Om Logistics Limited & Anr. vs. M/s Ryder India Pvt. Ltd. - CIRP rescinded, for want of cooperation/participation from the sole member of CoC.

NCLT New Delhi-II (29.07.2021) in Om Logistics Limited & Anr. vs. M/s Ryder India Pvt. Ltd. [IA. 2038 /ND/2020 in Company Petition No. (IB)-1742(ND)/2019 ] held that;  

• As per the Code, if any person [as defined under Section 3(23) of IBC] initiates the Insolvency Resolution Process fraudulently or with malicious intent for any purpose other than for the resolution of the insolvency, or liquidation, such an act is punishable under Section 65 (1) of IBC 2016.

• when the Applicant (IRP) is unable to carry forward the CIR process for want of cooperation/participation from the sole member of CoC, we feel it appropriate to terminate the CIR process of the Corporate Debtor. In view of the above, by exercising our jurisdiction under Section 60(5) of IBC 2016 along with inherent power under Rule 11 of the NCLT Rules, 2016, we hereby terminate the CIR process of the Corporate Debtor with immediate effect and release the Corporate Debtor from the rigors of the CIRP and moratorium.

 

Excerpts of the order;

The present I.A. No. 2038 of 2020 is preferred by Mr. Bikram Singh Gusain IRP (hereinafter referred as ‘Applicant’) of M/s Ryder India Pvt. Ltd. (hereinafter referred as ‘Corporate Debtor’), under Section 60(5) of IBC, 2016.

 

# 2. That the Applicant has made the following prayers in the Application under consideration:

• “a. Close the CIRP initiated action against M/s Ryder India Private Limited/CD.

• b. Consider dissolution of M/s Ryder India Private Limited/CD, if found just and reasonable.

• c. Discharge the Applicant/IRP from the responsibility of IRP.

• d. Pass such further and other order and directions as this Hon’ble Tribunal may deem fit and proper in the facts and circumstances of the matter.”

 

# 3. As submitted, the facts of the case in brief are that the Operational Creditor (OC), M/s Om Logistics Ltd. had filed an application bearing no IB-1742(ND)/2019 under Section 9 of IBC 2016 in this Tribunal for initiation of CIR Process against the Corporate Debtor M/s. Ryder India Pvt. Ltd. That vide order dated 26.09.2019, this Adjudicating Authority had initiated the CIR Process against the Corporate Debtor and appointed Mr. Bikram Singh Gusain IP, as the Interim Resolution Professional (IRP).

 

# 4. That the Applicant in the introductory para of its Application has averred the following :

“Further, the Applicant/IRP submits the company has no assets, the company has not filed its financial and statutory returns with the CoC after 31.03.2016. Currently, the company has no business/commercial operations. This Hon’ble Tribunal may consider dissolution of the CD, if found just and reasonable”.

 

# 5. It is stated by the Applicant that Public Announcement in ‘Form A’ was made in the newspapers namely, Business Standard (English) and Jansatta (Hindi) in Delhi NCR editions on 02.10.2019.

 

# 6. It is further stated by the Applicant that on 11.11.2019 the Operational Creditor M/s Om Logistics Limited filed its claim of Rs.1,59,830 with the IRP. Besides, one more claim of Rs 1,41,19,729/- was filed by Excise & Taxation Officer, Bahadurgarh Jhajjar, Haryana (hereinafter referred as “ETO Bahadurgarh”) on 10.12.2019.

 

# 7. It is submitted by the Applicant that on the basis of the aforesaid two claims received from Operational Creditors, CoC was constituted with ETO Bahadurgarh having 98.88% voting share and M/s Om Logistics Ltd. having 1.12% voting share in the CoC.

 

# 8. It is further submitted by the Applicant that the First meeting of CoC was convened on 23.12.2019, where M/s Om Logistics Ltd. did not attend the meeting and ETO Bahadurgarh abstained itself from voting. Therefore, no decision could be taken in the meeting.

 

# 9. It is added by the Applicant that again on 10.01.2020 during the Second Meeting of CoC due to absence of M/s Om Logistics Ltd. and non-voting by ETO Bahadurgarh no decision was taken.

 

# 10. It is further added by the Applicant that the Applicant convened the third meeting of the CoC on 20.01.2020. It is further stated that neither the members of the CoC nor the Ex-Directors attended the meeting. It is added that in terms of Regulation 22(2) of IBBI (Insolvency Resolution Process of Corporate Persons) Regulations 2016, the meeting was adjourned to 07.02.2020. However, it is submitted by the Applicant that none of the members of the CoC attended the re-convened meeting.

 

# 11. It is averred by the Applicant that subsequently, the ETO Bahadurgarh withdrew its claim vide letter No. 2408/ETO Ward 5/ dated 17.02.2020,

 

# 12. It is submitted by the Applicant that out of the two CoC members, whereas the ETO Bahadurgarh has withdrawn its claim and the other member Om Logistics Ltd. has not been pursuing the CIR Process.

