2020 (9) TMI 844 - HC - Insolvency and Bankruptcy

Court rules moratorium under IBC does not protect guarantors. Show-Cause Notice valid. Petition denied.

Sandip Kumar Bajaj & Anr. Versus State Bank of India & Anr.

The court dismissed the writ petition, ruling that the moratorium under Section 14 of the IBC does not shield the petitioners as guarantors from ... Validity of SCN - inclusion of name of petitioners in the list of wilful defaulters as per the Reserve Bank of India (RBI) Guidelines - 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 CIRP under the Insolvency and Bankruptcy Code, 2016? - HELD THAT:- 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. Validity of the impugned Show-Cause Notice - Challenge made 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 - HELD 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 is that the petitioners would altogether be excluded from participating in the resolution process despite being inextricably linked to the fate of the corporate debtor. Whether the post of Deputy Managing Director (mentioned as the head of the ‘appropriate committee’ in the impugned notice) is equivalent to that of the Executive Director (under clause 3(a)) of the Master Circular? - HELD THAT:- This court also takes judicial notice of the fact that there are presently no Executive Directors on the Board of the State Bank of India which is comprised of a Chairman, Managing Directors and Directors. As on 7th September, 2020, the Board of Directors of SBI comprises of a Chairman, 2 Managing Directors, 2 Shareholder Directors and 2 Nominee Directors. The State Bank of India Act of 1955 also does not contemplate a post of Executive Director. Therefore, the first contention with regard to an improperly constituted Committee under a Deputy Managing Director instead of the recommended Executive Director, fails. Allegation that the appointed Committee not applying its mind or making such non-application evident in the Show Cause Notice thus rendering it vulnerable - It is necessary for a Show Cause Notice to disclose the basis of the conclusion arrived at by the Committee under clause 3(a)? - If yes, how can such application of mind/formation of opinion be made apparent on the face of the Show Cause Notice? - HELD THAT:- In the facts of the present case, the contention of the petitioners of the impugned Notice being devoid of any indication of application of mind by the Committee is not acceptable on two grounds. First, the Master Circular does not require it and more important, the Annexure to the Show Cause Notice coupled with the Resolution of the Committee dated 17th June, 2019 provides sufficient material (and particulars specific to the Company of which the petitioners are guarantors) to satisfy that the Committee had indeed fulfilled its mandate under both sub-clauses (a) and (b) of clause 3. One of the most obvious ways in which working of the mind or some sort of deliberation by the persons concerned can be shown is by articulation of the findings arrived at with reference to a meeting (including of minds) where such deliberation palpably took place and the findings being relatable to the materials/evidence before the Committee entrusted with the duty to sift through the evidence to come to the conclusions. The conduct of the petitioners as would appear from the facts of the present case would further lend credence to the ‘prejudice’ point as considered in Pawan Kumar Patodia; or in other words, whether the petitioners have suffered any prejudice by issuance of the impugned Show Cause Notice. The scheme of clause 3 of the Master Circular (Mechanism for Identification of Wilful Defaulters) contemplates a two-tier system of identification where the decision of the first Committee under clause 3(b) would be subject to review by a second Committee under clause 3(c). Hence, no finality is attached to the decision of the first/identification Committee and more so at the stage of a Show-Cause Notice. Further, the Petitioners in this case received the impugned show-cause notice dated 14th November, 2019 together with the Annexure on 18th November, 2019. The date of receipt would appear from the reply of the petitioners dated 19th December, 2019 to the Show-Cause Notice. The challenge to the impugned Show Cause Notice dated 14th November, 2020 and the Notice dated 6th August, 2020, fails - Petition dismissed. Issues Involved:1. Whether the moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC) prohibits proceedings for identification of wilful defaulters.2. Validity of the impugned Show-Cause Notice under the RBI Master Circular on Wilful Defaulters, 2015.Issue-Wise Analysis:1. Moratorium under Section 14 of IBC:The petitioners argued that due to the moratorium declared under Section 14 of the IBC, proceedings under the RBI Master Circular for declaring them as wilful defaulters should be stayed. The moratorium was declared by the National Company Law Tribunal (NCLT) on 17th March, 2020. Section 14(1) of the IBC prohibits the institution or continuation of suits or proceedings against the corporate debtor. However, Section 14(3)(b) clarifies that this prohibition does not extend to a surety in a contract of guarantee to a corporate debtor. The court noted that the petitioners, being erstwhile guarantors, do not fall under the moratorium's protective umbrella. Additionally, Section 128 of the Indian Contract Act, 1872, which states that the liability of the surety is co-extensive with that of the principal debtor, was emphasized. Therefore, the argument that the moratorium under Section 14 of the IBC would shield the petitioners from the proceedings was rejected.2. Validity of the Show-Cause Notice:The petitioners contended that the Show-Cause Notice dated 14th November, 2019, and the notice of hearing dated 6th August, 2020, were invalid as they were not issued by the committee empowered under the RBI Master Circular. Specifically, they argued that the notices failed to disclose the particulars of the 'appropriate committee' and the evidence of wilful default. The court examined Clause 3 of the Master Circular, which outlines the mechanism for identifying wilful defaulters. Clause 3(a) requires the evidence of wilful default to be examined by a committee headed by an Executive Director or equivalent and consisting of two other senior officers. The court found that the Deputy Managing Director, who issued the notice, is equivalent to the Executive Director, satisfying Clause 3(a). The court also noted that the Show-Cause Notice included an annexure detailing the 'Justification/Reasons for declaring the Borrower as Wilful Defaulter,' fulfilling the requirement of Clause 3(b).The court referred to the Division Bench judgment in Union Bank of India versus Sudhir Kumar Patodia/Pawan Kumar Patodia, which held that delegation of the task of issuing a Show-Cause Notice does not invalidate the proceedings. The court also considered the petitioners' conduct, noting that they were initially not averse to appearing before the concerned committee for a personal hearing.Conclusion:The court dismissed the writ petition, holding that the moratorium under Section 14 of the IBC does not protect the petitioners as guarantors from proceedings under the RBI Master Circular. The court also upheld the validity of the Show-Cause Notice, finding that it complied with the requirements of the Master Circular. The petitioners were not entitled to the reliefs claimed, and the case was dismissed without any order as to costs.