NCLAT allows banks to pursue action against former IL&FS directors not on current board

The National Company Law Appellate Tribunal (NCLAT) has allowed Canara Bank and Indian Bank to proceed with actions to classify former directors of Infrastructure Leasing & Financial Services (IL&FS), who are no longer part of the company’s board, as wilful defaulters.

A two-member NCLAT bench led by Chairperson Justice Ashok Bhushan and Member Barun Mitra clarified that the immunity granted to IL&FS by a 2018 order does not extend to former directors who are not part of the reconstituted board. However, the protection will continue for professional directors who were reappointed to the IL&FS board after its overhaul on October 1, 2018.

“We are of the view that this protection shall extend to professional directors who have been reappointed in IL&FS and its subsidiaries as part of the present board,” the tribunal said. It also granted banks permission to approach the appropriate forum to initiate proceedings against other former directors.

The government had reconstituted the IL&FS board following revelations of a debt crisis involving over ₹90,000 crore, which had raised concerns across the financial sector. In response to the crisis, the NCLT had on October 1, 2018, replaced the existing board with a new one and granted sweeping protections to IL&FS and its group companies through an interim order issued later that month.

During recent hearings, IL&FS argued that this 2018 order shielded its directors from legal action. However, counsels for Canara Bank and Indian Bank contended that their notices were only issued to former directors who were responsible at the time of the defaults and not to the current management. They insisted that proceedings should move forward under the framework of the RBI’s guidelines.

Senior advocate Ramji Srinivasan, representing IL&FS, confirmed that the company had no objection to actions against former directors, so long as they are not part of the current NCLT-approved board. The tribunal emphasized that reappointed professional directors are to remain protected.

As of October 2018, IL&FS and its subsidiaries had borrowed ₹94,215 crore in fund-based debt out of a total external debt of ₹99,355 crore. Of this, about 51%—or ₹48,000 crore—was concentrated in four key group entities: IL&FS, IFIN, ITNL, and IEDCL.

Also See: NCLAT restrains banks from declaring IL&FS from wilful defaulter