Contempt Proceedings under the Insolvency and Bankruptcy Code, 2016 – By Mr. Ganga Ram Agarwal and Mr. Dhananjaya Sud

Contempt Proceedings under the Insolvency and Bankruptcy Code, 2016

-By Mr. Ganga Ram Agarwal, Partner and Mr. Dhananjaya Sud, Advocate, for AAA Insolvency Professionals LLP

Background

In 2016, the policy of Insolvency and Bankruptcy was streamlined and incorporated in the form of the Insolvency and Bankruptcy Code, 2016 (“Code”). Under Part II of the Code, the Hon’ble National Company Law Tribunal (“Hon’ble NCLT) has been given broad authority with respect to the Resolution and Liquidation Proceedings of the Corporate Debtor.

In compliance with the Code, the Parliament had pioneered a new technique giving power to the Financial Creditors as well as other Creditors of a Company to seek Resolution of a Company by appointing an Independent Professional to take charge of the affairs of the Company from its Board of Directors wherein the said Company had defaulted in paying a Debt for an amount over Rs.1,00,000/- (Rupees One Lac Only) which has now been increased to Rs.1,00,00,000/- (Rupees One Crore Only) by way of an amendment to Section 4 of the Code by the Central Government vide Notification dated 24.03.2020.

The insertion of the Eleventh Schedule to the Code brought amendments in the Companies Act, 2013, however, major provisions of the Companies Act, 2013 were untouched akin to Section 425 relating to giving powers to the Hon’ble NCLT to hold a person or an entity liable for contempt.

The offence of contempt was established in the common law during the year 1926 when the powers was given to High Courts to punish its subordinate courts for contempt. However, in 1971, through the Contempt of Courts Act, the offence of contempt was categorized into civil as well as criminal contempt.

Introduction

The term ‘contempt of court’ has been defined under Section 2 (a) the Contempt of Courts Act, 1971 as “civil contempt or criminal contempt”. Further the civil contempt and the criminal contempt are defined under Section 2 (b) and (c) of the Contempt of Courts Act, 1971.

The contempt can be issued by a court of law if any person or an entity willfully refuses to comply with the directions or any other process of the Court. In other words, the Court can issue contempt if any person or an entity fails to comply and breaches with the undertaking given to the Court.

Section 12 (4) of the Contempt of Courts Act, 1971, talks about the contempt by a company and the persons associated with the company wherein it provides that – “Where the person found guilty of contempt of court in respect of any undertaking given to a court is a company, every person who, at the time the contempt was committed, was in charge of, and was responsible to, the company for the conduct of business of the company, as well as the company, shall be deemed to be guilty of the contempt and the punishment may be enforced, with the leave of the court, by the detention in civil prison of each such person.”

Also, Section 12 (5) of the Contempt of Courts Act, 1971, talks about the contempt against the directors for their involvement in such fraudulent act shall also be held liable for the punishment for contempt. The said Section reads as – “Notwithstanding anything contained in sub-section (4), where the contempt of court referred to therein has been committed by a company and it is proved that the contempt has been committed with the consent or connivance of, or is attributable to any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of the contempt and the punishment may be enforced, with the leave of the court, by the detention in civil prison of such director, manager, secretary or other officer.”

Contempt Proceedings under the Code

The Hon’ble NCLT and the National Company Law Appellate Tribunal (“Hon’ble NCLAT”) shall have the same jurisdiction, powers and authority in respect of contempt of themselves as the High Court has and may exercise, for this purpose, the powers under the provisions of the Contempt of Courts Act, 1971.

The Hon’ble NCLT and the Hon’ble NCLAT have been construed with defined powers under the Code to take cognizance of the defaults committed by the companies in pursuant to the Corporate Insolvency Resolution Process (“CIRP”) with an intention of defrauding its creditors or any act with fraudulent purpose.

Any person who is a Corporate Person or any person who, at the time of the contempt was committed or was in charge of and was responsible to, such person for the conduct of business of the Corporate Person can be held responsible and liable by the Hon’ble NCLT and the Hon’ble NCLAT for contempt of court in respect of any undertaking given to a court and the punishment may be enforced, with the leave of the court, by the detention in civil prison of each such person.

The Hon’ble NCLAT in the matter of “Manoj K. Daga vs. ISGEC Heavy Engineering Pvt. Ltd. & Ors. [2020] ibclaw.in 266 NCLAT” held that the Directors of the Company in respect of their acts were guilty of serious contempt and violating the mandate of law of the Code applied by the orders of the Tribunal and the Appellate Tribunal and breach of undertaking and trust given on oath before the Appellate Tribunal.

Also, the Hon’ble NCLAT in the matter of “Mahesh Kumar Panwar vs. M/s Mega Soft Infrastructure Pvt. Ltd. and Ors. (2019) ibclaw.in 331 NCLAT” emphasized upon the fact that Section 425 of the Companies Act, 2013 can be invoked and initiated during the insolvency proceedings.

However, the Hon’ble NCLT recently in the matter of “K.K. Agarwal & Anr. vs. M/s Soni Infratech Pvt. Ltd. & Ors.” has taken a view that Section 425 is not applicable to the proceedings under the Code.

Conclusion

The role of the Hon’ble NCLT and the Hon’ble NCLAT in issuing contempt against any person or an entity or a company in a number of cases implies that the power to punish results in the compliance of the orders of the Court and better execution of the Resolution Process as well as the Liquidation Process under the Code.

Accordingly, in case, if the Hon’ble NCLT or the Hon’ble NCLAT finds, in a given set of facts, that the acts of the company or its officers on behalf of the company with an intention to defraud its creditors or are in breach of any directions passed by the Hon’ble Court, then such a company or its officers shall be liable for punishment of contempt.

Therefore, the Hon’ble NCLT or the Hon’ble NCLAT shall have the jurisdiction to initiate contempt proceedings against such a company or its officers acting on behalf of the company.