Supreme Court Clarifies Moratorium Under IBC: Anjali Rathi & Ors. vs. Today Homes & Infrastructure Pvt. Ltd. (2021)

Introduction

Date of the Judgment: 8 September 2021

Citation: [Not Available in Source]

Judges: Dr Dhananjaya Y Chandrachud, J, Vikram Nath, J, Hima Kohli, J

Can the promoters of a company undergoing insolvency proceedings be held personally liable for the company’s debts, even when a moratorium is in place? The Supreme Court of India addressed this critical question in a case involving homebuyers and a defaulting real estate developer. This judgment clarifies the extent of the moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC), specifically concerning the liability of the promoters of a corporate debtor. The three-judge bench, comprising Justices Dr Dhananjaya Y Chandrachud, Vikram Nath, and Hima Kohli, delivered the judgment.

Case Background

The case involves homebuyers who invested in the “Canary Greens” project by Today Homes & Infrastructure Pvt. Ltd. (the first respondent). The agreements promised possession within 36 months, which was to be in 2014 for most cases. The project was abandoned, leading the homebuyers to seek refunds with interest from the National Consumer Dispute Redressal Commission (NCDRC).

The NCDRC ruled in favor of the homebuyers on 12 July 2018, directing the first respondent to refund the principal amount with 12% interest and costs within four weeks, with an increase to 14% if not paid on time. The order attained finality.

The homebuyers initiated execution proceedings under Sections 25 and 27 of the Consumer Protection Act, 1986. The NCDRC issued notice on 7 September 2018. Meanwhile, the Delhi High Court stayed an NCDRC order from 23 October 2018, in a related matter, on 19 November 2018.

The NCDRC adjourned the execution proceedings multiple times in February and March 2019. On 11 March 2019, the Managing Director of the first respondent was directed to appear personally. The Delhi High Court issued a notice on 27 March 2019, and stayed coercive action against the Managing Director, leading to the first Special Leave Petition (SLP (C) No 12150 of 2019) before the Supreme Court.

On 1 April 2019, the NCDRC ordered the first respondent to refund the amount with interest within two weeks, failing which the Director, Mr. Ajay Sood, would be taken into custody, and the company’s and his personal properties would be attached. This order was to be effective only after the Delhi High Court’s decision. This led to Civil Appeal Nos 5231-5238 of 2019, challenging the conditional nature of the order.

During the pendency of the proceedings before this Court, arising out of the order of the Delhi High Court, certain developments took place. On 1 July 2019, notice was issued in SLP (C) No 12150 of 2019 and the order of the Delhi High Court was stayed. On 11 September 2019, the Court was informed that seven petitioners have settled their dispute and that a settlement with the others was likely.

On 31 October 2019, proceedings were initiated against the first respondent before the National Company Law Tribunal (NCLT) under Section 9 of the IBC by an operational creditor. The NCLT admitted the petition, initiating the corporate insolvency resolution process (CIRP) and declaring a moratorium under Section 14 of the IBC. This order led to SLP (C) Diary No 45043 of 2019, filed by other homebuyers, claiming the insolvency was a tactic to avoid refunds.

The homebuyers lodged their claims with the Resolution Professional (RP). Two Resolution Applicants emerged: (i) I & E Advertising Private Limited; and (ii) a consortium representing the home buyers. The Committee of Creditors (CoC), consisting only of homebuyers, approved the Resolution Plan submitted by the consortium with 96.93% vote. The RP filed an application for approval of the Resolution Plan before the Adjudicating Authority on 21 August 2021, which is pending.

Timeline:

Legal Framework

The case involves the interpretation of several key legal provisions:

• Sections 25 and 27 of the Consumer Protection Act, 1986: These sections deal with the enforcement of orders passed by the consumer courts, including execution proceedings.
• Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC): This section allows an operational creditor to initiate the corporate insolvency resolution process (CIRP) against a corporate debtor.
• Section 14 of the IBC: This section provides for a moratorium upon the commencement of CIRP, which prohibits the institution or continuation of suits or proceedings against the corporate debtor. It states:
  
  “14. Moratorium.—(1) Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely—
  (a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;
  (b) transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein;
  (c) any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002);
  (d) the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.”

The IBC aims to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms, and individuals in a time-bound manner. The moratorium under Section 14 is a crucial part of this process, providing a breathing space for the corporate debtor to reorganize its affairs.

Arguments

The petitioners, the homebuyers, argued that the promoters of the first respondent should be held personally liable to honor the settlements reached during the proceedings. They relied on paragraph 10(g) of the Resolution Plan approved by the CoC, which states:

“10(g).However, the erstwhile management, promoters (de jure or de facto), shareholders, managers, directors, officers, employees, workmen or other personnel who were in charge on or before CIRP commence date of THIPL shall continue to be liable for all the liabilities, claims, demand, obligations, penalties etc. arising out of any (i) proceedings, inquiries, investigations, orders, show causes, notices, suits, litigation etc. (including those arising out of any orders passed by the NCLT or any other court/department pursuant to the provisions of the Code or pursuant to any order passed/imposed by the SEBI), whether civil or criminal, pending before any authority, court, tribunal or any other forum prior to the acquisition of control by the Resolution Applicant over THIPL, or (ii) that may arise out of any proceedings, inquiries, investigations, orders, show cause, notices, suits, litigation etc. (including any orders that may be passed by the NCLT or any other court/department pursuant to the provisions of the Code), whether civil or criminal, that may be initiated or instituted post the approval of the Resolution Plan by the NCLT on account of any transactions entered into, or decisions or actions taken by, such existing management, promoters (de jure or de facto), shareholders, managers, directors, officers, employees, workmen or other personnel of THIPL, the new management of THIPL and/or the Resolution Applicant shall at no point of time be, directly or indirectly, held responsible or liable in relation thereto.”

