Personal Exposure Of Promoters In Insolvency

How India’s Insolvency Regime Is Quietly Rewriting the Risk Map

Introduction: The End of the Corporate Shield Assumption

At King Stubb & Kasiva, we increasingly see promoters confronting a reality that was once considered exceptional: corporate insolvency in India can translate into personal exposure.

The Insolvency and Bankruptcy Code, 2016 (IBC) was conceived as a creditor-friendly, time-bound resolution framework for stressed companies not as a regime to pierce the corporate veil. Yet, through evolving jurisprudence, enforcement practice, and lender strategy, the personal risk profile of promoters has materially expanded.

The Old Assumption: Corporate Insolvency Ends at the Company

For decades, Indian promoters operated on a familiar premise:

• Companies fail; promoters move on.
• Liability is capped by shareholding.
• Guarantees are negotiable, not inevitable.

IBC has disrupted this assumption, not by statute alone, but by how insolvency interacts with guarantees, avoidance actions, and enforcement strategy. The shift is subtle, but consequential.

Where Personal Exposure Actually Arises

Promoter exposure under insolvency does not flow from insolvency per se. It arises from adjacent legal hooks that activate once a company enters distress.

Personal Guarantees to Lenders

The most direct exposure stems from personal guarantees issued by promoters to banks and financial institutions. Key developments include:

• Simultaneous invocation of personal guarantees during CIRP
• Independent enforcement against guarantors even while resolution is pending
• Insolvency proceedings against personal guarantors themselves

The result is a dual-track risk: loss of the business and personal balance-sheet stress.

Avoidance Transactions: When the Past Is Revisited

Once insolvency proceedings commence, resolution professionals are duty-bound to examine historical transactions, including:

• Preferential transactions
• Undervalued transactions
• Fraudulent or wrongful trading

Promoters often underestimate how far back scrutiny can go. Transactions that were once commercially routine may later be re-characterised as value erosion. The real risk lies not merely in reversal of transactions, but in personal accountability where intent, control, or benefit is inferred.

Shadow Director & “Person in Control” Risks

Indian insolvency jurisprudence is increasingly willing to look beyond formal titles. Promoters who:

• Continued to direct affairs post-default
• Exercised control without board designation
• Influenced decisions during financial distress

may be treated as de facto or shadow directors, exposing them to:

• Disqualification risks
• Contribution claims
• Regulatory scrutiny beyond the company

Control, not designation, is becoming the decisive factor.

Related-Party Transactions and Group Structures

Promoters operating through complex group entities face amplified exposure where:

• Inter-company transactions lack arm’s-length documentation
• Cash flows are pooled informally
• Assets are ring-fenced across affiliates

In insolvency, such structures are frequently challenged, often with allegations of value diversion or preferential treatment. Group governance failures increasingly translate into personal credibility and legal risk.

Post-Resolution Exposure: The Myth of a Clean Exit

A successful resolution plan does not always end promoter exposure. Personal guarantees may survive resolution. Investigations into past conduct may continue. Parallel proceedings civil, regulatory, or even criminal may outlive the insolvency process. IBC resolution is therefore not a full release, but a recalibration of risk.

Why Promoter Exposure Is Expanding

Three forces are driving this evolution:

Lender Strategy Has Matured

Banks and financial institutions now view insolvency as one tool among many. Personal guarantees, forensic audits, and parallel enforcement are deployed strategically, not sequentially.

Judicial Emphasis on Accountability

Courts and tribunals have repeatedly emphasised that insolvency is not a refuge for misconduct. This has emboldened deeper inquiry into promoter conduct.

Governance Expectations Have Risen

The regulatory environment increasingly expects promoters to act as stewards of value not merely shareholders. Failure to do so invites scrutiny.

The Boardroom Blind Spot: Insolvency as a Late-Stage Risk

Many promoters treat insolvency planning as a terminal-stage exercise. This is a mistake. Personal exposure is often baked in:

• Years before default
• Through poorly documented guarantees
• Via informal group practices
• By continuing control during distress
• By the time insolvency is triggered, options narrow dramatically.

Reframing the Promoter’s Risk Lens

At King Stubb & Kasiva, we advise promoters and boards to reframe insolvency risk across three timelines:

Before Distress

• Review and rationalise personal guarantees
• Document commercial rationale for group transactions
• Strengthen board independence and oversight

During Stress

• Avoid informal decision-making
• Maintain clean separation between personal and corporate actions
• Seek early legal structuring, not reactive defence

During Insolvency

• Coordinate defence across corporate and personal exposure
• Anticipate parallel proceedings
• Preserve narrative consistency across forums

The Strategic Takeaway

IBC has not abolished limited liability but it has conditioned it on governance behaviour.

Promoters who:

• Treat companies as extensions of personal will
• Blur lines between control and ownership
• Underestimate documentation and process

face increasing personal exposure.

Those who embrace:

• Formal governance
• Transparent transactions
• Early risk assessment

retain both credibility and leverage even in distress.

Final Thought: Insolvency Is No Longer Just About the Company

In modern Indian insolvency practice, corporate failure and personal consequence are no longer neatly separable. For promoters, insolvency has become a test not just of capital structure, but of:

• Conduct
• Control
• Credibility

Understanding this shift early is not defensive, it is strategic.