 

# 15. It is further stated by the Applicant that the Ex-Director Mr. Rohtash Kumar Rohit handed over to him the Letter No. SARB/DSB/9730/209 dated 19.06.2019 regarding the one-time settlement with the SBI, Najafgarh Road, New Delhi and re-payment thereunder issued to the Corporate Debtor by the State Bank of India,

 

# 16. It is added by the Applicant that the Ex-Director Mr. Rohtash Kumar Rohit also handed over to him a copy of the ‘No Objection Certificate’ issued vide letter No. SARB/DSB/9730/229 dated 01.07.2019 by SBI addressed to M/s. Sakshi Leather Exports Pvt. Ltd., (owner of the property at which CD was running its plant). It is further added by the Applicant/ IRP that from these letters of SBI it can be inferred that the assets of the CD have been disposed of to settle the dues of the Bank.

 

# 17. After hearing submissions of the Applicant/IRP, perusing his averments and documents placed on record, this Bench is of the view that the prayer made by the IRP for dissolution of the Corporate Debtor cannot be accepted since the Liquidation is a pre-requisite to the Dissolution and in the present case, no order of Liquidation has been passed due to absence of any such proposal and non-functioning of the CoC.

 

# 18. We observe that even if the ETO Bahadurgarh has withdrawn its claim, the CoC could have functioned with the Sole Member/ Operational Creditor, at whose instance the CIRP was initiated. However, in the present case we notice that even the Sole Member/ Operational Creditor of the CoC has been shirking from the responsibility and not pursuing the CIR Process of the Corporate Debtor.

 

# 19. In case the Sole Member/ Operational Creditor of the CoC was not interested in pursuing the CIR Process, the appropriate course could have been to file a withdrawal application under Section 12A of IBC, 2016. The contents of the Section 12A are reproduced below :

• “12A. Withdrawal of application admitted under Section 7, 9 or 10

• The Adjudicating Authority may allow the withdrawal of application admitted under section 7 or section 9 or section 10, on an application made by the applicant with the approval of ninety per cent voting share of the committee of creditors, in such manner as may be specified.”

 

# 20. The aforesaid sequence of events shows that the intention of the Operational Creditor i.e., M/s. Om Logistics Ltd., at whose instance the CIR Process was initiated, was not for the resolution of Insolvency. Instead, the Operational Creditor has used this forum for recovery and got the CIR process kickstarted with malicious intent for a purpose other than the resolution of insolvency of the Corporate Debtor, which is not permissible under the IBC 2016. As per the Code, if any person [as defined under Section 3(23) of IBC] initiates the Insolvency Resolution Process fraudulently or with malicious intent for any purpose other than for the resolution of the insolvency, or liquidation, such an act is punishable under Section 65 (1) of IBC 2016. Hence, before taking any action under Section 65(1) IBC 2016, we think it proper to issue a show cause notice, under Rule 59 of the National Company Law Tribunal Rules 2016, on the Operational Creditor M/s. Om Logistics Ltd. through its Directors as to why the penalty as stipulated under Section 65(1) of IBC, 2016 shall not be imposed on it. Ld. Registrar NCLT is directed to issue the show cause notice under Section 65(1) of IBC 2016 read with Rule 59 of the National Company Law Tribunal Rules, 2016 on M/s. Om Logistics Ltd. through its Directors giving them fifteen days’ time to explain and submit in writing as to why the penalty as stipulated under Section 65(1) of IBC, 2016 shall not be imposed on them. The Registry is directed to allot a Case No. for the proceedings for which the Show Cause Notice is being issued to the Operational Creditor under Section 65(1) of IBC, 2016. Registry/ Court Officer to list this matter on 01.09.2021.

 

# 21. Now, coming to the prayer of the Applicant, we are of the view that it is not the duty of the IRP to run after the Members of CoC to attend the meeting and pursue the CIR Process. In a similar situation, when the CoC was not interested in pursuing the CIR Process, this Adjudicating Authority has terminated the CIR Process in the matter of M/s. Surendra Steels Sales Vs. M/s. Immortal Buildcon Pvt. Ltd., (IB)-1152(ND)2019 dated on 07.01.2020. The relevant extract of the said order is reproduced below :

• “...The IRP has submitted that he has been meeting expenses from his own pocket. Pursuant to the publication, no other claim was received. It is submitted that the first meeting has been held while the second meeting has been postponed a few times, at the instances of the Operational Creditor/CoC on grounds of a possible settlement with the Corporate Debtor. As such there was no confirmation of the RP further steps take. There was no concession on the fees to be given, much less expenses to be met. No progress has been made in this case. This bench is apprised of the fact that the Operational Creditor has been in talks of settlement with the Corporate Debtor and, is therefore, not interested in taking any step to proceed with the CIR process. Under such circumstances with no other claimant and the sole member of the CoC not being interested in prosecuting the CIR process, it would be expedient to terminate the CIR process. In view of the above, the CIR process is hereby, terminated. The Corporate Debtor is released from the rigors of the moratorium and is permitted to function through its own board. We find that the Operational Creditor has not only failed to reimburse the expenses and fees of the Interim Resolution Professional, but has also wasted the time of this Bench after the Petition was duly admitted. Accordingly, while terminating the CIR process, a cost of Rs. 50,000/- is imposed on the Operational Creditor to be paid to the Prime Minister’s Relief Fund....”

