A Single Bench of the Calcutta High Court in the case of Ayan Mallick v. State Bank of India, [W.P.O. No. 23 of 2021, decided on March 4, 2021], was posed with the following issues for adjudication: 

1. whether a company can be categorized as a wilful defaulter after the commencement of corporate insolvency resolution process (“CIRP”) in light of the moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (“the Code”)?
2. When the concerned company is the subject matter of CIRP, can its directors be prosecuted in any legal proceeding before any authority including, the ‘Wilful Defaulter Identification Committee’ established as per the relevant Reserve Bank of India (“RBI”) guidelines? 

Decision by the Court: 

1. With respect to issue number 1, the Calcutta High Court observed that, the moratorium stipulated under Section 14 of the Code has to be read in the context of the scope of operation of the resolution professional and thus, read in conjunction, the provisions of the Code indicate that Section 14(1), clauses (a) and (c) of the Code contemplate an arrest of all proceedings not only before courts of law and tribunals but before other authorities as well. The Calcutta High Court noted that, although, 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 Code. Hence, the Court held that:  

“22…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.”                       (emphasis supplied) 

2. With respect to issue number 2, the Calcutta High Court observed that Section 14 of the Code 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-à-vis the management of the corporate debtor by the resolution professional. However, as per the Calcutta High Court, 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 Code itself during CIRP. 

The Court further noted that, 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. 

The Calcutta High Court thus held that: 

“31. 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. 

32. In the circumstances considered above, 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.                                                                                                                                                                                                                                                                 (emphasis supplied) 

It may be noted that, the aforesaid decision was not the first such decision emanating from the Calcutta High Court, with another Single Bench having already allowed continuation of wilful defaulter proceedings against the directors during continuation of moratorium proceeding in the case of Sandip Kumar Bajaj v. State Bank Of India.  

The fact that, benefit of moratorium under Section 14 of the Code is not extended to natural persons has also recently been highlighted by a Three Judge Bench of the Supreme Court, in the case of P. Mohanraj v. Messrs. Shah Brothers Ispat Private Limited, [Civil Appeal No. 10355 of 2018, decided on March 1, 2021], where it was held that, although the corporate debtor would be covered under the moratorium provision contained in Section 14 of the Code, by which continuation and initiation of proceedings under Section 138/ 141 of the Negotiable Instruments Act, 1881 (“NI Act”) against the corporate debtor during CIRP would be barred; natural persons including directors, mentioned under sub-section (1) and (2) of  Section 141  of the NI Act, would continue to be statutorily liable under Chapter XVII of the NI Act.   

Please find attached a copy of the judgment.

This update has been contributed by Arka Majumdar (Partner) and Kunal Dey (Associate).