period when these transactions occurred.
The NCLT’s orders in the Bhushan Steel insolvency proceedings distinguished between directors who had actual knowledge of and participated in the fraudulent transactions and independent directors who had governance responsibility but no operational knowledge. The tribunal was reluctant to impose personal liability on independent directors solely on the basis of their governance role, absent evidence that they had participated in or approved the specific fraudulent transactions. This approach has been criticised as setting too high a threshold for independent director accountability, but it reflects a principled concern that criminalising governance failure without proof of individual culpability would deter board service.
The IL&FS insolvency produced a more stringent judicial approach. The NCLAT, in proceedings arising from the IL&FS Group’s collapse and the SFIO’s investigations, confirmed that nominee directors of IL&FS’s government shareholders could be investigated for conduct within the IL&FS Group even though they were serving in a representative capacity. The tribunal held that the duty to act in the interests of the company is absolute and overrides any instructions or expectations of the appointing shareholder. This is a significant holding that effectively dissolves the distinction between a nominee director’s duty to the appointing entity and the legal duty owed to the company.
The Supreme Court in Arcelormittal India Private Limited v. Satish Kumar Gupta (2019) considered the concept of a “person in management or control” of the corporate debtor in the context of ineligibility for resolution plans. The court’s broad interpretation of control, which looks through formal corporate structures to assess actual exercise of managerial authority, has implications for director liability analysis: where a person exercises effective control over a company’s decisions without holding a formal board position, they may be treated as a de facto director for the purposes of liability.
Contemporary Issues and Analysis
The nominee director problem is the most practically significant dimension of group company director liability. Large Indian corporate groups routinely have a single holding company that appoints nominee directors to the boards of dozens of subsidiaries. These nominees are typically senior employees or officers of the holding company rather than independent professionals. They receive board papers from each subsidiary, attend board meetings, and vote on resolutions, but their primary loyalty is to the holding company that employs and pays them.
The legal consequence of this arrangement is that the nominee director owes a fiduciary duty to each subsidiary on whose board they serve, but their appointment by and dependence on the holding company creates an obvious structural conflict. Where the holding company instructs the nominee director to vote in favour of a transaction that benefits the group but is not in the subsidiary’s independent interests, the director faces a choice between legal duty and practical loyalty. The Companies Act’s answer, that legal duty prevails, is clear in theory but very rarely enforced in practice.
Shadow directors, defined in UK company law as persons in accordance with whose directions the directors are accustomed to act, present a related but distinct problem. Indian company law does not contain a shadow director concept, but the SFIO’s investigation practice and some NCLT decisions have begun to treat holding company officers who exercise effective control over a subsidiary’s decision-making as if they were de facto directors of the subsidiary for liability purposes. This is a significant development because it extends personal liability beyond the formal board roster to include individuals who exercise real governance authority without the formal accountability that accompanies a board appointment.
The insolvency context creates the most acute version of the group company liability question. When a subsidiary within a group is undergoing insolvency, the question arises whether intercompany loans extended by the holding company or other group entities should be treated as creditor claims or, if they were used to prop up an insolvent entity rather than for genuine commercial purposes, as subordinated or disallowable claims. The NCLT has developed an inconsistent jurisprudence on this question, with some decisions adopting a strict formalistic approach that treats intercompany loans like any other creditor claim and others looking at the substance of the transaction and the purpose for which the funds were used.
Comparative and International Perspective
The UK Companies Act 2006 establishes a directors’ duty framework in Sections 171 to 177 that is substantially similar in structure to India’s Companies Act 2013, reflecting their common parentage in the UK Company Law Review that preceded the UK Act. Section 172 of the UK Act, which requires directors to act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole (the “enlightened shareholder value” standard), has generated a rich body of case law on how this duty operates in the context of a wholly owned subsidiary whose sole member is a holding company.
