Directors Cannot Use Corporate Structure To Evade Liability For Acquired Business Dues: NCLAT Delhi

On 27 October, the National Company Law Appellate Tribunal (NCLAT), New Delhi, held that individuals who take control of a corporate debtor and benefit from its business operations cannot use the separate legal personality of the acquiring company to evade corresponding liabilities.

A Bench comprising Judicial Member Justice N. Seshasayee with Technical Members Arun Baroka and Indevar Pandey upheld the recovery of Rs. 3 crore from Corsalite Educational Services Private Limited and limited personal liability to appellants Subbarao Siddabattula and Appellant Nos. 2 and 3, who had controlled the corporate debtor. It held:

“The doctrine of separate corporate personality cannot be invoked where the corporate form is used as a device to conceal the identity of the persons exercising complete control and to evade corresponding liabilities”

The dispute arose from a Business Purchase Agreement (BPA) dated 14 July 2017 between Wave Global Educational Services Private Limited, the corporate debtor, and Corsalite Educational Services Private Limited.

Under the agreement, Corsalite agreed to acquire the corporate debtor's business for Rs. 3 crore, comprising specified liabilities, directors' bonuses and consideration for acquiring the promoters' shareholding. The agreement contemplated that certain liabilities would be discharged from income generated by the business after the transfer.

Following the agreement, individuals associated with Corsalite assumed management and operational control of the corporate debtor. The appellants, who were directors and associates of Corsalite, joined the corporate debtor's board and took charge of its affairs. Appellants Nos. 1 to 3 resigned as directors in 2018.

Subsequently, the corporate debtor entered the corporate insolvency resolution process (CIRP) in November 2019 and went into liquidation in August 2021.

During liquidation, the Liquidator sought recovery of the unpaid Rs. 3 crore consideration. After the demands for payment were denied, the Liquidator approached the National Company Law Tribunal (NCLT), Delhi, which, by an order dated 2 September 2025, directed the appellants, Corsalite and another respondent to pay the amount. The appellants challenged that order before the NCLAT.

The appellants argued that they were neither parties to nor signatories to the BPA and could not be held personally liable for the contractual obligations. They contended that Appellant No. 1 had signed the agreement only as Corsalite's authorised representative.

They also argued that the Liquidator had neither pleaded grounds for lifting the corporate veil nor established fraud, misuse of the corporate structure or any other basis for imposing personal liability on the directors. Further, the dispute was purely contractual and fell outside the NCLT's jurisdiction under Section 60(5) of the Insolvency and Bankruptcy Code, 2016 (IBC).

The Liquidator countered that the appellants had taken over the corporate debtor's management immediately after executing the BPA and exercised financial and operational control over its business. They had mobilised fresh capital and expanded operations but could not subsequently disassociate themselves from liabilities arising during their tenure.

It also argued that Section 60(5) empowered the NCLT to adjudicate matters connected with liquidation and recovery of assets. Corsalite, the Liquidator contended, had merely served as a vehicle through which the appellants acquired and controlled the corporate debtor's business.

Rejecting the jurisdictional objection, the Tribunal held that the unpaid consideration under the BPA constituted a receivable forming part of the liquidation estate. Since the Liquidator was required under the IBC and the applicable Liquidation Regulations to recover the corporate debtor's assets and dues, proceedings to recover the amount were directly connected with liquidation and fell within Section 60(5).

On the merits, it noted that the appellants had assumed management soon after the agreement, occupied directorial positions, controlled finances, raised funds through fresh share issuances and expanded the business. It also found that the entire shareholding initially transferred to Corsalite was subsequently transferred to the principal appellants. It observed:

“Once possession, management and commercial benefits under the Agreement have been accepted and enjoyed, the purchaser cannot avoid payment of the agreed consideration by selectively relying upon isolated contractual clauses.”

Rejecting the reliance on privity of contract and separate corporate personality, the Bench noted that the appellants were not passive participants but had assumed key management positions. It observed that an individual who becomes the corporate debtor's Chairman and authorised signatory immediately after an acquisition cannot subsequently disclaim involvement in its management and affairs.

Further, it found that Corsalite had functioned as a vehicle through which the appellants acquired and controlled the corporate debtor. The corporate structure, therefore, could not serve as a shield against the liabilities arising from their control and enjoyment of the acquired business.

Accordingly, the NCLAT upheld recovery of the unpaid consideration but modified the NCLT's order to limit liability to Corsalite and Appellant Nos. 1, 2 and 3, against whom the Liquidator had specifically sought relief.