IL&FS: NCLAT Allows Banks To Resume Proceedings against Former Directors Not Part of New Board

Moneylife Digital Team 08 April 2025

Economy & Nation

In a significant ruling, the national company law appellate tribunal (NCLAT) has allowed Canara Bank and Indian Bank to initiate or continue legal proceedings against former directors of Infrastructure Leasing & Financial Services Ltd (IL&FS) who were not inducted into the reconstituted board formed during the company's government-led rescue. The tribunal also granted relief to professionals who were reappointed on the boards of IL&FS and group companies.

A two-member NCLAT bench comprising chairperson justice Ashok Bhushan and member Barun Mitra says, "We are of the view that this protection shall extend to professional directors, who have been reappointed in IL&FS and its subsidiaries who are the part of the present board. With respect to IL&FS and IL&FS group with regard to them we grant leave to the bank to make an application for proceeding against them."

The order, dated 3 April 2025, marks a turning point in the long-running IL&FS insolvency case, one of India's largest corporate defaults that triggered a systemic crisis in the country's financial sector in 2018.

The tribunal clarified that while a moratorium on proceedings under the Companies Act and other laws continues to protect the new board and its members, this shield does not extend to former directors who ceased to be part of IL&FS post-October 2018 when the Union government restructured the company.

"Persons who were part of the erstwhile board and who have not been continued in the reconstituted board are not covered under the umbrella of the moratorium... Proceedings can be initiated or continued against such persons," NCLAT stated.

The ruling comes in response to a petition by banks and financial creditors seeking clarity on whether they could pursue recovery actions and legal remedies against former board members of the embattled infrastructure financier.

IL&FS, once considered a blue-chip non-banking financial company, defaulted on several debt obligations in 2018, prompting regulatory and government intervention. The national company law tribunal (NCLT) had imposed a moratorium on proceedings to ensure a structured resolution process. However, ambiguity persisted regarding whether former directors could be held accountable under various legal provisions, including the Companies Act, Prevention of Money Laundering Act (PMLA) and others.

NCLAT emphasised that the moratorium was never intended to shield those responsible for alleged mismanagement or wrongdoing. "No blanket protection can be assumed by persons who are no longer in control or management of the company," the bench observed.

The IL&FS case is being closely monitored for its implications on insolvency jurisprudence and the broader financial system. The latest development could also boost creditor confidence, as it reinforces the principle that individuals cannot evade scrutiny merely by virtue of organisational restructuring.

NCLAT's order is expected to reignite several pending investigations and court actions involving former executives and board members of IL&FS and IL&FS group companies.

Last year in May, the Union government asked the board of IL&FS to recover excess remuneration worth Rs150 crore paid to the former directors of IL&FS Financial Services Ltd (IFIN) and IL&FS Transport Network (ITNL).

The government communication follows the submission of recast accounts by IL&FS for FY12-13 to FY17-18 which recorded losses of Rs9,600 crore instead of over Rs1,850 crore profit estimated by the management and board of IL&FS.

A 2018 submission by the Union ministry of corporate affairs (MCA) before NCLT revealed that top executives of IL&FS, including Ravi Parthasarathy, Hari Sankaran and Arun Kumar Saha, misused EWT and "the trust deed was instituted fraudulently with criminal intention to gain unlawful benefits." (Read: IL&FS Asks 200 Beneficiaries of Employee Welfare Trust To Refund Rs250 Crore: Report)

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