2019 (8) TMI 531 - HC - Insolvency and Bankruptcy

Dismissal of Contempt Petition due to Financial Distress

The court dismissed the contempt petition, holding that the respondents were not guilty of willful disobedience. The court found that the non-payment was ... Civil contempt - willful disobedience - compromise decree/consent decree as basis for contempt - execution jurisdiction versus contempt jurisdiction - moratorium under Section 14 of the Insolvency and Bankruptcy Code and its impact on satisfaction of decrees - lifting the corporate veil in contempt proceedingsCompromise decree/consent decree as basis for contempt - execution jurisdiction versus contempt jurisdiction - Whether a compromise decree passed on consent without an independent undertaking to the Court can be the subject matter of contempt proceedings and whether the contempt jurisdiction is ousted by availability of execution remedy. - HELD THAT: - The Court examined the distinction between non compliance of a compromise/consent decree and breach of a categorical undertaking to the Court. While Babu Ram Gupta was noted for drawing a distinction, the Court followed the Apex Court's later exposition in Rama Narang to hold that a consent decree is a decree and, when violated wilfully, can attract contempt jurisdiction. Availability of execution does not per se oust the Court's power to proceed under the Contempt of Courts Act; contempt jurisdiction may be exercised where the violation warrants punishment under the Act. On the preliminary objection, however, the Court rejected the respondents' contention that contempt jurisdiction is unavailable merely because execution is an alternative remedy and held that maintainability must be considered by reference to whether the violation is of a nature constituting civil contempt. [Paras 35, 36, 37]Preliminary objection rejected: contempt proceedings are not precluded merely because the decree is by consent or because execution is an available remedy; maintainability depends on whether there is willful disobedience.Civil contempt - willful disobedience - moratorium under Section 14 of the Insolvency and Bankruptcy Code and its impact on satisfaction of decrees - lifting the corporate veil in contempt proceedings - Whether the respondents committed civil contempt by willfully disobeying the compromise decree in circumstances where insolvency proceedings (appointment of IRP and moratorium) intervened, and whether directors/officers can be held liable by lifting the corporate veil. - HELD THAT: - Applying settled authorities, the Court emphasised that civil contempt requires a finding of wilful and intentional disobedience. Evidence showed initial part payment followed by financial collapse, recall of major financing, admission of insolvency proceedings, appointment of an IRP and pending liquidation. Those facts were undisputed and established that the company's management had been superseded and a moratorium operated, preventing respondents from giving preferential satisfaction to one operational creditor. The Court held that compelling circumstances arising from the insolvency process and the statutory prohibition on preferential payments precluded a finding of wilful disobedience. The fact of a later demand draft payment by certain individuals from personal funds in a separate criminal/compounding context did not establish that the company or its directors wilfully disobeyed the decree. Consequently, the judgments relied upon for piercing the corporate veil were held inapplicable to the present facts where compliance was prevented by operation of law and insolvency proceedings. [Paras 50, 51, 54, 57, 58]Respondents not guilty of civil contempt; petition dismissed as there is no proved willful disobedience and insolvency proceedings/moratorium prevent preferential satisfaction of the decree.Final Conclusion: The contempt petition was held maintainable in principle, but on the merits dismissed: there was no willful disobedience of the compromise decree because insolvency proceedings, appointment of an IRP and the statutory moratorium prevented preferential payment, and therefore respondents cannot be punished for civil contempt; the petition is dismissed and the contempt notice discharged. Issues Involved:1. Condonation of delay in filing rejoinder and reply.2. Alleged willful disobedience of an undertaking and compromise decree.3. Maintainability of contempt proceedings in the context of insolvency proceedings.4. Analysis of 'willful disobedience' in the context of contempt of court.Detailed Analysis:1. Condonation of Delay:- C.M. Appl. No. 3887/2019: The court allowed the application for condonation of a 9-day delay in filing the rejoinder.- C.M. Appl. No. 19227/2019: The court allowed the application for condonation of a 34-day delay in filing the reply.2. Alleged Willful Disobedience:- Contempt Petition: The petitioner filed a contempt petition under Sections 10 and 12 of the Contempt of Courts Act, 1961, read with Article 215 of the Constitution of India, against the respondents for willful disobedience of an undertaking dated 21.04.2017 and a compromise decree dated 10.07.2017.- Settlement Terms: The settlement included payment of Rs. 10,19,763 in five monthly installments. Default in payment would attract 12% interest per annum on the defaulted sum.- Default and Insolvency: Respondent No. 7 defaulted on the payments, leading to dishonored cheques. Subsequently, an Interim Resolution Professional (IRP) was appointed by the National Company Law Tribunal (NCLT) for insolvency proceedings.3. Maintainability of Contempt Proceedings:- Petitioner's Argument: The petitioner argued that the moratorium under Section 14 of the Insolvency and Bankruptcy Code (IBC) does not affect contempt proceedings. The petitioner cited several judgments to support the argument that the corporate veil can be lifted to hold directors/officers responsible for contempt.- Respondents' Argument: The respondents contended that there was no willful disobedience and that the company’s insolvency prevented compliance with the decree. They argued that the contempt petition is not maintainable as it seeks execution of the decree, which should be done through IBC proceedings.- Court's Analysis: The court referred to the Supreme Court’s decision in Rama Narang vs. Ramesh Narang, which held that contempt proceedings can be initiated for non-compliance with a compromise decree. The court rejected the preliminary objection regarding the non-maintainability of the petition.4. Analysis of 'Willful Disobedience':- Legal Standard: The court emphasized that for an act to constitute civil contempt, it must be a willful disobedience of a court order or decree. The term 'willful' implies a deliberate and intentional act.- Respondents' Defense: The respondents argued that the non-payment was due to the company's financial distress and subsequent insolvency proceedings, not willful disobedience. They highlighted that the IRP was appointed, and liquidation proceedings were initiated, which legally prevented them from making payments.- Court's Conclusion: The court found that the respondents' inability to pay was due to compelling circumstances arising from insolvency proceedings, not willful disobedience. The court held that the respondents could not be punished for contempt as the disobedience was not willful or intentional.Judgment:- Final Decision: The court dismissed the contempt petition and discharged the notice of contempt, concluding that the respondents were not guilty of willful disobedience. The court noted that if the company is revived or a fresh cause of action arises, the petitioner may seek appropriate remedies in law.