NCLAT allows Canara Bank and Indian Bank to take Legal Action against former directors of IL&FS
The National Company Law Appellate Tribunal (NCLAT) has given a green signal to Canara Bank and Indian Bank to take legal action against former directors of IL&FS (Infrastructure Leasing & Financial Services) in order to declare them as wilful defaulters. However, this permission applies only to those directors who were part of the old board, before October 1, 2018. The tribunal has clearly stated that directors who joined the IL&FS board after that date, including professional directors who were reappointed, will continue to be protected from such proceedings.
This decision came in the backdrop of a massive financial crisis that came to light in October 2018, when it was discovered that IL&FS and its group companies had accumulated a staggering debt of around Rs 90,000 crore. This raised serious concerns in the financial sector and led the central government to step in and appoint a new board on October 1, 2018, to take charge of the company. Soon after, on October 15, 2018, NCLAT issued an interim order that put a stay on all legal cases, recovery actions, and proceedings against IL&FS and its subsidiaries. The stay was meant to protect the company, ensure economic stability, and give the new board a chance to manage the crisis.
Recently, IL&FS argued that the October 15 order also protected its former directors from legal actions. However, the lawyers for Canara Bank and Indian Bank disagreed and clarified that they had only issued show cause notices to former directors who were responsible during the time of the financial mess. These notices, they said, were part of the process required under the Reserve Bank of India’s guidelines, and should be allowed to proceed. IL&FS responded by saying it had no objection to such action as long as it did not affect the current board members approved by the NCLT.
The NCLAT bench, comprising Chairperson Justice Ashok Bhushan and Member Barun Mitra, agreed with this view and ruled that banks could continue proceedings against the old directors but not against the current or reappointed professional directors. The tribunal recognized that certain directors may have been reappointed after the crisis and should not be held responsible for past decisions.
At the time of the crisis in October 2018, IL&FS had borrowed over Rs 94,000 crore in loans, with about 51% of this amount—roughly Rs 48,000 crore—being taken by just four companies within the IL&FS group: IL&FS itself, IFIN, ITNL, and IEDCL. The crisis led to the complete restructuring of the company’s board, and legal immunity was given to the newly appointed directors so that they could focus on reviving the company without fear of being blamed for past wrongdoings.
This decision by NCLAT strikes a balance between ensuring accountability for those who were in charge when the financial mismanagement occurred and protecting those who are currently working to fix the damage. It allows legal and financial investigations to move forward while safeguarding the recovery efforts led by the new management.
