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 ... Infringement of the rights of petitioner or not - utilization of credit facilities by the defaulter company - wilful defaulter or not - HELD THAT:- It is obvious that the writ court cannot go into a factual consideration of the merits of the allegations made in the notices at the show cause stage, particularly, since there is no flaw in the notices and the petitioner was given adequate opportunity to make written submissions in response thereof, thus adhering strictly to the letter and spirit of Clause 2.6 of the RBI Master Circular. The first impugned notice dated February 26, 2021 cannot be held to be vitiated merely by absence of specific mention of prior refusal by the petitioner, as guarantor, to honour his liability in such capacity. That apart, the legal fiction of dual capacity of the petitioner, that is, as a guarantor on the one hand and as a promoter/whole-time director on the other, ought to be pierced in view of the petitioner being in charge of the management of the defaulting company at the relevant period. A person at the helm of affairs during the period when the alleged default was committed is squarely an officer who is in default, as provided in Section 2(60) of the Companies Act, 2013 - The language of Section 14 of the IBC is very clear as to its object and purpose, which is to attract resolution applicants to make offers to facilitate corporate resolution of the insolvency. Initiation or continuation of recovery proceeding against the corporate debtor itself during such resolution would prove counter-productive to such purpose. A wilful defaulter proceeding does not come within the contemplation of Section 14 of the IBC, which primarily pertains to legal actions to foreclose, recover or enforce security interest, or recovery of any property or the debt-in-question - An act of wilful default, if committed by a promoter/whole-time director/guarantor of the corporate debtor who was in charge at the relevant period, is not obliterated automatically by the filing of an application under Section 7 of the IBC. Section 32A had not been inserted by amendment in the IBC on the date when hearing was concluded in the matter of Gaurav Dalmia (supra). Section 32A, which has been held to be intra vires by the Supreme Court, clearly stipulates that the Corporate Debtor shall not be prosecuted for an offence committed prior to commencement of CIRP once a Resolution Plan has been approved by the Adjudicating Authority - an OTS for settlement of the debt, ipso facto, cannot erase the wilful default of a promoter/director or guarantor, if committed. Moreover, in the present case, the OTS had not reached culmination in view of the instalments pursuant thereto having not been cleared by the petitioner, for whatever reason. As such, there was no concluded OTS in the present case at all. No fault can be found with the issuance of the impugned show-cause notices to justify judicial interference therewith - Petition dismissed. 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.