Calcutta High Court dismisses writ challenging bank notice to Duncans Industries director

Calcutta High Court dismisses writ challenging bank notice to Duncans Industries director

Court ruled that wilful default by promoter/whole-time director/guarantor of corporate debtor is not obliterated automatically by application u/S 7 of IBC

The Calcutta High Court dismissed a writ petition titled Gouri Prasad Goenka v. State Bank of India which was filed against two show-cause notices issued under the signature of Deputy General Manager of the State Bank of India against the Petitioner who is the Suspended Director and Promoter of the Corporate Debtor Company – Duncans Industries Limited.

A single judge Court of Justice Sabyasachi Bhattacharyya went through the show-cause notices issued against the Petitioner asking him to explain as to why the Petitioner should not be declared as a wilful defaulter on the grounds as mentioned in the said notices.

The first notice dated 26 February 2021 was addressed to the Petitioner as guarantor of Duncans and it was argued by the Petitioners that the notice is without any jurisdiction as it fails to satisfy the requirements of Clause 2.6 of the Reserve Bank of India Master Circular on Wilful Defaulters dated 1 July 2016 which is known as the 'RBI Master Circular'.

On the other hand, the second notice dated 2 March 2021 was sent to the Petitioner in the capacity of a whole-time director and promoter. It was submitted by the Petitioner that the Corporate Insolvency Resolution Process (CIRP) of the Company – Duncans Industries Ltd u/S 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) had commenced and is currently pending. The Petitioner further submitted that pending the resolution of corporate insolvency of the company, the suspended directors cannot be proceeded against prematurely for declaration of wilful defaulter since a moratorium was also declared u/S 14 of the IBC prohibiting institution or continuation of suits or proceedings against the Corporate Debtor Company which should be applicable to its suspended directors as well.

After going through the materials on record the Court, however, found that that the writ petition was premature since no right of the petitioner was infringed by the issuance of these show-cause notices. The grounds for such notices were clearly enumerated in both the notices and the Petitioner was given sufficient opportunity as per the RBI Master Circular to give representation against the notices.

The Court further stated that the notices were merely communications as per the 'orders and directions of the Committee', taken after consideration of the conduct of the account and utilization of credit facilities by the defaulter company, and this exercise was duly undertaken by the Identification Committee (IC) itself and not the Deputy General Manager. The entire preceding and proposed actions referred to in both the notices were taken by the IC, which had ample jurisdiction to do so under the RBI Master Circular. The Deputy General Manager merely communicated the show-cause notices to the Petitioner and did not intrude into the jurisdiction of the IC in any manner whatsoever.

The single judge found that there was no flaw in the notices and the Petitioner was given adequate opportunity to make written submissions in response thereof, thus adhering strictly to the letter and spirit of Clause 2.6 of the RBI Master Circular. It also stated Section 2(60) of the Companies Act, 2013 which provides that a person at the helm of affairs during the period when the alleged default was committed is squarely an officer who is in default.

"Mere apprehension of a future resolution of the corporate insolvency, by way of a prospective Resolution Plan which is yet to materialize, cannot absolve the petitioner, in the capacity of either guarantor or promoter/whole-time director, from the liability for such default," The Court observed.

The Court also highlighted the object of Section 14 of IBC, which is to attract resolution applicants to make offers to facilitate corporate resolution of the insolvency. Initiation or continuation of recovery proceeding against the corporate debtor itself during such resolution would prove counter-productive to such purpose. However, the Court observed that the whole-time directors and promoters who were in charge of the affairs of the defaulting company during the relevant period, when the default was committed, cannot be said to be absolved of their act of wilful default committed prior to final approval and acceptance of a resolution plan. It made the following observation –

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

The Court, therefore, dismissed the petition as it found no fault with the issuance of the show-cause notices to justify any judicial interference therewith.