2024 (3) TMI 990 - HC - Companies Law

Declaration of Wilful Defaulter of the petitioner - Liability of Directors - It is argued that in none of the Committee Orders, any cogent ground has been made out under the Master Circular of the Reserve Bank of India (RBI) for declaration of Wilful Defaulters - HELD THAT - The petitioner admittedly parked some amounts from its sales realizations not in the cash credit account but in a different account opened with a different Bank, that is, the ICICI Bank, Darjeeling Branch. Hence, at a time when the borrower-Company was duty-bound to channelize its entire funds through the respondent no. 1-Bank due to its agreement with the latter, it failed to meet such obligation, which was a condition of the cash credit facility, and routed some money through a different bank account. Such act is sufficient to come within the purview of diversion of funds as contemplated in the Master Circular. Admittedly, an agreement was entered into in the year 2004 which was much prior to the directions of the Central Government to take over management from the borrower-company. Even the Division Bench order of this Court directed the management to be continued by the borrower-Company. Hence, the lame excuse of the workers interest is mere lip-service in the mouth of the petitioner, since the borrower-company, evidently without knowledge or permission of the lender-Bank, had transferred the security, invoking the umbrella of the Central Government directions - The moratoria contemplated in the IBC were introduced for the protection of the corporate debtor in order to facilitate resolution. Such legal fiction, however, was created only in order to sustain the business of the company in the hands of the successful resolution applicant, inter alia, to protect the interests of the workers and the business of the unit in general. However, even if CIRP commences, the Directors, who were the masterminds in control and charge of affairs of the Company at the relevant juncture, cannot be absolved of any wilful default committed by the borrower-Company at the relevant juncture. In the present case, the petitioner was a Director and at the helm of affairs, responsible for the business operations of the company. The business decisions of the Company are attributable to the Directors, who are the living hands of the company which is a juristic person. Thus, the petitioner cannot be absolved of the wilful default committed by the borrower-Company in his capacity as a director and promoter, irrespective of an ongoing Corporate Insolvency Resolution Process. There are no patent irregularity or perversity in the impugned decisions or the procedure adopted by the Committees for arriving at the same, sufficient to interfere under Article 226 of the Constitution of India. The petition is dismissed on contest without any order as to costs.

Summary

Issues Involved:
1. Validity of the Review Committee's (RC) order affirming the declaration of Wilful Defaulter.
2. Impact of Corporate Insolvency Resolution Process (CIRP) on the status of wilful default.
3. Allegations of diversion of funds and improper routing of sale proceeds.
4. Allegations of unauthorized disposal of assets.
5. Requirement of independent findings by the RC.

Summary:

1. Validity of the Review Committee's (RC) order affirming the declaration of Wilful Defaulter:
The petitioner contended that the RC's order lacked independent reasons and merely repeated the decision of the Wilful Defaulters Identification Committee (First Committee). However, the Court found that the RC did provide independent findings and confirmed the First Committee's decision due to the absence of new evidence. The Court emphasized that both Committees are administrative, not quasi-judicial, and thus detailed judgments are not required.

2. Impact of Corporate Insolvency Resolution Process (CIRP) on the status of wilful default:
The petitioner argued that the CIRP under the Insolvency and Bankruptcy Code (IBC), 2016, should absolve the borrower-Company and its Director from being declared wilful defaulters. The Court rejected this argument, stating that the commencement of CIRP does not absolve the responsibility of the Directors for wilful defaults committed prior to the CIRP.

3. Allegations of diversion of funds and improper routing of sale proceeds:
The petitioner was accused of not routing the revenue from sales through the Bank's cash credit account, thereby diverting funds. The Court agreed with the Bank's argument that the credit summation in the company's account was significantly lower than the revenue earned, indicating that funds were not used to reduce the outstanding loan. The Court found that the petitioner had parked some sales realizations in an unauthorized account with ICICI Bank, Darjeeling Branch, which constituted diversion of funds as per the Master Circular.

4. Allegations of unauthorized disposal of assets:
The petitioner argued that the transfer of assets was for operational convenience and under government directives. The Court found these arguments unconvincing, noting that the borrower-Company had assigned its right to realize sale proceeds from tea gardens without the Bank's knowledge, thereby disposing of secured assets. This action was deemed a wilful default under the Master Circular.

5. Requirement of independent findings by the RC:
The petitioner claimed that the RC's order was a mere copy of the First Committee's decision. The Court found that the RC did consider relevant factors and provided independent findings, in addition to confirming the First Committee's decision. The Court held that detailed judgments were not necessary from administrative committees unless there was procedural irregularity or patent perversity.

Conclusion:
The Court dismissed the writ petition, upholding the RC's order affirming the declaration of Wilful Defaulter. The Court found no procedural irregularity or perversity in the decisions of the Committees and emphasized the importance of the RBI Master Circular in safeguarding the economic interests of the nation.