The Twilight Duty in Corporate Distress

I. The Twilight Period as a Corporate Governance Issue

The twilight period is best construed as a corporate governance crisis, not merely as an insolvency phase. Contemporary corporate governance is organised around the doctrine of shareholder primacy, under which directors are supposed to maximise the value of the firm for shareholders as the key residual claimants. This orientation is supported by economic studies of corporate law which conceptualise the firm as a nexus of contracts between different stakeholders, in which governance rules bring managerial incentives and shareholder wealth maximisation into consonance.

Yet this model becomes unstable when a business nears financial distress. Limited liability protects shareholders against losses beyond what they invested, which encourages risk-taking during an economic crunch even when such decisions may deplete the value available to credit providers. In that process creditors assume more economic risk, since the remaining assets of the firm are effectively applied to satisfy debt claims. The study of insolvency thus recognises that when a firm is likely to collapse financially, creditors become the principal economic stakeholders of the firm.

This tension is expressed only indirectly in Indian law. Although the fiduciary model remains shareholder-centric, as captured in Section 166 of the Companies Act, 2013, Section 66 of the Insolvency and Bankruptcy Code, 2016 imposes liability where directors continue the company’s business despite imminent insolvency. The twilight period therefore demonstrates a structural governance conflict in which directors must negotiate opposing shareholder and creditor interests.

II. Doctrinal Development of Creditor Duties in Common Law Jurisdictions

Common law courts came to recognise that shareholder-centric fiduciary governance is structurally unsustainable as insolvency sets in, since creditors, not shareholders, then bear the principal economic risk. Judicial doctrine thus shifted to rebalance the fiduciary obligations of directors in financial distress. In the United Kingdom the basis of this change was established in West Mercia Safetywear Ltd v. Dodd, where the Court of Appeal ruled that once the threat of insolvency has arisen, directors should not deal with corporate assets to the prejudice of creditors, but should instead act in the interests of the company’s creditors. This principle sits within the larger statutory context of Section 172 of the Companies Act 2006, under which directors are expected to promote the success of the company, but which implicitly allows the content of that duty to develop where creditor interests prevail.

In BTI 2014 LLC v. Sequana SA, the UK Supreme Court made clear that the doctrinal trigger arises when directors know, or ought to know, that an insolvent liquidation is likely — which modifies but does not supersede shareholder-focused fiduciary duties. Statutory reinforcement is found in Section 214 of the Insolvency Act 1986, which creates liability for directors who keep trading knowing that insolvency is unavoidable.

Australian jurisprudence, by contrast, focuses on the maintenance of assets for creditors in insolvency, while U.S. courts developed the notion of the “zone of insolvency” in Credit Lyonnais v. Pathe Communications, where creditors could assert claims; since then, however, creditor rights have been confined to derivative proceedings following Gheewalla. These developments show that various jurisdictions recognise the twilight governance problem but resolve it through different fiduciary models.

III. Indian Corporate Law: A Travelling Layout

Indian corporate law displays a structural division between corporate governance and insolvency regulation, and the twilight period is largely unregulated. The main statutory statement of directors’ duties is Section 166 of the Companies Act, 2013, which requires directors to act in good faith in the best interests of the company and its members. Although the provision codifies fiduciary obligations of care, diligence and loyalty, it rests on a shareholder-centric governance paradigm, and it remains undetermined whether “the interests of the company” extend to creditors in cases of financial distress. Broader debates on corporate governance in India mostly focus on board supervision and responsibility but remain largely within a shareholder-only frame.

Institutional mechanisms designed to control governance failure, including independent directors, should help reduce such failures; but as research in emerging markets demonstrates, concentrated ownership structures and weak enforcement often restrict the ability of such institutions to discipline management. Corporate governance law therefore offers directors no doctrinal guidance for decisions taken in times of financial distress.

