This article has been written by Raghavendra Kulkarni.
This article has been edited and published by Shashwat Kaushik.
Table of Contents
Introduction
A company, being an artificial entity established by law, lacks its own mind and body and cannot function independently. As per Section 2(20) of the Companies Act, 2013, a company is defined as one that is incorporated under this Act or any earlier company law. The company operates through its board of directors, who are officially appointed. According to Section 2(34) of the same Act, a director is defined as an individual appointed to the company’s board.
Hence, it is the paramount duty of the directors to protect the interests of the creditor in case of insolvency and even otherwise. The directors are responsible for the day-to-day activities of the company; under such circumstances, they owe fiduciary duties to the creditors to protect the interests of the creditors. All these duties are codified under Section 166 of the Companies Act. Let’s discuss them one by one in detail.
Duties of the director
Section 166 of the Companies Act, 2013 states about the duties of directors.
On the analysis of the above Section of the Companies Act, one can conclude that below listed are the duties of the directors.
- The directors should always act in accordance with the articles of association of the company. A company’s director must always work in accordance with articles of association and resolutions passed by the board of directors. Articles of association include various elements, including the purpose for which the company is formed, administrative structure, and powers and duties of the directors.
- Duty to act in good faith: Directors and officers of a corporation, when making decisions as fiduciaries, must act with a clear and deliberate awareness of their responsibilities. This duty of good faith requires them to prioritise the corporation’s interests and fulfil their roles with integrity and conscientiousness.
- Duty to avoid conflict with the company: Directors are under a fiduciary duty to avoid conflict between their interests and those to whom they owe a duty. For example, “A director of the company enters into a contract for certain services and that director himself is the owner of the company with whom the contract is entered into or by entering into such a contract, the director may be passing some benefits to his own family members or relatives.”
- Duty to exercise reasonable care, skill and diligence, and independent judgement: It is the duty of the director to exercise reasonable care and utilise all his skill and expertise as a man of ordinary prudence would have exercised in ordinary circumstances. Where the director has some special knowledge of the subject matter he is dealing with. Then in such circumstances, the director should make all reasonable efforts to utilise his special knowledge for the benefit of the company. Provided that such knowledge should not be in contravention of any law in force.
- Duty to avoid undue gain or advantage: A company director must not seek or try to obtain any improper benefit or advantage for themselves, their family members, partners, or associates. If a director is found guilty of gaining such an undue advantage, they must repay an amount equal to that gain to the company.
- Duty not to make assignments of his or their duties to any other person: The director is supposed to work or complete all the duties or tasks assigned to him without assigning the same to any other person unless and until the same is permitted by law or the same is lawful as per the rules and regulations of the company. According to Section 167(1)(b) of the Companies Act, if a director does not attend any of the Board of Directors meetings over a 12-month period, regardless of whether they have requested leave for their absence, they will automatically be disqualified from their position.
- Further, the act also provides a penalty for acting in contravention of this provision, which may vary from one lakh rupees to 5 lakh rupees.

The 41st Law Commission Report recommended some amendments to penal provisions, specifically suggesting that fines should replace imprisonment for offenders that are corporate entities. Despite these recommendations, no changes have been made to the law so far.
Apart from this, if you analyse the UK Companies Act, 2006, it also imposes certain duties on the directors to protect the creditor’s interest. Section 172(3) states that the responsibilities outlined in this section are subject to any laws or legal rules that require directors to consider or act in the interests of the company’s creditors under certain circumstances.
Apart from this, Section 172 of the UK Company’s Act 2006 provides that it is the duty of everyone to work towards promoting the success of the company.
In BTI 2014 LLC vs. Sequana SA and others, the Supreme Court of the United Kingdom recognised the obligation of directors to have regard to the interests of creditors when a company becomes insolvent or is on the verge of becoming insolvent. In the same case, the Supreme Court also observed that, according to Section 172(1) of the Companies Act 2006, directors are obligated to act in a manner that is most likely to benefit the company’s success, considering the interests of its shareholders collectively.
The creditor duty modifies this obligation. When the creditor duty applies, directors must also consider the interests of creditors when making decisions that aim to promote the company’s success. Importantly, this duty to creditors is not separate from their duty to the company itself; it’s integrated into their overall responsibilities.
Furthermore, shareholders cannot approve or validate any actions by directors that breach the creditor duty.
Steps director should take to protect the creditor in case of insolvency
- Take legal advice- Seek legal advice as early as possible from the company’s panel of legal experts. If there is a possibility the company is on the verge of facing insolvency proceedings or failure to follow any regulatory requirements. The director must seek legal advice as soon as possible from the panel of advocates appointed by the company.
- Keep a close eye on the company’s financial condition and give honest and accurate information about the company’s financial situation to creditors and other relevant persons-accuracy in financial reporting ensures financial credibility and reliability and more investors come forward to invest in the company. To ensure accuracy in financial reporting, it’s important to establish robust internal controls, use dependable accounting software, perform regular audits, keep thorough documentation, and stay current with accounting standards.
- Every step taken to protect the company from insolvency and every decision taken concerning the same should be documented and made available to the concerned persons as and when the same is sought.
- Create KPIs so that employees can focus on their efforts- KPIs are a very useful tool in performance management and business management and are widely used as a result. Setting KPIs that change the behaviour of your team and align effort and action on the tasks, activities, and projects that will best help the team reach the goals set is a critical first step.
- Comply with regulatory requirements and local legislation.
- Call for an annual meeting of shareholders without fail. Calling for an annual general meeting ensures healthy and effective interaction between the shareholders and management of the company. The Companies Act 2013 mandates that all companies, except one-person companies (OPCs), must hold an annual general meeting (AGM) each year to review and discuss the company’s results. This AGM should take place within six months after the end of the financial year, meaning by September 30th of each year. Additionally, the interval between two consecutive AGMs must not be more than 15 months. This ensures that shareholders are regularly informed about the company’s performance and important decisions are made in a timely manner.
- Re-evaluate the company’s activities to focus on the creditor’s interest- When a company faces or approaches insolvency, its directors must begin prioritising the interests of the company’s creditors. As the company’s financial situation becomes more unstable, directors are required to increasingly consider and protect the interests of the creditors.
- Minimise the additional debt- Section 185 of the Company Act 2013 puts certain restrictions on the granting of loans. On the analysis of Section 185(1), it is very clear that Section 185(1) of the Act states that:

Advancing loans directly or indirectly: The company cannot provide loans directly to any individual or entity associated with the directors.
Advancing loans represented by book debt: This includes not only direct loans but also any loans that are represented as receivables or debts on the company’s books.
Giving guarantees or providing security for loans: The company cannot offer guarantees or security for loans taken by certain individuals.
These restrictions specifically apply to loans or financial assistance involving:
- A director of the company.
- A director of the company’s holding company.
- A partner or relative of any director.
- Any firm in which a director or their relative is a partner.
Conclusion
It is very important and vital to the growth and stability of the company that directors should make all endeavours to protect the interests of the creditors at all times. Otherwise, no shareholder will come forward to invest in the company. The more robust the plan the directors make to protect the interests of the creditors, the more creditors come forward to invest in the company.
References
- https://ibclaw.in/directors-duties-in-india-a-critical-analysis-shivangi-gupta/#_ftn31
- https://www.dlapiper.com/en/insights/publications/energy-and-natural-resources-case-law-update/issue-9/supreme-court-confirms-directors-duty-to-creditors-in-limited-circumstances
