2021 (10) TMI 698 - HC - Indian Laws

Removal of names of the petitioners from the list of wilful defaulters - whether the writ petitioners being the promoter / directors of a company as well as guarantors to the loan facility can be classified as wilful defaulters even after the company is absolved of its liability? - HELD THAT - The Wilful Defaulters Review Committee in its meeting held on August 27, 2020, after considering the written representations submitted by the writ petitions and the department s response thereto, passed an order that the promoters/ directors of TCL i.e. the petitioners herein are fit to be declared as wilful defaulters. It was specifically observed by the said Review Committee that despite the fact that operations of the committee were allowed through TRA account only, the borrower has routed substantial transactions through non TRA accounts which is diversion of funds and violation of CDR terms and falls under the criteria of wilful default - The company operates through its directors. The directors, who are in charge of the affairs of the company are responsible for diversion of funds. Thus, in case a company is held guilty of diversion of funds the company as well as its directors can be classified as Wilful Defaulters. Though the company is absolved of its liability through corporate resolution process and the board of directors are removed from the board of the said company, such directors would still be liable in case they have furnished personal guarantee to the loan facility extended to the company. The directors being at the helm of the affairs of a company are responsible for diversion of funds. Whether the contractual obligations between the financial creditor and the surety are obliterated or modified or suspended by the eventual outcome of a proceeding under Section 7 of the IBC, 2016? - HELD THAT - It is now well settled that the corporate Debtor in a proceeding under the IBC, 2016 may stand discharged of its liability to its creditors but such discharge does not absolve the surety of its liability - A co-ordinate bench of this Hon ble Court in Gouri Shankar 2019 (11) TMI 1169 - CALCUTTA HIGH COURT after considering the provisions of Section 31 of the IBC, 2016 observed that the contractual obligations between the financial creditor and the surety are not obliterated or modified or suspended by the eventual outcome of a proceeding under section 7 of the IBC. This Court is of the view that the writ petitioners who were the guarantors to the loan facility extended to the company and have defaulted in repayment can be classified as wilful defaulters even after the company is absolved of its liability. This Court is of the view that the names of the writ petitioners cannot be removed from the list of wilful defaulters merely on the ground that the company is absolved of its liability as the petitioners have furnished personal guarantees to the loan facility extended by the respondent. The order of the Review Committee does not suffer from any infirmity. Appeal dismissed.

Summary

Issues Involved:
1. Classification of petitioners as wilful defaulters.
2. Validity of the Wilful Defaulters Review Committee's decision.
3. Impact of corporate insolvency resolution on personal guarantees by directors.
4. Alleged suppression of material facts by the petitioners.

Detailed Analysis:

1. Classification of Petitioners as Wilful Defaulters:
The petitioners challenged their classification as wilful defaulters by the Wilful Defaulters Review Committee, arguing that the identification of wilful default should consider the borrowers' track records and not isolated incidents. They contended that wilful default must be intentional, deliberate, and calculated. The petitioners argued that the company, being absolved of wilful default upon approval of the resolution plan, should extend the same absolution to them as promoters/directors.

2. Validity of the Wilful Defaulters Review Committee's Decision:
The petitioners claimed that the Review Committee's order was unreasoned and ignored their representations. The respondents countered that the petitioners, being guarantors, were liable despite the company's absolution. The Review Committee found that the petitioners had routed substantial transactions through non-TRA accounts, constituting a diversion of funds and violation of CDR terms, thus fitting the criteria of wilful default under the Master Circular.

3. Impact of Corporate Insolvency Resolution on Personal Guarantees by Directors:
The court noted that while the company might be absolved of its liability through the corporate resolution process, the directors who provided personal guarantees remain liable. The resolution plan approved by the National Company Law Tribunal explicitly stated that existing guarantees by the erstwhile promoters would continue to be in full force. The court cited previous judgments to affirm that the discharge of the corporate debtor does not absolve the surety of liability.

4. Alleged Suppression of Material Facts by the Petitioners:
The respondents argued that the petitioners suppressed material facts by not disclosing the pending proceedings before the Debts Recovery Tribunal. The court agreed, stating that such suppression warranted dismissal of the writ petition. The court referenced the Supreme Court's judgment in Prestige Lights Ltd. vs. State Bank of India, emphasizing that suppression of material facts is grounds for dismissal.

Conclusion:
The court held that the petitioners, as guarantors, could be classified as wilful defaulters even after the company was absolved of its liability. The Review Committee's decision was found to be reasoned and based on substantial evidence of fund diversion. The suppression of material facts by the petitioners further justified the dismissal of the writ petition. The court dismissed the writ petition without any order as to costs.