2025 (5) TMI 2003 - AT - IBC

Initiation of legal proceedings against the Personal Guarantors by any other Financial Creditor at the stage when the moratorium has been imposed under Section 96 of the I B Code 2016 - HELD THAT - Whenever an Appellate Tribunal is called upon to answer or judicially scrutinize an order passed under a statute it has had to confine itself to the grounds taken and the arguments extended by the counsel for the parties. At the stage of exercising the Appellate jurisdiction of scrutinizing the judicial propriety of orders passed by the Ld. NCLT the Appellate Tribunal is not required to traverse into the conduct of the party to the proceedings before the Tribunal. The view expressed by the Tribunal in the impugned order dated 13.12.2024 rejecting the proceedings drawn under Section 95 of the I B Code 2016 by the Appellant because of the embargo created due to Section 96 of the I B Code 2016 do not suffer from any apparent error of fact and law. The grievance of the Appellant is that he has been denied to file an application under Section 95 of the I B Code 2016 because another application under Section 95 of the I B Code 2016 has already been filed and the interim moratorium is in place. In normal circumstances once orders are passed under Section 100 either admitting or rejecting the said application the grievances will be addressed. If the application gets admitted he can file his claims with the Resolution Professional. If it is rejected he can file his own Section 95 application. Conclusion - The legal actions already initiated against a Personal Guarantor under Section 95 of the I B Code 2016 with an interim moratorium in place under Section 96 preclude any other Financial Creditor from initiating fresh proceedings during the moratorium. The Ld. Adjudicating Authority to hereby requested to expedite the said proceedings. Apart from this the appeal lacks merit and the same is accordingly dismissed .

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal are:

(a) Whether, upon the imposition of an interim moratorium under Section 96 of the Insolvency and Bankruptcy Code, 2016 (I & B Code), any other Financial Creditor can initiate legal proceedings under Section 95 against the Personal Guarantor of a Corporate Debtor when proceedings initiated by another Financial Creditor are already pending;

(b) Whether the bar created under Section 96(1)(b) of the I & B Code, 2016, prohibiting initiation of legal proceedings during the interim moratorium, can be circumvented or interpreted differently by applying the principles of purposive construction or the mischief rule;

(c) Whether written submissions, which are not part of pleadings as defined under Order VI Rule 1 of the Civil Procedure Code, 1908 (CPC), can be relied upon at the appellate stage in proceedings under the I & B Code;

(d) The legal status and applicability of a Ministry of Corporate Affairs Discussion Paper dated 18.01.2023 concerning Section 96 of the I & B Code, 2016, in judicial interpretation;

(e) Whether the impugned order suffers from violation of the audi alteram partem principle;

(f) The scope of appellate scrutiny regarding procedural delays and conduct of parties before the Adjudicating Authority.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Bar on Initiation of Proceedings under Section 95 during Interim Moratorium under Section 96

Legal Framework and Precedents: Section 95 of the I & B Code, 2016, enables a Financial Creditor to initiate insolvency proceedings against a Personal Guarantor of a Corporate Debtor. Section 96 mandates the commencement of an interim moratorium upon filing an application under Section 94 or 95. Section 96(1)(b)(ii) explicitly prohibits creditors from initiating any legal action or proceedings in respect of any debt during the interim moratorium period. The constitutional validity of Sections 95 to 100, including Section 96, was upheld by the Supreme Court in a recent judgment dated 09.11.2023.

Court's Interpretation and Reasoning: The Tribunal held that once an application under Section 95 is pending and an interim moratorium is in force, no other Financial Creditor can initiate fresh proceedings against the same Personal Guarantor. The bar under Section 96(1)(b) is absolute and creates a statutory embargo on initiation of parallel or subsequent proceedings during the moratorium. The Tribunal rejected the appellant's contention that such a bar can be circumvented.

Key Evidence and Findings: The Respondent's memorandum established that an application under Section 95 was already pending against the Personal Guarantor by IDBI Trusteeship Services Limited. The appellant's petition was dismissed on this basis.

Application of Law to Facts: The Tribunal applied the plain language of Section 96, emphasizing that the interim moratorium applies to all creditors and suspends legal actions related to the debt. Since the proceedings were ongoing, the appellant's petition was barred.

Treatment of Competing Arguments: The appellant argued for a purposive or mischief-based interpretation allowing initiation of proceedings despite the moratorium. The Tribunal rejected this, referencing the Supreme Court's upholding of the constitutional validity of the provisions, thereby precluding contrary interpretations.

Conclusion: The Tribunal concluded that the statutory bar under Section 96(1)(b) is unambiguous and binding, precluding initiation of a second or subsequent Section 95 proceeding during the interim moratorium.

Issue (b): Applicability of the Mischief Rule and Purposive Construction to Section 96

Legal Framework and Precedents: The appellant relied on the mischief rule of statutory interpretation, as explained in a Supreme Court judgment concerning the Indian Medical Council Act, 1956, which requires courts to consider the law before the Act, the defect or mischief the Act sought to remedy, the remedy provided, and the reason for the remedy.

Court's Interpretation and Reasoning: The Tribunal distinguished the present case from the medical education context, noting that the I & B Code is a special statute with overriding effect under Section 238. The Supreme Court has already upheld the constitutional validity of Sections 95 and 96, which precludes any reinterpretation under the mischief rule that would undermine the statutory scheme.

