If directors act correctly, they may not be held liable for debts. It is a well-acknowledged fact that a company is a separate legal entity. However, under Directors personal liability, directors may be held accountable for the company’s insolvency or non-payment of debts if the company wilfully defaults. In the case of many private investments, the investors insist that directors be personally liable for defaults or even material contractual breaches. Thus, a director can be held liable for corporate debts in certain scenarios, mainly if he has:
– Signed a personal guarantee.
– Even after knowing the company is insolvent, he has continued to prioritize shareholders over creditors.
– Sold company assets below their market value or for free.
– Overpaid himself from the company’s account, creating an overdrawn director’s loan.
– Raised funds to repay creditors via fraudulent means. If he has provided inaccurate information to obtain finance.
– Indulged in wrongful trading or breached his fiduciary duty, or made misleading statements.
The liability to pay for debts extends to legal heirs as well. This means that if a director dies, their heirs will still have to settle payments. All of this makes D&O a must-have for any company.
Key Takeaways
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The “Creditor-First” Shift: When a company nears insolvency, a director’s primary duty shifts from shareholders to creditors. Failing to prioritize the asset pool for creditors can lead to a court order requiring directors to personally contribute millions to the company’s assets (e.g., recent 2026 NCLT rulings forced personal contributions of over ₹10 Crores).
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Inherited Liability: While a director’s “personal skills” duties end at death, their monetary debts do not. Under the Code of Civil Procedure (Section 50), legal heirs can be held liable for a deceased director’s debts, though this is capped at the value of the assets they inherit.
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The “Lifesaver” Policy: D&O Insurance is no longer optional. It acts as a financial shield, covering defense costs (which are rising steadily in 2026) and settlements. Without it, a director must fund their own legal defense even if the allegations are false.
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Beyond Executive Roles: Independent and Nominee directors are no longer immune. Regulatory bodies like SEBI are now imposing heavy penalties (ranging from ₹10 Lakhs to ₹5 Crores) on non-executive directors for failing to maintain oversight or safeguard minority interests.
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Fraud & Wilful Default: Insurance and corporate indemnity do not cover fraudulent acts. If a director raised funds via misleading statements or provided inaccurate information to obtain finance, they are personally on the hook without any insurance fallback.
Directors Personal Liability (D&O Policy) – Lifesaver for Directors
When a company becomes insolvent or suffers significant losses, typically, the investors first blame the directors. Additionally, employees can also sue the directors for racial discrimination claims, unfair treatment, security-related claims, or for management buyout claims. Since the directors and management are independent of each other, so, it becomes a requisite for a company to avail a protection solution. This policy can help the company to contest contingencies and financial shortfalls. Thus, Directors’ & Officers’ Liability Insurance is like a lifesaver in such cases as the core purpose of a D&O policy is to provide financial protection to directors. Directors personal liability policy protects the directors against the consequences of actual or alleged ‘wrongful acts’ while acting within the scope of their professional duties.
The sum assured for Directors and Officers (D&O) insurance policies is calculated based on several factors, including the company’s size, industry, and potential risks. The insurer may also consider the insured individuals’ roles and responsibilities, past claims history, and the policy’s coverage limits and deductibles.
D&O policy offers protection to directors and officers when they are held liable by:
- Employees – for discrimination, harassment, breach of employment contract, defamation, misleading misrepresentation, wrongful employment practice, etc.
- Creditors – alleging that the director allowed the company to trade whilst knowing it could not pay its debts.
- Government agencies – directors and officers may be personally liable for breaches of hundreds of statutes.
- Competitors – Trade practices-related claims brought against the directors for misleading and deceptive type conduct.
- Shareholders – alleging that the directors mismanaged the operations of the company and its funds.
Summary: Directors’ Personal Liability
Conclusion
Directors and Officers liability insurance protects the past, present, and future directors and officers of profit or non-profit companies (Listed and Non-Listed). The D&O policy protects them from damages resulting from alleged or actual wrongful acts they may have committed in their positions. The policy provides protection in the event of any actual or alleged error, misstatement, omission, misleading statement, or breach of duty. Additionally, it provides indemnity to directors and officers for legal costs, damages, and expenses incurred, arising from claims brought against them personally – for acts in their executive capacity.
Additional Read: Why should start-ups need a D & O policy?
Get the right policy with SecureNow
To properly cover your directors and officers, you must buy the best D&O liability insurance policy. However, with so many general insurance companies offering a D&O insurance policy, it could be a difficult task to choose the right one. Let SecureNow help you make the right choice.
Frequently Asked Questions (FAQs)
Q1: Can a director be jailed for a company’s non-payment of debts?
A) Generally, non-payment is a civil matter. However, if the non-payment involves fraud, cheating, or criminal breach of trust (e.g., raising funds with fake documents), the director can face criminal prosecution and imprisonment under the Indian Penal Code.
Q2: Does D&O Insurance cover the director if they lose a case for “fraud”?
A) No. D&O policies have a “Final Adjudication” clause. While they may pay for your defense costs during the trial, if the final court verdict finds you guilty of willful fraud or dishonesty, the insurer will typically demand that you repay all the legal fees they covered.
Q3: What is “Wrongful Trading”?
A) Wrongful trading occurs when a director knows (or ought to have known) that the company has no reasonable prospect of avoiding insolvency but continues to incur new debts. Under IBC Section 66, the NCLT can order such directors to pay compensation into the company’s pool.
Q4: If a director resigns, does their personal liability for past acts end?
A) No. A director remains liable for any “wrongful acts” or statutory defaults that occurred during their tenure, even after they have surrendered their position. Tax and GST laws specifically allow recovery from ex-directors for the period they were in office.
Q5: Is it true that a director’s children have to pay the company’s debts?
A) Only to a limited extent. If a director dies with personal liabilities, the legal heirs are responsible for settling those payments only up to the value of the property they inherited from the deceased director. They cannot be forced to pay from their own independent earnings.
About The Author
Rajesh
MBA Finance
With a wealth of expertise in the insurance realm, Rajesh is a distinguished writer specializing in articles focusing on directors and officers insurance for SecureNow. Boasting 9 years of experience in the industry, he profoundly understands the complexities surrounding directors and officers liability coverage. Their articles delve into the intricacies of D&O insurance, providing readers with invaluable insights into risk mitigation strategies and policy considerations. Renowned for their comprehensive knowledge and attention to detail, Rajesh is dedicated to delivering informative and engaging content that empowers individuals and businesses to navigate the complexities of insurance with confidence.
