The Insolvency and Bankruptcy Code, 2016 was intended to provide a clean slate to businesses through resolution. Critically assess whether this protection extends to individual directors facing fraud or criminal liability.

Q. The Insolvency and Bankruptcy Code, 2016 was intended to provide a clean slate to businesses through resolution. Critically assess whether this protection extends to individual directors facing fraud or criminal liability. (15 marks, 250-350 words)

Section 32A of the IBC, 2016 extinguishes the corporate debtor's liability for pre-resolution offences once a plan bringing in unrelated management is approved [1]. The clean slate, however, attaches to the entity, not to the individuals who ran it — a distinction the Reliance Home Finance (RHFL) proceedings have sharply illustrated.

Where the clean-slate protection genuinely operates - Statutory basis: Section 32A bars prosecution, attachment or confiscation against the corporate debtor and its assets after plan approval, provided control passes to a person unconnected with the erstwhile management [1]. - Commercial logic: A resolution applicant will not bid for an entity carrying open-ended legacy liability; certainty of claims is what makes the resolution market function. - Judicial reinforcement: Claims not forming part of an approved plan stand extinguished, so creditors cannot revive dues post-approval [1].

Where it does not extend to directors - Express carve-out: Section 32A itself preserves the liability of every person who was a designer, promoter, officer or director of the corporate debtor at the time of the offence [1]. - Parallel regulatory track: SEBI penalised RHFL-linked individuals, including a promoter-director, for fund-diversion-related violations — action independent of the IBC resolution [2]. - Banking track: Banks may still classify a borrower or director as "fraud" under RBI's Master Directions on Fraud Risk Management, with consequences of credit exclusion through the Central Fraud Registry [3]. - Judicial view: The Delhi High Court declined to interdict a bank's show-cause notice to an RHFL director in January 2026, rejecting the plea that a Supreme Court-approved resolution plan barred it [4].

The necessary safeguard - Individual liability must still follow due process: the Supreme Court in SBI v. Rajesh Agarwal (2023) read audi alteram partem into the fraud directions, requiring notice, hearing and a reasoned order before fraud tagging [5].

Thus the Code balances two aims — reviving the enterprise while pursuing those who hollowed it out. Strengthening early-warning systems, timely issuance of notices and reasoned speaking orders would make this dual approach both faster and fairer, ensuring the clean slate remains a tool of revival rather than a shield against accountability.

(~330 words)

Sources: 1. Insolvency and Bankruptcy Code, 2016 (bare Act, IBBI) — Section 32A immunity for the corporate debtor, its carve-out for promoters/directors/officers, and extinguishment of claims on plan approval 2. SEBI, Adjudication Order in respect of 8 entities in the matter of Reliance Home Finance Limited (September 2024) — penalties on RHFL-linked individuals for securities law violations 3. RBI, Master Directions on Fraud Risk Management (2024) — fraud classification and reporting framework applicable to banks 4. High Court of Delhi (official website, case status and judgments) — January 2026 order refusing to interdict the Union Bank show-cause notice to an RHFL director 5. Supreme Court of India (official website, judgments) — State Bank of India v. Rajesh Agarwal (2023), reading natural justice into fraud classification