 

# 22. In the circumstances, when the Applicant is unable to carry forward the CIR process for want of cooperation/participation from the sole member of CoC, we feel it appropriate to terminate the CIR process of the Corporate Debtor. In view of the above, by exercising our jurisdiction under Section 60(5) of IBC 2016 along with inherent power under Rule 11 of the NCLT Rules, 2016, we hereby terminate the CIR process of the Corporate Debtor with immediate effect and release the Corporate Debtor from the rigors of the CIRP and moratorium.

 

-----------------------------------

Blogger’s Comments; The sole operational creditor is in a very precarious situation. Instead of a non-cooperative attitude, as sole member of CoC, he could have moved resolution for liquidation of the CD in the very first meeting of the CoC, which could have saved him from penalties under Section 65(1) of IBC.

• # Section 65. Fraudulent or malicious initiation of proceedings. -

• (1) If, any person initiates the insolvency resolution process or liquidation proceedings fraudulently or with malicious intent for any purpose other than for the resolution of insolvency, or liquidation, as the case may be, the Adjudicating Authority may impose upon a such person a penalty which shall not be less than one lakh rupees, but may extend to one crore rupees.

 

----------------------------------------------------------

Orator Marketing Pvt. Ltd. vs Samtex Desinz Pvt. Ltd. - The definition of ‘Financial Debt’ in Section 5(8) of IBC does not expressly exclude an interest free loan.

SCI (26.07.2021) in Orator Marketing Pvt. Ltd. vs Samtex Desinz Pvt. Ltd. [Civil Appeal No. 2231 of 2021] held as under: 

• # 22. . . . .  ‘Financial debt’ means outstanding principal due in respect of a loan and would also include interest thereon, if any interest were payable thereon. If there is no interest payable on the loan, only the outstanding principal would qualify as a financial debt. Both NCLAT and NCLT have failed to notice clause (f) of Section 5(8), in terms whereof ‘financial debt’ includes any amount raised under any other transaction, having the commercial effect of borrowing.

• # 31. .. . it is reiterated that the trigger for initiation of the Corporate Insolvency Resolution Process by a Financial Creditor under Section 7 of the IBC is the occurrence of a default by the Corporate Debtor. ‘Default’ means non-payment of debt in whole or part when the debt has become due and payable and debt means a liability or obligation in respect of a claim which is due from any person and includes financial debt and operational debt. The definition of ‘debt’ is also expansive and the same includes inter alia financial debt. The definition of ‘Financial Debt’ in Section 5(8) of IBC does not expressly exclude an interest free loan. ‘Financial Debt’ would have to be construed to include interest free loans advanced to finance the business operations of a corporate body.

 

Excerpts of the order;

This appeal under Section 62 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the IBC) is against the final judgment and order of the National Company Law Appellate Tribunal (NCLAT), New Delhi in Company Application (AT)(Insolvency) No. 1064 of 2020 dated 08-03-2021, whereby the NCLAT has been pleased to dismiss the appeal of the Appellant and confirmed the order dated 23.10.2020 of the Adjudicating Authority, i.e., the National Company Law Tribunal (NCLT), New Delhi, dismissing the petition being CP(IB) No. 908/ND/2020, filed by the Appellant under Section 7 of the IBC with the finding that the Appellant is not a financial creditor of the Respondent. The Appellant is an assignee of the debt in question.

 

# 2. The short question involved in this Appeal is, whether a person who gives a term loan to a Corporate Person, free of interest, on account of its working capital requirements is not a Financial Creditor, and therefore, incompetent to initiate the Corporate Resolution Process under Section 7 of the IBC.

 

# 8. The judgment and order of the NCLAT, affirming the judgment and order of the Adjudicating Authority (NCLT) and dismissing the appeal is patently flawed. Both the NCLAT and NCLT have misconstrued the definition of ‘financial debt’ in Section 5(8) of the IBC, by reading the same in isolation and out of context.

 

# 9. In construing and/or interpreting any statutory provision, one must look into the legislative intent of the statute. The intention of the statute has to be found in the words used by the legislature itself. In case of doubt, it is always safe to look into the object and purpose of the statute or the reason and spirit behind it. Each word, phrase or sentence has to be construed in the light of the general purpose of the Act itself, as observed by Mukherjea, J. in Poppatlal Shah Vs. State of Madras [AIR 1953 SC 274], and a plethora of other judgments of this Court. To quote Krishna Iyer, J, the interpretative effort “must be illumined by the goal, though guided by the words”.

