In a significant development in the ongoing legal proceedings related to the Infrastructure Leasing & Financial Services (IL&FS) crisis, the National Company Law Appellate Tribunal (NCLAT) has allowed Canara Bank and Indian Bank to initiate proceedings against former directors of IL&FS, who are no longer part of the reconstituted board appointed in 2018.

This decision draws a clear line between the old guard and the new leadership that took over IL&FS during a financial meltdown that had threatened India’s financial sector stability.

Backdrop: The IL&FS Financial Crisis

The roots of this decision go back to October 1, 2018, when the Government of India intervened in the affairs of IL&FS after revelations of a massive debt pile of ₹90,000 crore. The NCLT superseded the board of IL&FS and appointed a new one, which included professionals and former bureaucrats.

At that point, the group had availed ₹94,215 crore in fund-based debt out of a total external liability of ₹99,355 crore. Four key entities—IL&FS Group, IL&FS Financial Services (IFIN), IL&FS Transportation Networks Ltd (ITNL), and IL&FS Energy Development Company Ltd (IEDCL)—were responsible for nearly ₹48,000 crore, or about 51% of the total debt.

What the NCLAT Said

A two-member NCLAT bench, comprising Justice Ashok Bhushan (Chairperson) and Barun Mitra (Member), clarified that:

"This protection shall extend to Professional Directors who have been reappointed in IL&FS and its subsidiaries and are part of the present board."

On the other hand, the appellate tribunal granted permission to Canara Bank and Indian Bank to make applications for proceedings against erstwhile directors, based on allegations during their tenure before the board's overhaul in October 2018.

Previous Legal Protection

Following the board change, the NCLAT had on October 15, 2018, issued a blanket stay against all legal or recovery actions against IL&FS and its group entities. This was done considering:

• The public interest

• The sensitivity of the financial crisis

• And the need to stabilize the economic environment

At that time, this protection was viewed as crucial to allow the new board breathing space to carry out a structured resolution of the mammoth debt crisis.

Banks' Arguments Against Former Directors

During the recent proceedings, counsel for Canara Bank and Indian Bank made it clear that:

• They are only seeking to pursue show-cause notices already issued to the former directors.

• These notices relate to their alleged lapses during their term, which contributed to the IL&FS crisis.

• The actions are in line with the Reserve Bank of India’s (RBI) circular governing the process to declare wilful defaulters.

The banks clarified they are not targeting the current board members, which prompted a partial agreement from IL&FS’ side.

IL&FS’ Stand on Protection

Senior Advocate Ramji Srinivasan, appearing for IL&FS, stated that:

• The company has no objections to proceedings against former directors.

• However, directors reappointed after the 2018 board change, especially professional and independent directors, should continue to be protected by earlier NCLT/NCLAT orders.

The NCLAT accepted this view, thereby maintaining a clear demarcation between legacy responsibilities and present-day management obligations.

Implications of the Ruling

This verdict has several significant implications:

• Bank-led accountability for financial failures may see traction if similar actions are pursued in other large financial defaulter cases.

• The protection of professional directors underscores the judiciary's intent to encourage independent corporate governance without fear of retrospective liabilities.

• It maintains continuity and credibility in the IL&FS resolution process, which is still ongoing and being closely monitored by financial institutions and regulators.

Key Terms Explained

Wilful Defaulter:
As per RBI guidelines, a wilful defaulter is a borrower who has the means to repay a loan but deliberately avoids payment or diverts funds for unintended purposes.

NCLAT:
The National Company Law Appellate Tribunal hears appeals against the decisions of NCLT, which is the primary court for corporate law matters in India, including bankruptcy, insolvency, and mergers.

IL&FS Crisis:
IL&FS defaulted on a series of loan repayments in 2018, triggering panic in the financial markets. Its interconnectedness with mutual funds, banks, and NBFCs exposed significant gaps in the credit rating system and corporate governance in India.

What Happens Next?

With the green light from NCLAT, Canara Bank and Indian Bank can now formally initiate proceedings under the RBI’s framework to declare former IL&FS directors as wilful defaulters. These proceedings may lead to:

• Disqualification from future directorships

• Legal recovery of dues

• Reputational damage, especially for prominent figures in India’s corporate sector

The tribunal’s ruling also serves as a template for future actions in similar corporate mismanagement cases, ensuring that legacy board members do not escape scrutiny.

Conclusion

The NCLAT’s nuanced ruling in the IL&FS matter strikes a balanced approach—allowing accountability for past wrongdoings, while ensuring the stability and legitimacy of the ongoing resolution process. It reinforces the judiciary’s commitment to corporate responsibility while respecting professional integrity.

For India’s financial ecosystem, this decision represents both a reminder of past vulnerabilities and a hopeful signal for improved governance and regulatory action in future crises.

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