Can a corporate debtor avoid insolvency proceedings under Section 7 by merely changing its management?
A common misconception is that if the board or shareholding of a company changes, the new management will not be liable for the company’s past financial debts. However, liability under Section 7 of the Insolvency and Bankruptcy Code (IBC) does not get extinguished simply because the management of the Corporate Debtor (CD) has changed.
Tejas Sudhkar K, a corporate lawyer and an upcoming insolvency professional summarises the issue:
- Even if the management changes, the financial debt, along with all associated liabilities and defaults in repayment, remains. Once the debt is proven and the default is established, a petition under Section 7 will stand.
- In several real estate projects, funds may be routed through other entities or individuals. However, if the Corporate Debtor has benefited from those funds, it cannot claim exemption from liability on the grounds of a lack of privity of contract.
- Even if funds pass through agents, the Corporate Debtor remains liable if it ultimately benefits from the funds received.
- The Adjudicating Authority (AA) will focus on identifying the ultimate beneficiary of the funds. A mere technicality or a change in management does not absolve a company of its debts.
- Legal Precedents:
- Neha Himatsingka v. Himatsingka Resorts Pvt. Ltd. – Confirmed that a new management cannot defeat an otherwise valid Section 7 application.
- Gaurav Bhargava v. Noble Co-op Bank Ltd. – Clarified that loans taken in the company’s name are not the personal liabilities of erstwhile directors.
- Ranjan Goyal v. Sharad Vadehra & Ambika Prasad Sharma v. Horizon Buildcon Pvt. Ltd. – Held that if the Corporate Debtor has benefited from the funds, the absence of privity cannot be used as a defense under Section 7.
Ultimately, a Corporate Debtor cannot be absolved of its liabilities by merely changing its board or management. The IBC seeks to balance the rights of creditors with corporate resolution, focusing on the facts of debt and default rather than who is managing the Corporate Debtor.
Note: This write-up first appeared on the author’s Linkedin post
Also See: Ghanashyam Mishra and Sons Pvt Ltd vs Edelweiss Asset Reconstruction Company