 

# 10. When a question arises as to the meaning of a certain provision in a statute, the provision has to be read in its context. The statute has to be read as a whole. The previous state of the law, the general scope and ambit of the statute and the mischief that it was intended to remedy are relevant factors.

 

# 14. In Pioneer Urban Land and Infrastructure Ltd. Vs. Union of India [(2019) 8 SCC 416], this Court speaking through Nariman, J. referred to several earlier judgments including Innoventive Industries Ltd. (supra) and Swiss Ribbons Pvt. Ltd. (supra) and held that even individuals who were debenture holders and fixed deposit holders could also be financial creditors who could initiate the Corporate Resolution Process.

 

# 15. The definition of ‘financial debt’ in Section 5(8) of the IBC cannot be read in isolation, without considering some other relevant definitions, particularly, the definition of ‘claim’ in Section 3(6), ‘corporate debtor’ in Section 3(8), ‘creditor’ in Section 3(10), ‘debt’ in section 3(11),  ‘default’ in Section 3(12), ‘financial creditor’ in Section 5(7) as also the provisions, inter alia, of Sections 6 and 7 of the IBC.

 

# 16. Under Section 6 of the IBC, a right accrues to a Financial Creditor, an Operational Creditor and the Corporate Debtor itself to initiate the Corporate Insolvency Resolution Process in respect of such Corporate Debtor, in the manner provided in Chapter II of the IBC.

 

# 18. The eligibility of a person to initiate the Corporate Insolvency Resolution Process, if questioned, has to be adjudicated upon consideration of the key words and expressions in the aforesaid Section and other related provisions.

 

# 21. The definition of ‘financial debt’ in Section 5(8) of the IBC has been quoted above. Section 5(8) defines ‘financial debt’ to mean “a debt along with interest if any which is disbursed against the consideration of the time value of money and includes money borrowed against the payment of interest, as per Section 5(8) (a) of the IBC. The definition of ‘financial debt’ in Section 5(8) includes the components of sub-clauses (a) to (i) of the said Section.

 

# 22. The NCLT and NCLAT have overlooked the words “if any” which could not have been intended to be otiose. ‘Financial debt’ means outstanding principal due in respect of a loan and would also include interest thereon, if any interest were payable thereon. If there is no interest payable on the loan, only the outstanding principal would qualify as a financial debt. Both NCLAT and NCLT have failed to notice clause (f) of Section 5(8), in terms whereof ‘financial debt’ includes any amount raised under any other transaction, having the commercial effect of borrowing.

 

# 23. Furthermore, sub-clauses (a) to (i) of Sub-section 8 of Section 5 of the IBC are apparently illustrative and not exhaustive. Legislature has the power to define a word in a statute. Such definition may either be restrictive or be extensive. Where the word is defined to include something, the definition is prima facie extensive.

 

# 24. In Dilworth v. Commissioner of Stamps [(1899) AC 99] the Privy Council, dealing with a definition which incorporated the word “include”, said, “The word ‘include’ is very generally used in interpretation clauses in order to enlarge the meaning; and when it is so used these words or phrases must be construed as comprehending, not only such things as they signify according to their natural import, but also those as things which the interpretation clause declares that they shall include. But the word ‘include’ is susceptible of another construction, which may become imperative, if the context of the Act is sufficient to show that it was not merely employed for the purpose of adding to the natural significance of the words or expressions defined. It may be equivalent to ‘mean and include’, and in that case it may afford an exhaustive explanation of the meaning which, for the purposes of the Act, must invariably be attached to these words or expressions.”

 

# 25. In dealing with the definition of ‘industry’ in the Industrial Disputes Act 1947 in the State of Bombay v. Hospital Mazdoor Sabha and Ors [AIR 1960 SC 610], a three-judge Bench of this Court speaking through Gajendragadkar, J. said “It is obvious that the words used in an inclusive definition denote extension and cannot be treated as restricted. Where we are dealing with an inclusive interpretation, it would be inappropriate to put a restrictive interpretation upon words of wider denotation.”

 

# 27. Of course, depending on the context in which the word ‘includes’ may have been used, and the objects and the scheme of the enactment as a whole, the expression ‘includes’ may have to be construed as restrictive and exhaustive.

 

# 29. In Jaypee Infratech Ltd. V. Axis Bank Ltd. [(2020) 8 SCC 401], the debts in question were in the form of third-party security, given by the Corporate Debtor to secure loans and advances obtained a third party from the Respondent Lender and, therefore, held not to be a financial debt within the meaning of Section 5(8) of the IBC. There was no occasion for this Court to consider the status of a term loan advanced to meet the working capital requirements of the Corporate Debtor, which did not carry interest. Having regard to the Aims, Objects and Scheme of the IBC, there is no discernible reason, why a term loan to meet the financial requirements of a Corporate Debtor for its operation, which obviously has the commercial effect of borrowing, should be excluded from the purview of a financial debt.

