Promoter-Directors Of Resolution Applicant, Who Are Also Guarantors Of Company, Not Entitled To Immunity Blanket Of IBC S.14: Calcutta HC [Read Order]

The Calcutta High Court has ruled that section 29-A or 31 of the IBC would not provide a shield against the operation of its section 14(3)(b) and that the promoter-directors of the Resolution Applicant-Company, who are also guarantors of the Company, would not come under the immunity-blanket of Section 14.The Court also iterated that the 2015 RBI Master Circular on Wilful Defaulters does not mandate that the Show Cause Notice must disclose the basis of the satisfaction of the concerned Committee or the conclusion arrived at from the evidence before it that there has been a "wilful default".The challenge in the writ petition before Justice Moushumi Bhattacharya was to a notice issued by the respondent State Bank of India to the petitioners by which the petitioners have been called upon to show cause and make submissions in writing within 30 days from the date of receipt of the notice as to why their names should not be included in the list of wilful defaulters as per the Reserve Bank of India (RBI) Guidelines. The Show Cause Notice dated 14th November, 2019 was followed by correspondence between the parties culminating in a notice for personal hearing dated 6th August, 2020 by which the petitioners were called upon to personally appear before the WilfulDefaulter Identification Committee on 24th August, 2020 at a specific time. Both these notices had been challenged in this writ petition and the petitioners sought cancellation of these notices.The Single Judge appreciated that the scheme framed by the RBI was to identify events of wilful default by borrowers where the particular unit has defaulted in its payment obligations to the lender despite having a capacity to pay or has diverted the borrowed funds for some other purpose other than the specific purpose for which the funds were made available. The scheme evolved a mechanism of identifying such defaults by various methods of monitoring and prevention."The first point in this writ petition is whether the Company and the petitioners can be subjected to proceedings for identification of Wilful Defaulters under the RBI Master Circular, 2015 in the face of the ongoing Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016. Section 14 of the IBC is relevant. Paragraph 1 of the writ petition describes the petitioners as the erstwhile directors as well as the erstwhile promoters and guarantors of the Company, Mohan Motor Udyog Private Limited, which is presently undergoing CIRP by virtue of an order dated 17th March, 2020 passed by the NCLT, Kolkata Bench. By the said order, Moratorium was declared for the purposes as referred to under Section 14 of the IBC. The order of Moratorium is to remain effective from the date of admission till the completion of the CIRP", recorded the bench.The bench appreciated that it is clear from section 14(3)(b) that the prohibition on institution or continuation of suits and other proceedings against the corporate debtor do not extend to a surety. The bench noted that Section 29-A (Persons not eligible to be Resolution Applicant) lists the categories of persons who are not eligible to submit a resolution plan and includes a wilful defaulter under the RBI guidelines (clause (b)) as well as "a connected person" enumerated under clause (j) including a promoter of the resolution applicant (the Company in this case).Against these provisions, the case sought to be made out on behalf of the petitioners was that the petitioners would altogether be excluded from participating in the resolution process despite being inextricably linked to the fate of the corporate debtor. In other words, the petitioners would suffer a double-whammy as it were and be left to fend for themselves even when a moratorium is declared under section 14 while being deprived of the fruits of a successful resolution process."However attractive this argument may be in the context of the apparent unfair treatment meted out to promoters of a corporate debtor, section 128 of the Indian Contract Act, 1872 must be kept in mind where the liability of the surety is co-extensive with that of the principal debtor unless the contract provides to the contrary", reflected the bench, ruling that the argument that section 29-A or 31 would provide a shield against the operation of section 14(3)(b) and that the petitioners would come under the immunity-blanket of section 14 is contrary to the law governing insolvency resolution process and the RBI guidelines for dealing with wilful defaults of corporate entities.Moving on to the second issue, the Court noted that the second issue is validity of the impugned Show-Cause Notice on the ground that the said notice does not comply with the RBI guidelines relating to wilful defaults by an entity as expressed in the Master Circular which is binding on the respondent Bank. According to the petitioner, the impugned show-cause notice belied not only the formation and constitution of the "Committee" under...

Promoter-Directors Of Resolution Applicant, Who Are Also Guarantors Of Company, Not Entitled To Immunity Blanket Of IBC S.14: Calcutta HC [Read Order]

Mehal Jain

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