Part of the response to opportunistic behaviour lies in the Insolvency and Bankruptcy Code: Section 66 places liability on directors who continue trading despite knowing that the company is insolvent, and Section 70 makes it an offence to act improperly in the course of insolvency resolution. Judicial reasoning also places considerable emphasis on creditor protection; in Puneet Kaur v. K.V. Developers, the NCLAT held that insolvency systems must provide fair treatment of creditor claims. However, these provisions only come into play once insolvency has commenced, showing that Indian law implicitly acknowledges twilight-period misconduct but supplies no consistent fiduciary standard for director conduct before the insolvency process begins.

IV. The Regulatory Blind Spot: Missing Pre-Insolvency Governance

Indian corporate regulation sets up a structural distinction between corporate governance law and insolvency law, leaving the twilight period almost unregulated. Solvent companies are largely regulated under the Companies Act, 2013, which defines the legal framework of board authority, fiduciary responsibility and shareholder oversight. Once a company is formally in default, however, a new regulatory framework takes over under the Insolvency and Bankruptcy Code, 2016, which provides a creditor-driven resolution mechanism based on the Corporate Insolvency Resolution Process and the authority of the Committee of Creditors. The institutional system established by the Insolvency and Bankruptcy Board of India further confirms that the regulatory apparatus is designed mainly to address insolvency after it has become formal.

Economic scholarship explains why this discontinuity is a problem. Insolvency regimes aim to coordinate creditor claims and salvage firm value once a company is insolvent, but significant destruction of value occurs before the insolvency process begins, when directors delay filing or pursue excessively risky courses of action. Because Indian law governs director conduct when a firm is solvent and when it is insolvent, but not when it is in financial distress, directors acting in that phase are left without guidance as to whose interests they must serve.

The outcome is a regulatory gap between corporate governance and insolvency law, in which a financially distressed firm continues to be governed by shareholder-oriented corporate law even though creditors have become the principal risk bearers.

V. The Twilight Duty: A Design for Indian Corporate Law

The answer to the governance vacuum between corporate law and insolvency law is a framework of twilight-period governance that rebalances the responsibilities of directors in financial distress. One reform would be to introduce a statutory duty of creditor consideration, following Section 172 of the UK Companies Act, which obliges directors to promote the success of the company without disregarding the interests of a wider group of stakeholders. An equivalent Indian provision would clarify that directors must weigh creditor interests when determining what is in the best interests of the company as insolvency approaches, consistent with the shift in the allocation of economic risk.

The second reform consists of early-distress governance mechanisms. International governance standards emphasise that boards should monitor financial sustainability and maintain oversight of risk management systems. Building on that principle, Indian boards could be required to monitor solvency and liquidity indicators, so that financial distress is tracked and addressed before formal insolvency processes are triggered.

Lastly, the reform should include a safe harbour mechanism for restructuring, as under the Australian safe harbour reforms. Those provisions relieve directors of liability for insolvent trading where they are pursuing restructuring measures reasonably likely to lead to a better outcome than liquidation.

A combination of these reforms would create a calibrated twilight-period responsibility, under which creditors are safeguarded while company executives can still deploy lawful corporate rescue strategies.

VI. Conclusion: Re-Conceptualising Fiduciary Duties in Corporate Distress

The twilight period reveals a basic governance tension within corporate law. As financial distress deepens, the conventional shareholder model becomes unstable, because creditors rather than shareholders are the principal economic risk-takers. Comparative common law jurisdictions have answered this dilemma by developing doctrines requiring directors to take account of creditor interests as insolvency looms. Such doctrines recognise that fiduciary duties must vary as the identity of a firm’s residual risk-bearers changes.

Indian corporate law, however, remains incomplete. Although directors of solvent companies are regulated by the Companies Act, 2013, and formal insolvency is controlled by the Insolvency and Bankruptcy Code, 2016, neither system expressly addresses the conduct of directors when a firm is in financial distress before it enters an insolvency process. As a result, Indian corporate law lacks a consistent doctrinal framework on the fiduciary duty of directors in the twilight period.

By mapping comparative doctrines, identifying this regulatory void, and proposing a statutory twilight duty, this article moves a step closer to a framework that aligns corporate governance regulation with insolvency policy while preserving legitimate entrepreneurial decision-making in circumstances of corporate distress.