 

# 30. In Prabhudas Damodar Kotecha Vs. Manhabala Jeram Damodar [(2013) 15 SCC 358], this Court interpreting Section 41(1) of the Presidency Small Cause Courts Act, 1882, as amended by the Maharashtra Act XIX of 1976, observed that ‘the golden rule is that the words of a statute must prima facie be given their ordinary meaning when the language or phraseology employed by the legislature is precise and plain’. Since Section 41(1) does not specifically exclude a gratuitous licensee or make a distinction between a licensee with material consideration or without material consideration, the expression ‘licensee’ in Section 41(1) was held to also include a ‘gratuitous licensee’.

 

# 31. At the cost of repetition, it is reiterated that the trigger for initiation of the Corporate Insolvency Resolution Process by a Financial Creditor under Section 7 of the IBC is the occurrence of a default by the Corporate Debtor. ‘Default’ means non-payment of debt in whole or part when the debt has become due and payable and debt means a liability or obligation in respect of a claim which is due from any person and includes financial debt and operational debt. The definition of ‘debt’ is also expansive and the same includes inter alia financial debt. The definition of ‘Financial Debt’ in Section 5(8) of IBC does not expressly exclude an interest free loan. ‘Financial Debt’ would have to be construed to include interest free loans advanced to finance the business operations of a corporate body.

 

# 32. The appeal is, therefore, allowed. The judgment and order impugned is, accordingly, set aside. The order of the Adjudicating Authority, dismissing the petition of the Appellant under Section 7 of the IBC is also set aside. The petition under Section 7 stands revived and may be decided afresh, in accordance with law and in the light of the findings above. 

 

-------------------------------------------------

Gouri Prasad Goenka vs State Bank Of India - A wilful defaulter proceeding does not come within the contemplation of Section 14 of the IBC.

HC Calcutta (21.06.2021) in Gouri Prasad Goenka vs State Bank Of India [WPO No. 171 of 2021] held as under: 

• that a wilful defaulter proceeding is to disseminate credit information and not for recovery of property. As such, the moratorium or institution of a proceeding under Sections 14 and 7 of the IBC respectively does not debar a proceeding for declaration of wilful defaulter.

• That apart, the legal fiction of dual capacity of the petitioner, that is, as a guarantor on the one hand and as a promoter/whole-time director on the other, ought to be pierced in view of the petitioner being in charge of the management of the defaulting company at the relevant period. A person at the helm of affairs during the period when the alleged default was committed is squarely an officer who is in default, as provided in Section 2(60) of the Companies Act, 2013.

• However, whole-time directors and promoters who were in charge of the affairs of the defaulting company during the relevant period, when the default was committed, cannot be said to be absolved of their act of wilful default committed prior to final approval and acceptance of a resolution plan.

• The moratorium envisaged in Section 14 of the IBC creates no hindrance to a wilful defaulter declaration proceeding, which, as held by the Supreme Court in several judgments, is "to disseminate credit information pertaining to wilful defaulters for cautioning banks and financial institutions so as to ensure that further bank finance is not made available to them" and not for recovery of debts or assets of the corporate debtor, which could hamper the corporate resolution process.

• Thus, a wilful defaulter proceeding does not come within the contemplation of Section 14 of the IBC, which primarily pertains to legal actions to foreclose, recover or enforce security interest, or recovery of any property or the debt-in-question.

 

Excerpts of the order;

1. The writ petitioner has challenged two notices, respectively dated February 26, 2021 and March 2, 2021 both issued under the signature of Deputy General Manager of the State Bank of India (SBI). Both the letters are show-cause notices on similar grounds sent to the petitioner, the first in the capacity of guarantor of Duncans Industries Ltd. and the second in the capacity of Whole-time Director and Promoter (since suspended) of Duncans Industries Ltd.

 

2. The notices have been issued for the petitioner to show cause as to why the petitioner shall not be declared as wilful defaulter on the grounds as mentioned in the said notices. Submissions in writing were also sought in the show-cause notices from the petitioner. 2

 

3. Learned counsel for the petitioner argues that the first notice dated February 26, 2021, addressed to the petitioner as guarantor of Duncans, was without jurisdiction inasmuch as it fails to satisfy the requirements of Clause 2.6 of the Reserve Bank of India Master Circular on Wilful Defaulters dated July 1, 2016 (hereinafter referred to as "the RBI Master Circular"). It is argued that the show-cause notice contained no allegation to the effect that the petitioner, as guarantor, refused to comply with the demands made by the respondent-Bank, despite having sufficient means to do so, which is a pre-requisite for such notice to a guarantor.

