2022 (2) TMI 364 - HC - Insolvency and Bankruptcy

Wilful Defaulter - squaring off of debt - proceedings under wilful defaulter guidelines are covered under the moratorium under Section 96 of the Act or not - HELD THAT - The argument that the bank having instituted proceedings under the wilful defaulter guidelines could not and/or should have instituted proceedings under Section 95 of the IBC is fallacious. There is, in fact, no bar to proceed parallelly under the two laws. The purpose of the two proceedings is completely different. It is essentially for a creditor to take a call when and what proceedings it wants to take against a borrower constituent. A plain reading of the two Sections would clearly indicate that the Moratorium U/s. 14 aims at protecting the Corporate Debtor and none else. The object and purpose is to protect the image of the juristic person to enable smooth passage of a Resolution Plan. The value of the Corporate Debtor must be protected and kept away from the acts and omissions of its promoters and shareholders. This would make the CD more attractive and would generate more interest in prospective suitors - The very purpose of separation of corporate insolvency under Part II of the IBC from individual insolvency under Part III must be understood. They are separate and distinct and aim to achieve different ends. The principles applied the incorporate insolvency cannot be applied to personal insolvency. It is essentially for this purpose that this Legislature has applied the moratorium under Section 14 to the corporate debtor as a whole and moratorium under Section 96 is restictively applied only to the debt. The object and purpose of a moratorium is to invite resolution applicants for revival of corporate debtors under Part II. Under Part III however the purpose of moratorium is to facilitate repayment/resolution of the debt to all categories of debtors. The object and purpose of the Master Circular for willful default is dissemination credit information of the willful defaulter so that other lenders are cautioned and do not lend any further money. It is also aim at preventing further fraud and loss of public money. A willful defaulter proceeding is not for recovery of debt. The repayment of debt will not ipso facto extinguish the default. This has to be assist and applied in the facts of the instant case - this Court is inclined to accept the argument of Mr. Rai for the bank that the moratorium in respect of debt is restricted to proceedings of recovery of any debt against the respondent in person . Recovery proceedings or proceedings under Section 96 of the IBC, 2016, or the borrower s success therein, would not absolve the borrower who has been found to be a wilful defaulter. The willful defaulter proceedings only aims at dissemination of information. The bank s responsibility to institute criminal proceedings would also be interfered with if the arguments of the petitioners are accepted - this Court is not inclined to entertain the writ petition. Petition dismissed.

Summary

Issues Involved:
1. Applicability of moratorium under Section 96 of the Insolvency and Bankruptcy Code (IBC), 2016 to wilful defaulter proceedings.
2. Distinction between moratorium under Section 14 and Section 96 of the IBC.
3. The purpose and scope of wilful defaulter proceedings.
4. The relevance of previous judgments in the context of the current case.

Issue-wise Detailed Analysis:

1. Applicability of Moratorium under Section 96 of the IBC to Wilful Defaulter Proceedings:
The writ petitioner argued for a stay on the order dated 18th October 2021, declaring him a wilful defaulter, citing the moratorium under Section 96 of the IBC. The petitioner relied on a previous decision (Ayan Mallick & Anr. vs. SBI) to support his claim. However, the court found this argument fallacious, stating that the moratorium under Section 96 does not apply to wilful defaulter proceedings. The court emphasized that the moratorium under Section 96 is restricted to proceedings for the recovery of any debt against the respondent "in person" and does not extend to wilful defaulter proceedings, which aim at disseminating credit information and preventing further fraud.

2. Distinction between Moratorium under Section 14 and Section 96 of the IBC:
The court highlighted the differences between Sections 14 and 96 of the IBC. Section 14 applies to "corporate debtors" and aims to protect the corporate debtor's assets and facilitate the resolution process. In contrast, Section 96 applies to "debt" and provides an interim moratorium on legal actions related to debts. The court referred to the Supreme Court's decision in SBI vs. V. Ramakrishnan, which clarified that Section 14 does not apply to personal guarantors, while Sections 96 and 101 provide broader protection for debts in individual insolvency cases.

3. Purpose and Scope of Wilful Defaulter Proceedings:
The court explained that wilful defaulter proceedings are not aimed at debt recovery but at disseminating information about the defaulter to caution other lenders and prevent further financial loss. The proceedings serve to put the public and financial institutions on notice about the defaulter's conduct. The court cited the Supreme Court's decision in Manish Kumar vs. Union of India, which stated that the purpose of a moratorium under the IBC is not to allow wrongdoers to escape liability.

4. Relevance of Previous Judgments in the Context of the Current Case:
The court addressed the petitioner's reliance on the Ayan Mallick case, noting that the decision did not consider the distinctions between Sections 14 and 96 of the IBC as clarified in the Ramakrishnan case. The court also referred to the decision in Suresh Kumar Patni & Ors. vs. SBI, which emphasized the bank's responsibility to take criminal action against wilful defaulters. The court concluded that the moratorium under Section 96 does not stay wilful defaulter proceedings, as doing so would defeat the purpose of the IBC and allow wrongdoers to continue their misconduct.

Conclusion:
The court dismissed the writ petition, stating that the moratorium under Section 96 of the IBC does not apply to wilful defaulter proceedings. The court emphasized the distinct purposes of Sections 14 and 96 and upheld the bank's right to proceed with wilful defaulter actions. The court also highlighted the importance of disseminating information about wilful defaulters to protect public finances and prevent further fraud. The petitioner's arguments were found to be without merit, and the court affirmed the bank's actions under the wilful defaulter guidelines.