Supreme Court Clarifies Moratorium Under IBC Does Not Bar Proceedings Against Company Directors in Consumer Cases (17 January 2024)

Date of the Judgment: 17 January 2024
Citation: 2024 INSC 54
Judges: Abhay S. Oka, J., Ujjal Bhuyan, J.
Can the directors of a company be held liable for a consumer court order when the company is undergoing insolvency proceedings? The Supreme Court of India recently addressed this critical question, clarifying that the moratorium under the Insolvency and Bankruptcy Code, 2016 (IBC) does not bar proceedings against company directors. This judgment, delivered by a bench comprising Justices Abhay S. Oka and Ujjal Bhuyan, emphasizes that while a company is protected by a moratorium during insolvency, its directors and officers may still be held liable for their actions.

Case Background

The case involves a dispute between a flat buyers association, Ansal Crown Heights Flat Buyers Association (Regd.), and M/s. Ansal Crown Infrabuild Pvt. Ltd., a real estate developer, along with its directors. The flat buyers had approached the National Consumer Disputes Redressal Commission (NCDRC) due to delays in the completion of their housing project. The NCDRC had ordered the developer to complete the project and hand over possession of the flats or, alternatively, refund the deposited amount with interest. When the developer failed to comply, the homebuyers filed execution applications to enforce the order.

However, during the execution proceedings, the developer company became subject to insolvency proceedings under Section 9 of the IBC. The National Company Law Tribunal (NCLT) admitted the insolvency petition, triggering a moratorium under Section 14 of the IBC. The NCDRC then held that the decree could not be executed against the company due to the moratorium. It also stated that it would not be appropriate to proceed against the directors of the company (respondent Nos. 2 to 9) because they were not parties to the original complaint.

Timeline

Course of Proceedings

The National Consumer Disputes Redressal Commission (NCDRC) initially directed the developer to complete the project or refund the amount. When the developer failed to comply, the flat buyers filed execution applications. However, the NCDRC then held that the decree could not be executed against the company due to the moratorium under Section 14 of the IBC. The NCDRC also stated that it would not be appropriate to proceed against the directors of the company (respondent Nos. 2 to 9), as they were not parties to the original complaint. The flat buyers then appealed to the Supreme Court.

Legal Framework

The primary legal framework in this case is the Insolvency and Bankruptcy Code, 2016 (IBC), specifically Section 14, which deals with the moratorium. Section 14(1) of the IBC states:
“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;
(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 Court also considered Section 32A of the IBC, which provides for the liability of a corporate debtor for an offense committed prior to the commencement of the corporate insolvency resolution process. The second proviso to Section 32A(1) states:
“Provided further that nothing contained in this sub-section shall affect the liability of any person who was a director, manager, key managerial personnel or any other officer of the corporate debtor with respect to such offence.”

The Court also referred to the Negotiable Instruments Act, specifically Sections 138 and 141, which deal with dishonor of cheques and the liability of directors of companies. This framework is used to determine whether the directors of the company can be held liable even when the company is under a moratorium.

Arguments

Appellant’s Arguments:

• The appellants argued that the moratorium under Section 14 of the IBC only applies to the company and does not prohibit proceedings against the directors or officers of the company.
• They relied on the second proviso to sub-section (1) of Section 32A of the IBC, which states that the liability of directors or officers is not affected by the moratorium.
• They cited the Supreme Court’s decisions in P. Mohanraj vs. Shah Bros. Ispat (P) Ltd. and Anjali Rathi and others vs. Today Homes and Infrastructure Pvt. Ltd. And Others to support their claim that proceedings can continue against the directors.

Respondent’s Arguments:

• The respondents argued that the order sought to be executed did not impose any liability on the directors (respondent Nos. 2 to 9).
• They contended that the NCDRC had held that the directors were not parties to the original complaint.
• They submitted that the case of Anjali Rathi was a departure, and it allowed proceedings against promoters only because there was a settlement.

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:

1. Whether the moratorium under Section 14 of the IBC prohibits the execution of a consumer court order against the directors of a company when the company is under insolvency proceedings?
2. Whether the directors of the company were liable to abide by the order passed against the company?

Treatment of the Issue by the Court

Authorities

The Supreme Court relied on the following authorities:

Judgment

How each authority was viewed by the Court?