 

4. Regarding the second notice, sent to the petitioner in the capacity of whole-time director and promoter, learned counsel argues that a petition was filed against the Duncans Industries Ltd. under Section 7 of the Insolvency and Bankruptcy code, 2016 (IBC), which resulted in commencement of a Corporate Insolvency Resolution Process (CIRP) of the company, which is still pending. An Interim Resolution Professional (IRP) was appointed over the company on and from March 5, 2020 and the power of its Board of Directors stood suspended in terms of Section 17(1)(b) of the IBC. A moratorium was also declared under Section 14 of the IBC prohibiting, inter alia, the institution or continuation of suits or proceedings against the corporate debtor- company. Hence, no proceeding could be instituted or continued for declaration of wilful defaulter in respect of the company itself, for which no notice was served on it.

 

5. Broadly arguing that the object and purpose of the IBC is resolution of corporate insolvency, learned counsel for the petitioner argues that, since no notice of wilful default was or could, in law, be served on the company itself, by the same logic, no such notice could also be served on its suspended promoter/director.

 

6. Learned counsel relies on Committee of Creditors of Essar Steel India Limited through Authorised signatory Vs. Satish Kumar Gupta and others, reported at (2020) 8 SCC 531, in support of the proposition that the resolution of corporate insolvency extinguishes the debts of the corporate debtor.

 

7. Learned counsel for the petitioner next cites the case of Gaurav Dalmia Vs. Reserve Bank of India, reported at 2020 SCC OnLine Cal 668, in support of the proposition that once the alleged default of the company itself is extinguished by virtue of a corporate resolution, the 'wilful defaulter' tag of all the promoters and directors in such capacity only (and not in their individual capacities) for the same default, had to go.

 

8. It is reiterated by counsel that, pending the resolution of corporate insolvency of the company, the suspended directors cannot be proceeded against prematurely for declaration of wilful defaulter.

 

9. Learned counsel for the petitioner next contends that a One-Time Settlement (OTS) proposal of the company had been accepted by the respondent-Bank and was sanctioned on September 30, 2019. It is admitted that after making some payments under the OTS, the company could not make further payment. However, the ground for stopping payment is, inter alia, cited to be admission of the petition under Section 7 of the IBC and imposition of moratorium under Section 14 of the IBC. Even thereafter, the Bank continued to extend the time for payment under the OTS, which could not be honoured in view of the subsistence of the aforesaid proceeding and moratorium.

 

10. The petitioner filed written notes of arguments, against which the respondent-SBI has also filed similar notes. Subsequently, a rejoinder written note was filed on behalf of the SBI in view of additional judgments having been relied on by the writ petitioner in its notes, to which a further  response in writing was given by the petitioner.

 

11. Learned counsel for the Bank argues that the writ petition is premature, being directed against show-cause notices, which do not create any cause of action or infringe any legal right of the petitioner.

 

12. In this context, learned counsel places reliance on State of Uttar Pradesh Vs. Brahm Dutt Sharma and Another, reported at (1987) 2 SCC 179 and Trade Tax Officer, Saharanpur Vs. Royal Trading Company, reported at (2005) 11 SCC 518. The ratio laid down in the said judgments is that there ought not to be interference by High Courts under Article 226 of the Constitution of India at the show cause stage.

 

13. In support of the argument that issuance of a show-cause notice does not infringe any right of the petitioner, since the Identification Committee (IC) can always drop the proceedings if the same is without merits after considering the representation of the alleged defaulter, learned counsel for the bank cites Secretary, Ministry of Defence and Ors. Vs. Prakash Chandra Mirdha, reported at (2012) 11 SCC 565.

 

14. Learned counsel for the respondent-Bank next cites Kejriwal Mining Pvt. Ltd and Ors. Vs. Allahabad bank and Anr., reported at 2020 SCC OnLine Cal 1250, to argue that the IC order does not attain finality until the same is scrutinised by the Review Committee (RC).

 

15. By placing reliance on Union Bank of India Vs. Sudhir Kumar Patodia (CAN 5340 of 2019 in MAT 787 of 2019) and Union of India Vs. Pawan Kumar Patodia (CAN 5342 of 2019 in MAT 788 of 2019), both unreported Division Bench judgments of this Court, learned counsel contends that the Division Bench clearly found that even if the wilful defaulter notice was issued under the signature of the Deputy General Manager but the decision and consideration was by the Wilful Defaulter Identification Committee, such fact does not invalidate the notice itself. Moreover, it was held that no factual consideration can be undertaken by the writ court at the show cause stage.

 

16. It is further contended by the respondent-Bank that even if the authority having the power to decide a particular issue wrongly or improperly issues a show-cause notice, corrigible by the same authority (IC) or a higher authority (RC), it would, at best, be an error within, and not without jurisdiction, since the authority is deemed to have jurisdiction to issue the same. In support of such proposition, learned counsel for the Bank places reliance on Official Trustee, West Bengal and Others Vs. Sachindra Nath Chatterjee and Another, reported at AIR 1969 SC 823.