The petitioners contended that the NCDRC order dated 1 April 2019, passed during the execution proceedings, also supported their claim for personal liability of the promoters.

The respondents, including the Resolution Professional, emphasized that the Resolution Plan was still pending approval before the Adjudicating Authority under Section 31(1) of the IBC. They argued that it would be inappropriate to issue directions for attaching personal properties of the promoters at this stage.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issue before the Court was:

• Whether the moratorium under Section 14 of the IBC prevents proceedings against the promoters of the corporate debtor for honoring settlements.

Treatment of the Issue by the Court

Authorities

The Supreme Court relied on the following authorities:

• P. Mohanraj v. Shah Bros. Ispat (P) Ltd. [(2021) 6 SCC 258] – Supreme Court of India: This case clarified that the moratorium under Section 14 of the IBC applies only to the corporate debtor and not to its directors/management.
• Section 14 of the Insolvency and Bankruptcy Code, 2016: This section provides for a moratorium upon the commencement of CIRP, which prohibits the institution or continuation of suits or proceedings against the corporate debtor.

Judgment

The Court clarified the application of the moratorium under Section 14 of the IBC, stating that it does not extend to the promoters of the corporate debtor. The Court relied on the judgment in P. Mohanraj v. Shah Bros. Ispat (P) Ltd. [(2021) 6 SCC 258]*.

The Court held that the petitioners were not prevented from initiating proceedings against the promoters of the first respondent for honoring the settlements. However, the Court did not issue a direction for attaching personal properties of the promoters at this stage.

What weighed in the mind of the Court?

The Court’s decision was primarily influenced by the following factors:

• The need to clarify the scope of the moratorium under Section 14 of the IBC.
• The precedent set by the Supreme Court in P. Mohanraj v. Shah Bros. Ispat (P) Ltd. [(2021) 6 SCC 258], which held that the moratorium does not extend to the directors/management of the corporate debtor.
• The fact that the Resolution Plan was still pending approval before the Adjudicating Authority.

The Court’s reasoning was primarily based on legal interpretation and precedent, with less emphasis on the factual aspects of the case.

The Court considered the argument that the promoters should be held liable based on the Resolution Plan. However, it rejected this argument at this stage because the plan was pending approval. The Court emphasized that it was not appropriate to issue a direction for attaching personal properties of the promoters before the Resolution Plan was approved.

The Court quoted P. Mohanraj v. Shah Bros. Ispat (P) Ltd. [(2021) 6 SCC 258]:

“…the moratorium provision contained in Section 14 IBC would apply only to the corporate debtor, the natural persons mentioned in Section 141 continuing to be statutorily liable under Chapter XVII of the Negotiable Instruments Act.”

The Court clarified that while the moratorium under Section 14 of the IBC protects the corporate debtor, it does not shield the promoters from liability. This ensures that the promoters cannot evade their responsibilities by hiding behind the corporate veil during the CIRP.

Key Takeaways

✓ The moratorium under Section 14 of the IBC does not prevent proceedings against the promoters of a corporate debtor.

✓ Homebuyers can pursue legal remedies against promoters for honoring settlements, even if the company is undergoing insolvency proceedings.

✓ The Court will not issue directions for attaching personal properties of promoters based on a Resolution Plan that is yet to be approved.

✓ The Resolution Plan must be approved by the Adjudicating Authority before any consequences emanating from the plan can be enforced.

Directions

The Supreme Court directed the NCLT to dispose of the application for approval of the Resolution Plan expeditiously, preferably within six weeks from the date of receipt of a certified copy of the order.

Specific Amendments Analysis

[Not Applicable in this case, as no specific amendments were discussed in the judgment.]

Development of Law

The ratio decidendi of the case is that the moratorium under Section 14 of the IBC does not extend to the promoters of the corporate debtor. This clarifies the scope of the moratorium and ensures that promoters cannot evade their liabilities by hiding behind the corporate veil during the CIRP. This judgment reinforces the principle established in P. Mohanraj v. Shah Bros. Ispat (P) Ltd. [(2021) 6 SCC 258], which held that the moratorium applies only to the corporate debtor.

Conclusion

The Supreme Court’s judgment in Anjali Rathi v. Today Homes clarifies that the moratorium under Section 14 of the IBC does not protect the promoters of a corporate debtor from legal proceedings. This decision ensures that promoters can be held personally liable for the company’s debts, even during insolvency proceedings. The Court has also directed the NCLT to expedite the approval of the Resolution Plan, balancing the interests of all stakeholders.