• The Supreme Court followed P. Mohanraj vs. Shah Bros. Ispat (P) Ltd. [(2021) 6 SCC 258]* and reiterated that the moratorium under Section 14 of the IBC applies only to the corporate debtor and not to the directors or officers of the company.
• The Supreme Court followed Anjali Rathi and others vs. Today Homes and Infrastructure Pvt. Ltd. And Others [(2021) SCC OnLine SC 729]* and clarified that the moratorium under Section 14 of the IBC does not prevent proceedings against the promoters of the company.
• The Court interpreted Section 14 of the Insolvency and Bankruptcy Code, 2016* to apply only to the corporate debtor and not to its directors or officers.
• The Court relied on the second proviso to Section 32A(1) of the Insolvency and Bankruptcy Code, 2016* to clarify that the liability of directors or officers is not affected by the moratorium.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the interpretation of the Insolvency and Bankruptcy Code, 2016 (IBC), and its interplay with the liability of company directors. The Court emphasized that the moratorium under Section 14 of the IBC is intended to protect the corporate debtor, not to shield its directors from their liabilities. This was reinforced by the second proviso to Section 32A(1) of the IBC, which explicitly states that the liability of directors is not affected by the moratorium. The Court also relied on its previous judgments, particularly in P. Mohanraj and Anjali Rathi, which clarified that proceedings against directors can continue even when the company is under moratorium.

Logical Reasoning:

The Court reasoned that if directors were allowed to escape liability due to the company’s moratorium, it would defeat the purpose of consumer protection laws and could encourage corporate misconduct. The Court also noted that the National Commission had not considered the liability of the directors and had not made any finding that the moratorium under the IBC would apply to the directors. The Court stated:

“…only because there is a moratorium under Section 14 of the IBC against the company, it cannot be said that no proceedings can be initiated against the opposite party Nos. 2 to 9(the respondent Nos. 2 to 9) for execution, provided that they are otherwise liable to abide by and comply with the order, which is passed against the company. The protection of the moratorium will not be available to the directors/officers of the company.”

The Court clarified that while the company is protected by the moratorium, the directors’ liability remains intact. The Court did not make a final decision on the liability of the directors but remitted the matter back to the National Commission to decide this issue.

The Court also observed:

“We clarify that the issue whether opposite party Nos. 2 to 9(the respondent Nos. 2 to 9) to the execution are otherwise liable, will have to be decided by the National Commission in accordance with law.”

The court did not consider any alternative interpretations of the provisions and stuck to the plain reading of the statute and its previous judgments.

Key Takeaways

• The moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC), applies only to the corporate debtor and not to its directors or officers.
• Directors of a company can be held liable for consumer court orders even if the company is under insolvency proceedings.
• The liability of directors is not affected by the moratorium, as per the second proviso to Section 32A(1) of the IBC.
• The National Commission must determine whether the directors are liable to comply with the order passed against the company.
• Directors can raise objections regarding their liability in the execution proceedings.

Directions

The Supreme Court set aside the impugned judgments and orders of the National Commission and remitted the execution application back to the National Commission. The Court directed that the execution proceedings should continue against the directors, and they are entitled to raise objections regarding their liability.

Development of Law

The ratio decidendi of this case is that the moratorium under Section 14 of the IBC does not protect the directors or officers of a company from liability. This judgment reinforces the position of law established in P. Mohanraj and Anjali Rathi, clarifying that the moratorium is meant to protect the company during insolvency proceedings, not to shield its directors from their legal obligations. There is no change in the previous position of law, but the judgment further clarifies that the moratorium under Section 14 of the IBC does not bar proceedings against the directors/officers of the company.

Conclusion

The Supreme Court’s judgment in this case clarifies that the moratorium under Section 14 of the IBC does not extend to the directors or officers of a company. This means that directors can be held liable for consumer court orders even when the company is undergoing insolvency proceedings. The Court remitted the execution application to the National Commission to determine the liability of the directors, allowing them to raise objections. This decision ensures that the liability of directors is not circumvented due to the company’s insolvency, upholding the principles of consumer protection and corporate accountability.

Category

Parent Category: Insolvency and Bankruptcy Code, 2016

Child Categories:

• Section 14, Insolvency and Bankruptcy Code, 2016
• Section 32A, Insolvency and Bankruptcy Code, 2016
• Moratorium
• Corporate Insolvency Resolution Process
• Liability of Directors
• Consumer Protection

FAQ

Q: What is a moratorium under the Insolvency and Bankruptcy Code (IBC)?
A: A moratorium is a temporary suspension of legal proceedings against a company that is undergoing insolvency proceedings. It is designed to give the company time to reorganize its affairs without the pressure of legal action.

Q: Does the moratorium under the IBC protect company directors from liability?
A: No, the moratorium under Section 14 of the IBC only protects the company itself. It does not protect the directors or officers of the company from their individual liabilities.

Q: Can I pursue a case against the directors of a company if the company is under insolvency?
A: Yes, you can pursue a case against the directors of a company even if the company is under insolvency proceedings. The Supreme Court has clarified that the moratorium does not bar proceedings against directors.

Q: What should I do if I have a consumer court order against a company that is now under insolvency?
A: You can file an execution application against the directors of the company. The National Commission will then determine if they are liable to comply with the order and allow them to raise objections.

Q: What is the significance of this Supreme Court judgment?
A: This judgment clarifies that directors cannot escape liability by hiding behind the company’s insolvency. It reinforces the principle that directors are accountable for their actions and ensures that consumer rights are protected, even when a company is under insolvency proceedings.