 

17. By placing reliance on Kotak Mahindra Bank Limited Vs. Hindustan National Glass & Industries Limited and Ors., reported at (2013) 7 SCC 369, learned counsel for the Bank submits that a wilful defaulter proceeding is to disseminate credit information and not for recovery of property. As such, the moratorium or institution of a proceeding under Sections 14 and 7 of the IBC respectively does not debar a proceeding for declaration of wilful defaulter.

 

18. Learned counsel for the Bank relies on Manish Kumar Vs. Union of India and Another, reported at 2021 SCC OnLine SC 30, for the proposition that wrong-doers are not allowed to get away by virtue of Section 32A of the IBC (as recently amended), but the said section was inserted in order to attract resolution applicants.

 

19. As far as the additional judgments cited by the petitioner, the first of such is that of Ghanashyam Mishra and Sons Private Limited through the Authorized Signatory Vs. Edelweiss Asset Reconstruction Company Limited through the Director & Ors., reported at 2021 SCC OnLine SC 313, which approved the ratio laid down in Essar Steel (supra).

 

20. The petitioner also cites M/s Atlantic Projects Limited & Ors. Vs. The Allahabad Bank & Ors., reported at 2019 SCC OnLine Cal 611, to argue that a show-cause notice issued by the Deputy General Manager on behalf of the Identification Committee delegates the power of the IC, and, as such, is not valid.

 

21. Citing Whirlpool Corpn. Vs. Registrar of Trade Marks, reported at (1998) 1 SCC 1, the petitioner contends that issuance of show-cause notice itself without authority of law or jurisdiction justifies interference by the writ court and there is no question of alternative remedy being a bar.

 

22. Next relying on State Bank of India Vs. M/s Jah Developers Pvt. Ltd. & Ors, reported at (2019) 6 SCC 787, the petitioner argues that the revised Circular of the RBI was issued in public interest and ought to be read reasonably.

 

23. Such additional contentions are sought to be distinguished by learned counsel for the respondent in the context of the present case.

 

24. As far as the first question is concerned, it is ex facie clear from the materials-on-record that the writ petition is premature, since no right of the petitioner has been infringed by issuance of the show cause notice. The grounds for such notices were clearly enumerated in both the impugned notices and the petitioner was given sufficient opportunity as per the RBI Master Circular to give representation against the notice.

 

25. That apart, it is evident from the impugned notices that those were merely communications as per the "orders and directions of the Committee", taken after consideration of the conduct of the account and utilization of credit facilities by the defaulter company, which exercise was duly undertaken by the IC itself and not the Deputy General Manager.

 

26. The petitioner, in the said notices, was given opportunity to make submissions in writing within 15 days from the date of the notices and it was clearly mentioned that the IC would pass necessary orders thereupon. The entire preceding and proposed actions referred to in both the notices were taken by the IC, which had ample jurisdiction to do so under the RBI Master Circular. As such, the Deputy General Manager merely communicated the show-cause notices to the petitioner and did not intrude into the jurisdiction of the IC in any manner whatsoever. Thus, placing reliance on the dual Division Bench judgments of Union Bank of India (supra), it can safely be held that the issuance of the notice by the Deputy General Manager ipso facto did not invalidate the notice.

 

27. Since M/s Atlantic Projects (supra) relied on orders passed by a learned Single Judge in connection with the Union Bank of India matter, which were overruled by implication in the Division Bench judgments, passed in appeals against such orders of the learned Single Judge, the law laid down by the Division Bench has to be taken as the final pronouncement on the issue, which supports the above inference.

 

28. It is obvious that the writ court cannot go into a factual consideration of the merits of the allegations made in the notices at the show cause stage, particularly, since there is no flaw in the notices and the petitioner was given adequate opportunity to make written submissions in response thereof, thus adhering strictly to the letter and spirit of Clause 2.6 of the RBI Master Circular.

 

29. The first impugned notice dated February 26, 2021 cannot be held to be vitiated merely by absence of specific mention of prior refusal by the petitioner, as guarantor, to honour his liability in such capacity. That apart, the legal fiction of dual capacity of the petitioner, that is, as a guarantor on the one hand and as a promoter/whole-time director on the other, ought to be pierced in view of the petitioner being in charge of the management of the defaulting company at the relevant period. A person at the helm of affairs during the period when the alleged default was committed is squarely an officer who is in default, as provided in Section 2(60) of the Companies Act, 2013.

 

30. Mere apprehension of a future resolution of the corporate insolvency, by way of a prospective Resolution Plan which is yet to materialize, cannot absolve the petitioner, in the capacity of either guarantor or promoter/whole-time director, from the liability for such default.

 

31. The language of Section 14 of the IBC is very clear as to its object and purpose, which is to attract resolution applicants to make offers to facilitate corporate resolution of the insolvency. Initiation or continuation of recovery proceeding against the corporate debtor itself during such resolution would prove counter-productive to such purpose.