The UK courts have held that where a subsidiary is wholly owned, the directors may properly take into account the interests of the group as a whole in making decisions, because the benefit to the group ultimately benefits the subsidiary’s members. However, this concession does not extend to situations where the subsidiary has independent creditors or where the subsidiary is in financial difficulty, at which point the directors’ duty shifts to encompass the interests of creditors. The landmark House of Lords decision in Salomon v. Salomon (1897), affirming corporate separateness, has been qualified in the UK by a developing jurisprudence on piercing the corporate veil and by the wrongful trading provisions of the Insolvency Act 1986, creating a more nuanced picture than the formal corporate structure suggests.
Germany’s Konzernrecht, or group company law, represents the most developed statutory framework for addressing the governance of corporate groups in any major jurisdiction. The German Stock Corporation Act distinguishes between contractual group arrangements, where a domination agreement formally acknowledges the holding company’s authority to give instructions to the subsidiary even where this is detrimental to the subsidiary, and de facto groups, where no formal agreement exists and the standard prohibitions on prejudicial instructions apply. This framework explicitly acknowledges the reality of group governance rather than pretending that each subsidiary operates independently, and provides a set of mechanisms for compensating subsidiaries for decisions taken for the benefit of the group.
Practical and Policy Implications
The current Indian framework creates several perverse incentives. The absence of a clear nominee director liability standard means that holding companies can effectively control subsidiaries through nominee directors without bearing direct accountability for the decisions those nominees make. The nominee director bears personal legal risk for the decisions they are instructed to make, while the holding company that gave the instructions is partially insulated by corporate separateness.
The SFIO’s expansive use of investigation powers under Section 212 has created a different kind of perversity: the threat of personal criminal liability for governance failures has made independent board appointments in high-risk companies extremely difficult to fill. The MCA’s amendment of the Companies Act in 2020 to limit independent director liability to acts committed with their “own knowledge, attributable to their own conduct, and not where they have acted in good faith or on advice from experts” was a response to this dynamic, but its practical effect on SFIO investigation practice is unclear.
The NCLT’s inconsistent approach to wrongful trading under Section 66 of the IBC means that creditors of failed group companies cannot predict with confidence whether directors of related entities will be held personally accountable, reducing the deterrent effect of the provision and creating uncertainty in restructuring negotiations.
Suggestions and Reforms
The most urgent reform needed is a statutory framework for group company governance that acknowledges the reality of group structures rather than treating each subsidiary as if it operates entirely independently. India should consider adopting elements of the German Konzernrecht model: a formal mechanism for holding companies to exercise governance authority over subsidiaries through disclosed and regulated domination agreements, with corresponding obligations to compensate subsidiaries for decisions made for group benefit.
Second, the Companies Act should be amended to include a de facto director provision that extends the duties and liabilities of directors to persons who exercise equivalent governance authority without a formal appointment, drawing on established UK case law in this area.
Third, the SFIO should develop published guidance on the standards applied to determine whether a director of an associated company bears responsibility for fraud in a group entity, reducing the current uncertainty that makes it difficult for directors to assess their personal risk exposure.
Fourth, the IBC’s wrongful trading provision should be supplemented by detailed NCLT Practice Directions on the standard of knowledge required, the steps that must be taken to avoid liability once insolvency is foreseeable, and the relationship between Section 66 liability and the pre-existing Companies Act duty framework.
Conclusion
Director liability in Indian group companies sits at the intersection of the corporate separateness principle, the fiduciary duty framework, insolvency law, and regulatory enforcement in a way that current law addresses incompletely. The fundamental tension between a director’s duty to the company they serve and the practical reality of group-level governance instructions has not been resolved by the Companies Act’s formal framework, and the courts have produced inconsistent results in attempting to apply that framework to complex group structures. A legislative acknowledgement of group company reality, combined with clearer standards for nominee director liability and de facto director responsibility, would substantially improve both the predictability of the law and its effectiveness as a governance deterrent.
