Cal HC rules Moratorium u/s 14 IBC does not bar wilful defaulter proceedings against directors of CD

A Single Judge Bench of the Calcutta High Court comprising Justice Sabyasachi Bhattacharyya in the matter of Ayan Mallick and Another v. State Bank of India and Others, REED 2021 Cal 03549, held that in proceedings for a declaration of Wilful Defaulter under RBI guidelines, the Directors of the Corporate Debtor that is undergoing Corporate Insolvency Resolution Process (CIRP) cannot claim immunity under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC). Further, the Calcutta High Court observed that in the said proceedings, the corporate veil has to be lifted to examine the Directors' role in the alleged actions of the Corporate Debtor-company, which lead to the proposed declaration of Wilful Defaulter. The salient facts of the case, the issues involved, and the judgment pronounced by the Calcutta High Court have been discussed below.

BACKGROUND

The petitioners are the erstwhile Directors of M/s. A. K. Power Industries Private Limited (AKPIL), which took a loan from Respondent-State Bank of India (SBI) and subsequently failed to repay the same. At the behest of the SBI, a forensic audit was carried out into the affairs of the AKPIL in April 2019, and thereafter, on 10 May 2019, SBI declared the account of AKPIL as a ‘No Fraud Account’. Subsequently, AKPIL forwarded a One-Time Settlement proposal, which was accepted by SBI.

In the interregnum, CIRP was commenced in respect of the AKPIL by an order dated 1 October 2019 passed by the National Company Law Tribunal, Kolkata Bench. During the pendency of the CIRP, SBI issued a notice on 4 November 2019 calling upon the company and the petitioners to show-cause notice as to why their names should not be included in the list of Wilful Defaulters as per the relevant Reserve Bank of India (RBI) guidelines. The petitioners replied to such notice. Subsequently, several letters were issued to the petitioners as well as the AKPIL asking them to appear before the Wilful Defaulter Identification Committee for a personal hearing. In the present writ petition, the petitioners challenged one such notice dated 6 August 2020.

ISSUES

The issues that arose for adjudication before the Calcutta High Court were as under:

1. Whether a company can be categorized as a Wilful defaulter after the commencement of CIRP in light of the moratorium under Section 14 of the IBC?

2. When the concerned company is the subject matter of CIRP, can its directors be prosecuted by the ‘Wilful Defaulter Identification Committee’ established as per the relevant RBI guidelines?

ANALYSIS

On the first issue, the Calcutta High Court observed that the moratorium stipulated in Section 14 of the IBC has to be read in the context of the scope of operation of the resolution professional. Read in conjunction, the provisions of the IBC indicate that Section 14(1), Clauses (a), and (c) contemplate an arrest of all proceedings against Corporate Debtor not only before courts of law and tribunals but before other authorities as well. Further, the Calcutta High Court noted that, although, the declaration of wilful defaulter dealt with in the RBI guidelines is not an action to foreclose, recover or enforce any security interest created by the corporate debtor, the effect of such a declaration is to interdict and conflict with the functioning of the resolution professional within the scope of the IBC. Hence, it concluded that the continuance of proceedings for a declaration of Wilful Defaulter in respect of the borrowing company must be construed to fall within the purview of the moratorium provided in Section 14 of the IBC.

As regards the second issue, the Cal HC noted that Section 17(1) of IBC clearly provides that the management of the affairs of the Corporate Debtor shall vest in the interim resolution professional and the powers of the Board of Directors of the said debtor shall stand suspended and be exercised by the interim resolution professional. The scope of functioning of the interim resolution professionals and resolution professionals is clearly laid down in sections 17, 18, 20, 23, and 25 of the IBC. It is clear from the said provisions that the Directors are shut out from having any role in the functioning of the Corporate Debtor from the inception of the CIRP. Hence, the steps taken against the Directors by the ‘Wilful Defaulter Identification Committee’ such as publication of their names in the list of Wilful Defaulters do not affect the CIRP at all. Thus, the petitioners cannot claim immunity under Section 14 of the IBC, which is not covered by the moratorium contemplated therein, although the company itself is covered by such a moratorium for the reasons discussed above. Accordingly, this writ petition filed by the petitioners was dismissed by the Calcutta High Court.