 

32. However, whole-time directors and promoters who were in charge of the affairs of the defaulting company during the relevant period, when the default was committed, cannot be said to be absolved of their act of wilful default committed prior to final approval and acceptance of a resolution plan.

 

33. Moreover, Section 14(3)(b) of the IBC clearly carves out an exception for a surety in a contract of guarantee to a corporate debtor from the purview of such moratorium, which governs the writ petitioner in the present case.

 

34. Unlike certain statutes, which provide for mandatory statutory pleadings (for example, pleadings as to readiness and willingness under Section 16 of the Specific Relief Act, 1963), the RBI Master Circular does not contemplate any mandatory averment in the show- cause notice regarding prior refusal to honour liability by the guarantor. Hence, the impugned notices would not be vitiated even if specific allegations to that effect were absent therein.

 

35. As regards satisfaction of the requirements of the Clauses of the RBI Master Circular on merits in a particular case, it depends upon a factual consideration, first by the IC and then the RC, for the 'wilful defaulter' label to be attached finally, and cannot be adjudicated prematurely by the writ court at the stage of show cause.

 

36. The moratorium envisaged in Section 14 of the IBC creates no hindrance to a wilful defaulter declaration proceeding, which, as held by the Supreme Court in several judgments, is "to disseminate credit information pertaining to wilful defaulters for cautioning banks and financial institutions so as to ensure that further bank finance is not made available to them" and not for recovery of debts or assets of the corporate debtor, which could hamper the corporate resolution process.

 

37. Thus, a wilful defaulter proceeding does not come within the contemplation of Section 14 of the IBC, which primarily pertains to legal actions to foreclose, recover or enforce security interest, or recovery of any property or the debt-in-question.

 

38. An act of wilful default, if committed by a promoter/whole-time director/guarantor of the corporate debtor who was in charge at the relevant period, is not obliterated automatically by the filing of an application under Section 7 of the IBC.

 

39. In Gaurav Dalmia (supra) this court considered the question as to the effect of approval of a resolution plan. If such a plan is approved and thereafter a show-cause notice is issued, the factual scenario would be entirely different from the present case, where no such resolution plan has been approved as yet and the CIRP is only at an initial stage. The declaration of a whole-time director/promoter or a guarantor as wilful defaulter cannot adversely affect the resolution process in any manner whatsoever. Rather, the purpose of such declaration of wilful defaulter, as indicated in the RBI Master Circular itself, is to disseminate credit information for cautioning banks and financial institutions and has no nexus with recovery of the debt.

 

40. Moreover, Section 32A had not been inserted by amendment in the IBC on the date when hearing was concluded in the matter of Gaurav Dalmia (supra). Section 32A, which has been held to be intra vires by the Supreme Court, clearly stipulates that the Corporate Debtor shall not be prosecuted for an offence committed prior to commencement of CIRP once a Resolution Plan has been approved by the Adjudicating Authority. The said provision, according to the Supreme Court, was important to attract bidders who must also be granted protection from any misdeeds of the past since they had nothing to do with it. Hence, the purpose of introduction of Section 32A clearly indicates that the officers of the defaulting company in charge of its management and affairs at the relevant juncture are not absolved thereby. Such provision, which is now in force, has, thus, a relevant bearing on the present adjudication.

 

41. Similarly, an OTS for settlement of the debt, ipso facto, cannot erase the wilful default of a promoter/director or guarantor, if committed. Moreover, in the present case, the OTS had not reached culmination in view of the instalments pursuant thereto having not been cleared by the petitioner, for whatever reason. As such, there was no concluded OTS in the present case at all.

 

42. Even Essar Steel (supra), in paragraph no. 105 thereof, stipulates that the guarantor cannot escape payment, as the Resolution Plan itself may so provide, although a successful resolution applicant starts on a fresh slate after such resolution, as indicated in paragraph no.107 of the said report. 

 

43. In view of the above discussions, no fault can be found with the issuance of the impugned show cause notices to justify judicial interference therewith. Accordingly, the writ petition fails.

 

44. WPO 171 of 2021 is dismissed on contest, without any order as to costs. However, it is made clear that the merits of the wilful defaulter declaration proceeding against the petitioner have not been gone into by this Court and the observations made in this order are all tentative, restricted to the limited ambit of deciding the validity and legality of the impugned show-cause notices. Such observations will, thus, not prejudice the rights and contentions of either of the parties in the wilful defaulter declaration proceeding.

 

45. In view of the instant writ petition being sub judice till passing of this order due to no fault of the writ petitioner, the time-limit for filing of representation by the petitioner by way of written submissions, in response to the impugned show-cause notices, is extended for the ends of justice for a further period of 15 days from this date. However, such time-limit is peremptory and in the event the same is not adhered to strictly by the writ petitioner, the respondent will be free to take subsequent steps in respect of the wilful declaration proceeding in accordance with law.

 

-------------------------------------------------