2021 (6) TMI 722 - HC - Insolvency and Bankruptcy

Court Upholds Show-Cause Notices, Grants Extension for Response

The court dismissed the writ petition challenging show-cause notices, affirming their validity and jurisdiction. The court allowed the petitioner ... Wilful defaulter declaration - RBI Master Circular on Wilful Defaulters Clause 2.6 - Jurisdiction to issue show-cause notices - Power of Identification Committee and Review Committee - Moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC) - Corporate Insolvency Resolution Process (CIRP) - Liability of promoters, whole-time directors and guarantors during CIRP - Section 14(3)(b) IBC - exception for surety - Section 2(60) Companies Act, 2013 - officer in default - Effect of One-Time Settlement (OTS) and pending resolution on wilful default tag - Section 32A IBC - protection post-approval of resolution planJurisdiction to issue show-cause notices - Power of Identification Committee and Review Committee - RBI Master Circular on Wilful Defaulters Clause 2.6 - Validity of the impugned show-cause notices and maintainability of writ petition at the show-cause stage - HELD THAT: - The writ petition was held premature because issuance of show-cause notices in accordance with the RBI Master Circular does not, by itself, infringe any legal right of the petitioner and is amenable to consideration first by the Identification Committee (IC) and thereafter by the Review Committee (RC). The impugned notices were communications of the IC's orders and provided the petitioner an opportunity to make written submissions within the time stipulated by the Master Circular. The mere fact that the notices were signed by the Deputy General Manager as communicator did not invalidate them where the IC had jurisdiction and had undertaken the requisite exercise; such signature merely conveyed the IC's decision. The writ court must not undertake factual adjudication of merits at the show-cause stage where procedure under the Master Circular has been followed. [Paras 24, 25, 26, 28, 35]Writ petition dismissed as premature; impugned show-cause notices upheld as not vitiated for being issued in accordance with the RBI Master Circular and communicated by the Deputy General Manager on behalf of the IC.Liability of promoters, whole-time directors and guarantors during CIRP - Moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC) - Corporate Insolvency Resolution Process (CIRP) - Section 14(3)(b) IBC - exception for surety - Section 32A IBC - protection post-approval of resolution plan - Whether moratorium under Section 14 IBC or pendency of CIRP absolves suspended promoters/whole-time directors or guarantors from proceedings for declaration as wilful defaulter - HELD THAT: - The court held that the moratorium under Section 14 IBC is aimed at facilitating resolution by restraining recovery actions against the corporate debtor and does not, in principle, bar proceedings for declaration of wilful defaulter, which are intended to disseminate credit information rather than effect recovery. Officers who were in charge of management when the default occurred are not absolved of wilful default by mere initiation of CIRP; their acts prior to approval of any resolution plan remain examinable. Further, Section 14(3)(b) IBC expressly carves out an exception for a surety in a contract of guarantee from the moratorium, making such persons amenable to proceedings. The protective effect of Section 32A (which operates after approval of a resolution plan) and factual scenarios where a resolution plan has been approved were distinguished: if and when a resolution plan is approved, consequences may differ, but no such plan exists in the present case and therefore the pendency of CIRP does not automatically erase alleged wilful default. [Paras 32, 33, 36, 38, 40]Moratorium and pendency of CIRP do not preclude initiation of wilful defaulter proceedings against promoters, whole-time directors or guarantors who were in charge at the relevant time; exception for surety under Section 14(3)(b) noted, and effect of an approved resolution plan distinguished.Wilful defaulter declaration - Section 2(60) Companies Act, 2013 - officer in default - Effect of One-Time Settlement (OTS) and pending resolution on wilful default tag - Whether absence of specific allegation in the notice that a guarantor refused to honour liabilities despite having means vitiates a wilful defaulter show-cause notice; and whether an OTS absolves alleged wilful default - HELD THAT: - The court found that the RBI Master Circular does not mandate a specific averment in the show-cause notice that a guarantor had refused to honour obligations despite sufficient means; absence of such wording does not vitiate the notice. Where the petitioner occupied dual capacities (guarantor and promoter/director) and was in charge of management during the period of default, the corporate veil may be pierced and liability as an officer in default under corporate law principles may attach. An OTS that has not been consummated cannot erase wilful default; incomplete or