Point of Law: Resolution of corporate insolvency - Notice - An act of wilful default, if committed by a promoter/whole-time director/guarantor of corporate debtor who was in charge at relevant period, is not obliterated automatically by filing of an application under Section 7 of IBC.

JUDGMENT :

1. The writ petitioner has challenged two notices, respectively dated February 26, 2021 and March 2, 2021 both issued under the signature of Deputy General Manager of the State Bank of India (SBI). Both the letters are show-cause notices on similar grounds sent to the petitioner, the first in the capacity of guarantor of Duncans Industries Ltd. and the second in the capacity of Whole-time Director and Promoter (since suspended) of Duncans Industries Ltd.

2. The notices have been issued for the petitioner to show cause as to why the petitioner shall not be declared as wilful defaulter on the grounds as mentioned in the said notices. Submissions in writing were also sought in the show-cause notices from the petitioner.

3. Learned counsel for the petitioner argues that the first notice dated February 26, 2021, addressed to the petitioner as guarantor of Duncans, was without jurisdiction inasmuch as it fails to satisfy the requirements of Clause 2.6 of the Reserve Bank of India Master Circular on Wilful Defaulters dated July 1, 2016 (hereinafter referred to as “the RBI Master Circular”). It is argued that the show-cause notice contained no allegation to the effect that the petitioner, as guarantor, refused to comply with the demands made by the respondent-Bank, despite having sufficient means to do so, which is a pre-requisite for such notice to a guarantor.

4. Regarding the second notice, sent to the petitioner in the capacity of whole-time director and promoter, learned counsel argues that a petition was filed against the Duncans Industries Ltd. under Section 7 of the Insolvency and Bankruptcy code, 2016 (IBC), which resulted in commencement of a Corporate Insolvency Resolution Process (CIRP) of the company, which is still pending. An Interim Resolution Professional (IRP) was appointed over the company on and from March 5, 2020 and the power of its Board of Directors stood suspended in terms of Section 17(1)(b) of the IBC. A moratorium was also declared under Section 14 of the IBC prohibiting, inter alia, the institution or continuation of suits or proceedings against the corporate debtor-company. Hence, no proceeding could be instituted or continued for declaration of wilful defaulter in respect of the company itself, for which no notice was served on it.

5. Broadly arguing that the object and purpose of the IBC is resolution of corporate insolvency, learned counsel for the petitioner argues that, since no notice of wilful default was or could, in law, be served on the company itself, by the same logic, no such notice could also be served on its suspended promoter/director.

6. Learned counsel relies on Committee of Creditors of Essar Steel India Limited through Authorised signatory Vs. Satish Kumar Gupta and others, reported at (2020) 8 SCC 531, in support of the proposition that the resolution of corporate insolvency extinguishes the debts of the corporate debtor.

7. Learned counsel for the petitioner next cites the case of Gaurav Dalmia Vs. Reserve Bank of India, reported at 2020 SCC OnLine Cal 668, in support of the proposition that once the alleged default of the company itself is extinguished by virtue of a corporate resolution, the ‘wilful defaulter’ tag of all the promoters and directors in such capacity only (and not in their individual capacities) for the same default, had to go.

8. It is reiterated by counsel that, pending the resolution of corporate insolvency of the company, the suspended directors cannot be proceeded against prematurely for declaration of wilful defaulter.

9. Learned counsel for the petitioner next contends that a One-Time Settlement (OTS) proposal of the company had been accepted by the respondent-Bank and was sanctioned on September 30, 2019. It is admitted that after making some payments under the OTS, the company could not make further payment. However, the ground for stopping payment is, inter alia, cited to be admission of the petition under Section 7 of the IBC and imposition of moratorium