Independent Director Accountability In The Twilight Zone Of Insolvency: Liability Towards Subsidiary Creditors And Stakeholder Protection Framework
- IJLLR Journal
- Jul 9
- 2 min read
Malika Singh, NALSAR, University of Law, Hyderabad
ABSTRACT
The twilight zone of insolvency presents a complex regulatory challenge as companies operate on the brink of financial collapse while maintaining technical solvency. During this precarious period, independent directors of parent companies face unprecedented dilemmas when evaluating related party loan approvals to financially distressed subsidiaries. The existing protection under Section 149(12) of the Companies Act 2013, which shields independent directors from liability unless actual knowledge of misconduct can be demonstrated, creates significant gaps in accountability when subsidiary creditors suffer substantial losses.
This research addresses two fundamental questions that emerge from the intersection of corporate governance and insolvency law. The primary inquiry examines whether independent directors of parent companies can be held liable to subsidiary creditors during the twilight zone when they approve material-related party transactions without conducting adequate financial health assessments. Although subsidiary creditors suffer direct effects from insufficient director monitoring, the analysis shows that present legal frameworks do not clearly define culpability paths, leaving them without effective remedy. The secondary research topic investigates whether extensive reform of current liability frameworks is necessary to improve protection for various company stakeholders during financial hardship. The analysis demonstrates that traditional shareholder-centric governance models become inadequate when companies operate in the twilight zone, necessitating expanded duties toward creditors, employees, and other affected parties.
The study proposes a graduated liability framework designed for the Twilight Zone period. Under this framework, independent directors who authorize loans to subsidiaries from significantly linked parties without adhering to the required due diligence criteria are subject to direct accountability. At the same time, the proposed method encourages thorough thinking rather than risk-averse decision-making by providing critical protections for directors who follow tougher procedural criteria.
The research bridges traditional director responsibility concepts with corporate group structures' specific issues during financial hardship, contributing to corporate governance literature. The results suggest that regulatory change should focus on fair accountability mechanisms that protect stakeholder interests while preserving independent directors' independence and corporate governance knowledge.
Keywords: Twilight zone insolvency, Independent director liability, Subsidiary creditor protection, Corporate group governance, Section 149(12) reform, Stakeholder accountability, Financial distress management.