unperformed settlement instalments do not amount to a concluded settlement that would obliterate the alleged default. [Paras 29, 34, 41, 42]Show-cause notice to guarantor not invalidated for lack of explicit averment regarding prior refusal; incomplete OTS does not erase alleged wilful default and persons in management are liable as officers in default where applicable.Jurisdiction to issue show-cause notices - Power of Identification Committee and Review Committee - Whether the fact that Identification Committee's decision is subject to review by the Review Committee precludes issuance of a show-cause notice or renders it non-justiciable at the show-cause stage - HELD THAT: - The court observed that issuance of a show-cause notice is an interlocutory step in a process where the IC initially considers facts and the RC may thereafter scrutinise the IC's decision; the IC may also drop proceedings. The existence of further internal scrutiny (RC) or the possibility of the IC/RC revisiting the matter does not render issuance of a notice invalid nor does it preclude judicial review only at the show-cause stage. Final adjudication on satisfaction of the Master Circular's clauses involves factual consideration by IC/RC and cannot be undertaken prematurely by the writ court. [Paras 25, 26, 28, 35]Existence of IC/RC review does not invalidate the show-cause notices; factual satisfaction of the Master Circular's requirements is for IC/RC and not for premature interference by the writ court.Final Conclusion: The writ petition challenging the two show-cause notices is dismissed as premature; the impugned notices are not vitiated on the grounds urged, the petitioner is granted a peremptory further period of 15 days to file written representations, and the court's observations are tentative and confined to the limited issue of validity of the notices without prejudicing the merits of the wilful defaulter proceedings. Issues Involved:1. Jurisdiction and validity of show-cause notices.2. Applicability of Insolvency and Bankruptcy Code (IBC) moratorium.3. Impact of One-Time Settlement (OTS) on wilful defaulter proceedings.4. Prematurity of the writ petition.Issue-wise Detailed Analysis:1. Jurisdiction and Validity of Show-Cause Notices:The petitioner challenged two show-cause notices dated February 26, 2021, and March 2, 2021, issued by the Deputy General Manager of the State Bank of India (SBI). The petitioner argued that the first notice, addressed to him as a guarantor, lacked jurisdiction as it did not satisfy Clause 2.6 of the RBI Master Circular on Wilful Defaulters. The court found that the notices were issued by the Deputy General Manager as per the orders and directions of the Identification Committee (IC), which had ample jurisdiction under the RBI Master Circular. The court held that the issuance of the notice by the Deputy General Manager did not invalidate it. The court also noted that the petitioner was given an opportunity to make submissions in writing, adhering to the RBI Master Circular.2. Applicability of Insolvency and Bankruptcy Code (IBC) Moratorium:The petitioner contended that since Duncans Industries Ltd. was undergoing Corporate Insolvency Resolution Process (CIRP) under Section 7 of the IBC, no proceeding for declaration of wilful defaulter could be instituted or continued. The court held that the moratorium under Section 14 of the IBC does not bar wilful defaulter proceedings, as these are meant to disseminate credit information and not for recovery of debts. The court further noted that Section 14(3)(b) of the IBC exempts sureties in a contract of guarantee from the moratorium.3. Impact of One-Time Settlement (OTS) on Wilful Defaulter Proceedings:The petitioner argued that an OTS proposal had been accepted by the bank, and payments were made under it until the CIRP commenced. The court found that the OTS did not reach culmination as the instalments were not cleared, and thus, there was no concluded OTS. The court held that an OTS, even if concluded, cannot erase the wilful default of a promoter/director or guarantor.4. Prematurity of the Writ Petition:The court found the writ petition premature as it was directed against show-cause notices, which do not create any cause of action or infringe any legal right of the petitioner. The court relied on precedents, including State of Uttar Pradesh Vs. Brahm Dutt Sharma and Trade Tax Officer, Saharanpur Vs. Royal Trading Company, which held that interference by High Courts at the show-cause stage is not warranted. The court emphasized that the petitioner was given adequate opportunity to respond to the notices, and the IC would pass necessary orders based on the submissions.Conclusion:The court dismissed the writ petition, holding that the show-cause notices were valid and within jurisdiction. The court extended the time for the petitioner to file written submissions in response to the notices by 15 days. The court clarified that its observations were tentative and would not prejudice the rights and contentions of either party in the wilful defaulter declaration proceeding.