2021 (3) TMI 279 - HC - Insolvency and Bankruptcy

Doctrine of piercing the corporate veil - Issuance of notice during moratorium period - proceeding for declaration of Wilful Defaulter - petitioners argues that in view of the prior commencement of CIRP under the Insolvency and Bankruptcy Code, 2016 (IBC), the Identification Committee had no authority to issue the show-cause notice dated November 4, 2019 and the subsequent notices for personal hearing pursuant thereto - Whether Directors are at par with their company as far as the moratorium under Section 14 of the IBC is concerned? - HELD THAT - The moratorium stipulated in Section 14 of the IBC has to be read in the context of the scope of operation of the resolution professional. Read in conjunction, the provisions of the IBC indicate that Section 14(1), Clauses (a) and (c) contemplate an arrest of all proceedings not only before courts of law and tribunals but before other authorities as well. Although, strictly speaking, the declaration of Wilful Defaulter dealt with in the RBI guidelines is not an action to foreclose, recover or enforce any security interest created by the corporate debtor, the effect of such a declaration is to interdict and conflict with the functioning of the resolution professional within the scope of the IBC. Thus, the continuance of proceedings for declaration of Wilful Defaulter in respect of the borrowing company must be construed to fall within the purview of the moratorium provided in Section 14 of the IBC. The Directors of the company, however, stand on a different footing - Section 17(1) clearly provides that the management of the affairs of the corporate debtor shall vest in the interim resolution professional and the powers of the Board of Directors of the said debtor shall stand suspended and be exercised by the interim resolution professional. The scope of functioning of the interim resolution professionals are clearly laid down in Sections 17, 18 and 20 of the IBC. The Directors are shut out from having any role in the functioning of the corporate debtor-company from the inception of the CIRP. As such, the present petitioners, in the capacity of Directors of the borrower company, cannot interfere in the functioning of the company at all. On the other hand, the steps taken against the Directors, even in their capacity as Directors, such as publication of their names in the list of Wilful Defaulters and the like, do not affect the CIRP at all, since the Directors have no truck with the company from the moment of inception of the CIRP. Section 14 of the IBC contemplates a moratorium in respect of all proceedings against the corporate debtor, for the obvious reason that the continuance of other proceedings may lead to conflicting decisions vis- vis the management of the corporate debtor by the resolution professional. However, such immunity cannot be extended to Directors in view of their interference with the affairs of the company being negated by the provisions of the IBC itself during CIRP - Hence, whatever may be the consequence of declaration of the Directors, even in the capacity of Directors of the company, as Wilful Defaulters, the same does not interfere with the CIRP in any manner in view of the prior dissociation of the Directors from the affairs of the company at the commencement of the CIRP. In proceedings for declaration of Wilful Defaulter, the corporate veil has to be lifted in order to examine the role of the Directors in the alleged actions of the corporate debtor-company which lead to the proposed declaration of Wilful Defaulter - the petitioners cannot take advantage of Section 14 of the IBC merely on the ground of being at par with the corporate debtor, which itself is covered by the said section. Adopting the doctrine of piercing the corporate veil, particularly in view of the contemplation of the RBI guidelines being to promote public policy and advance public interest, the Directors cannot claim to be at par with their company as far as the moratorium under Section 14 of the IBC is concerned. Petition dismissed.

Summary

Issues:
1. Application of moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC) on proceedings for declaration of Wilful Defaulter against a company and its Directors.
2. Authority of the Wilful Defaulter Identification Committee to issue show-cause notices during the Corporate Insolvency Resolution Process (CIRP).
3. Exclusion of Directors from management of corporate debtor during CIRP and their liability as guarantors.

Analysis:
1. The petitioners, former Directors of a company, challenged the Wilful Defaulter notice issued during CIRP, claiming immunity under Section 14 of the IBC. The court examined the conflict between RBI guidelines and IBC provisions, concluding that the moratorium extends to the company but not its Directors. The Directors' dissociation from company affairs during CIRP allows proceedings against them as Wilful Defaulters.

2. The court considered the authority of the Identification Committee to issue show-cause notices during CIRP. It held that Directors, excluded from managing the company during CIRP, can be prosecuted as guarantors despite the moratorium, emphasizing the need to lift the corporate veil to examine their roles.

3. The judgment highlighted the distinct positions of Directors and the company during CIRP. While the company benefits from the moratorium, Directors, including guarantors, are not covered. The doctrine of piercing the corporate veil was applied to justify prosecuting Directors as Wilful Defaulters, emphasizing public policy and interest over Director-company parity.

In conclusion, the writ petition challenging the Wilful Defaulter notice was dismissed, affirming the liability of the Directors as guarantors despite the moratorium under Section 14 of the IBC. The judgment clarifies the scope of immunity for Directors and the application of RBI guidelines in cases of Wilful Defaulters during CIRP.