Recovery proceedings or proceedings under Section 96 of the IBC, 2016 would not absolve the borrower who has been found to be a wilful defaulter

Facts of the case

M/s. one JVL Agro Industries Ltd was a constituent of the bank and enjoyed diverse credit facilities. The petitioner and his family admittedly controlled the majority shareholding in the JVL Agro Industries Ltd. The latter was accustomed to act as per wishes and dictates of the petitioner. He is also a promoter/ director and was the main person behind the corporate debtor, M/s. JVL Agro Industries Ltd.

Insolvency proceedings, being CP (IB) No. 223/ALD/2018 came to be instituted under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) against M/s. JVL. The resolution plan failed and the company was directed to be wound up. The bank issued a show-cause to the petitioner under the Wilful Defaulter Guidelines on 7th November, 2019. During the pendency of the said proceedings, an application under Section 95 of the IBC, being C.P No. (IB) 58/ALD/2021 was filed by the Bank against the writ petitioner around 4th October, 2021. Thereafter the final order of the review committee was passed on18th October, 2021 declaring him a willful defaulter.

The writ petitioner seeks intervention of this Court with an order dated 18th October, 2021 passed by the Reviewing Authority under the Wilful Dafaulter proceedings of the State Bank of India. The bank has already communicated the order to RBI and CIBIL and other sites. The writ petitioner submits that he is entitled to stay of the aforesaid order 18th October, 2021, in view of the moratorium under Section 96 of the 2016 Act. Reliance is placed upon a decision dated 4.3.2021 of Co-ordinate Bench in Ayan Mallick & Anr. vs. SBI (2021) ibclaw.in 105 HC.

Decision of the High Court

Whether the scope of Moratorium U/s. 14 is the same as Section 96 of the IBC:

• A plain reading of the Section 14 and Section 96 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 distinction between the two Sections has been dealt with in the decision of the Supreme Court in the case of SBI Vs. Ramakrishnan reported in [2018] ibclaw.in 29 SC.
• 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 corporate 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 restrictively 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.

Proceedings under Section 96 of the IBC, 2016 would not absolve the borrower who has been found to be a wilful defaulter:

• 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. Like a moratorium is under the IBC is not aimed at letting a wrong doer to get away as held by the Supreme Court in the case of Manish Kumar vs. Union of India reported in (2021) ibclaw.in 16 SC.
• In the backdrop of the above 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”. This is in harmony with dicta in the Ramakrishnan Case (supra). To stay wilful defaulter proceedings, criminal proceeding or quasi criminal proceeding under any Moratorium under Section 96 would defeat the object and purpose of the part III of the IBC. Stay of such collateral proceedings would also result in putting a premium on the impropriety and illegality for which the proceedings under Section 95 are initiated. The argument of Mr. Rajarshi Dutta that the continuation of the wilful defaulter proceedings would seriously hamper and impede his client’s ability to make good repay or come up with; a scheme to satisfy creditors is fallacious. Such stay would also amount to permitting a wrong doer to commit a further wrongs for the purpose of remedying an existing wrong. All lenders are required to be put on notice of the willful default who to prevent further erosion of public finances. It appears to this Court that the Ramakrishnan decision has not been placed before the Coordinate Bench in the Ayan Mallick case (supra). As already stated earlier any moratorium under the IBC cannot permit a wrong doer to continue to such doing.
• This Court in the Suresh Kumar Patni & Ors. vs. SBI reported in AIR 2021 Calcutta 249 has addressed the right/responsibility of the bank to take criminal action against a defaulter borrower who has been identified as a defaulting borrower. The purpose behind the said clause 4.3 of the wilful defaulter guidelines, as dealt with in the Patni decision (supra) is essentially to put the public at large on notice of the financial conduct of the petitioner. The same is more of a responsibility and obligation than a right. 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.

For the reasons stated hereinabove, this Court is not inclined to entertain the writ petition  and shall stand dismissed.

Case Reference: High Court of Calcutta in Adarsh Jhunjhunjwala Vs. State Bank of India & Anr., reported at (2021) ibclaw.in 104 HC, dated 24.12.2021.