2020 (3) TMI 855 - HC - Insolvency and Bankruptcy

Validity of declaration of wilful defaulter - HELD THAT - The initial order of the Identification Committee declaring the petitioners as well as the PMPL as wilful defaulters was upheld both by the coordinate bench of this court on April 6 2017 and affirmed by a division bench of this court sitting in appeal over the order of the learned Single Judge passed on June 12 2017 - The fresh representation thereafter before the Review Committee might have contained several allegations including some already adjudicated by the Identification Committee on merits which attained finality the scope of enquiry of the Review Committee which was opened up only by the order of the Supreme Court dated May 8 2019 was restricted by the said order itself to the subsequent event of corporate resolution and its effect on the wilful defaulter tag on the petitioners - the issue raised by the petitioners has to be turned down since the Review Committee was justified in restricting its enquiry only to such subsequent event and its effect and not reopening the merits of the declaration of wilful defaulters by the Identification Committee since the same had already attained finality. As far as the subsequent event is concerned the petitioners are justified in arguing that since the wilful default tag was attached to the petitioners merely in the capacity of the promoters and directors of the defaulting company which itself had been absolved of such default automatically removing its wilful defaulter tag such tag could not be sustained thereafter. The petitioners were castigated as wilful defaulters only due to the alleged actions taken by them in commission of the default by PMPL. Hence the term wilful default even in respect of the petitioners does not pertain to their general conduct as company officials but is restricted to the default committed by the company of which they were promoters/directors - the Review Committee adopted a palpably erroneous legal process in taking the view that the petitioners and the company were individually labelled as wilful defaulters. The impact of the sustenance of such tag would be severely detrimental to the petitioners more so in view of the provisions of Section 29A of the Insolvency and Bankruptcy Code 2016. Once the default itself is resolved through a Corporate Resolution Process and the company is itself absolved from such tag by its merger with a different company the default cannot be said to continue in respect of the directors since it has already been absolved. It was not separate causes of action which led to the declaration of the petitioners and the PMPL as wilful defaulters but the same alleged defaults - Once the default itself goes by virtue of a corporate resolution the wilful defaulter tag of the petitioners in the capacity of promoters and directors of such company only and not in their individual capacities had to go. Thus the Review Committee acted palpably without jurisdiction in refusing to withdraw the wilful defaulter tag attached to the petitioners on an unjust and unfair basis. Petition allowed.

Summary

Issues Involved:
1. Legality of the declaration of petitioners as wilful defaulters by the Identification Committee.
2. Scope of the Review Committee's jurisdiction in reconsidering the declaration of wilful default.
3. Impact of the Corporate Insolvency Resolution Process (CIRP) on the wilful defaulter tag of the petitioners.
4. Petitioners' right to a comprehensive review by the Review Committee.

Detailed Analysis:

1. Legality of the Declaration of Petitioners as Wilful Defaulters by the Identification Committee:
The petitioners, who were promoters and directors of PMPL, were declared wilful defaulters by the respondent bank's Identification Committee on January 9, 2017. This declaration was upheld by a coordinate bench on January 20, 2017, and subsequently by a division bench on June 12, 2017. The petitioners challenged this declaration, arguing that the Review Committee did not reconsider the original order but only considered the subsequent event of corporate resolution. The court found that the initial order had attained finality and could not be reopened by the Review Committee.

2. Scope of the Review Committee's Jurisdiction in Reconsidering the Declaration of Wilful Default:
The petitioners argued that the Review Committee should have conducted a full review of the original order. However, the court held that the Review Committee's scope was limited to considering the impact of the subsequent corporate resolution event on the wilful defaulter tag, as directed by the Supreme Court. The Review Committee was justified in restricting its enquiry to this aspect and not reopening the merits of the original declaration.

3. Impact of the Corporate Insolvency Resolution Process (CIRP) on the Wilful Defaulter Tag of the Petitioners:
The court noted that the CIRP led to the transfer of PMPL and its assets to Essel Mining and Industries Limited, resolving the company's debts. Since the company was absolved of its wilful defaulter tag, the petitioners, as its promoters/directors, could not continue to be labelled as wilful defaulters. The court held that the Review Committee erred in sustaining the wilful defaulter tag for the petitioners after the company's resolution.

4. Petitioners' Right to a Comprehensive Review by the Review Committee:
The petitioners contended that their representation to the Review Committee was comprehensive and should have been fully considered. The court agreed, stating that the Review Committee should have reviewed all aspects of the declaration, including the veracity and legality of the original order. The court found that the Review Committee acted without jurisdiction in not providing a full review as directed by the Supreme Court.

Conclusion:
The court allowed the writ petitions, setting aside the impugned orders of the Review Committee dated October 25, 2019. The court declared that the wilful defaulter tag of the petitioners was withdrawn, allowing them to participate in business activities in their individual capacities or as promoters/directors of other companies. The respondents were directed to take necessary consequential steps accordingly.