Key Evidence and Findings: The Tribunal referred to the Supreme Court's decision in Dilip B. Jiwrajka v. Union of India & Others, which confirmed the validity and intended effect of the moratorium provisions.

Application of Law to Facts: Applying the principle of stare decisis and respecting the special nature of the I & B Code, the Tribunal held that the mischief rule could not be invoked to dilute the clear statutory bar imposed by Section 96.

Treatment of Competing Arguments: The appellant's reliance on the mischief rule was rejected as inconsistent with the binding Supreme Court precedent and the legislative intent behind the Code.

Conclusion: The Tribunal held that the mischief rule is inapplicable to Section 96 of the I & B Code, 2016, given the settled constitutional validity and statutory clarity.

Issue (c): Reliance on Written Submissions Not Constituting Pleadings

Legal Framework and Precedents: The I & B Code does not expressly define pleadings or regulate written submissions. The Tribunal applied the general principles of pleadings under Order VI Rule 1 of the CPC, which defines pleadings as plaints and written statements. Order VIII Rule 9 restricts subsequent pleadings unless leave of the court is obtained.

Court's Interpretation and Reasoning: The Tribunal held that written submissions filed before the NCLT, which were not part of the formal pleadings (petition or reply), cannot be treated as pleadings for the purpose of appeal under Section 61 of the I & B Code. The appellant did not seek or obtain leave under Order VIII Rule 9 to treat such submissions as pleadings.

Key Evidence and Findings: The appellant attempted to rely on written submissions made before the NCLT to support his arguments on Section 96, but these were not part of the pleadings.

Application of Law to Facts: The Tribunal applied the CPC principles by analogy to fill the legal vacuum in the I & B Code, emphasizing that pleadings must be limited to petitions and replies unless leave is granted.

Treatment of Competing Arguments: The appellant's attempt to rely on non-pleading submissions was rejected as procedurally impermissible.

Conclusion: The Tribunal ruled that written submissions not forming part of pleadings cannot be considered at the appellate stage without prior permission.

Issue (d): Legal Status of Ministry of Corporate Affairs Discussion Paper

Legal Framework and Precedents: The appellant referred to a Discussion Paper dated 18.01.2023 issued by the Ministry of Corporate Affairs, which suggested reconsideration of restrictions under Section 96.

Court's Interpretation and Reasoning: The Tribunal held that a Discussion Paper is a preliminary document inviting comments and does not constitute law. It has no binding or guiding force in judicial proceedings. Further, no subsequent amendment or notification has been issued to alter Section 96.

Key Evidence and Findings: The absence of any official Gazette notification or amendment following the Discussion Paper was noted.

Application of Law to Facts: The Tribunal applied Article 13 of the Constitution, which defines "law" for fundamental rights purposes, and found that the Discussion Paper does not qualify as law under this definition.

Treatment of Competing Arguments: The appellant's reliance on the Discussion Paper to argue for a mischief-based interpretation was rejected.

Conclusion: The Discussion Paper cannot be used to override or reinterpret the statutory provisions of the I & B Code.

Issue (e): Alleged Violation of Audi Alteram Partem Principle

Legal Framework and Precedents: The appellant contended that the impugned order violated the principle of hearing both sides.

Court's Interpretation and Reasoning: The Tribunal observed that it is not necessary for the adjudicating authority to elaborate on every ground raised, especially when the statutory provisions themselves conclusively address the issue. The record showed that the appellant was heard and his contentions considered.

Key Evidence and Findings: The impugned order reflects consideration of the appellant's submissions and grounds.

Application of Law to Facts: The Tribunal applied the principle that procedural fairness does not require exhaustive discussion if the law itself bars the claim.

Treatment of Competing Arguments: The appellant's claim of denial of natural justice was rejected as unfounded.

Conclusion: No violation of audi alteram partem was found.

Issue (f): Scope of Appellate Scrutiny Regarding Delays and Conduct

Legal Framework and Precedents: The appellant raised concerns about delays and adjournments in the pending proceedings initiated by another creditor.

Court's Interpretation and Reasoning: The Tribunal held that appellate scrutiny is confined to grounds raised and arguments made. It is not the forum to probe the conduct of parties or procedural delays before the adjudicating authority.

Key Evidence and Findings: Reference was made to a High Court judgment which held that past conduct is irrelevant at the appellate stage unless specifically pleaded and argued.

Application of Law to Facts: The Tribunal declined to entertain arguments on delays or adjournments as irrelevant to the legal question under appeal.

Treatment of Competing Arguments: The appellant's grievance regarding delay was noted but not entertained as a ground for appeal.

Conclusion: The appellate jurisdiction does not extend to revisiting procedural conduct or delays.

3. SIGNIFICANT HOLDINGS

"Section 96(1)(b)(ii) of the I & B Code, 2016, creates an absolute bar that the creditors of the debtor shall not initiate any legal action or proceedings in respect of any debt during the interim moratorium period."

"The constitutional validity of Sections 95 to 100 of the I & B Code, 2016, having been upheld by the Hon'ble Apex Court, the provisions contained therein cannot be interpreted contrary to the statutory scheme by applying the principles of purposive construction or the mischief rule."

"Written submissions which are not part of pleadings as defined under Order VI Rule 1 of the Civil Procedure Code, 1908, cannot be relied upon at the appellate stage without prior leave of the court."

"A Discussion Paper issued by the Ministry of Corporate Affairs, which has not been followed by any legislative amendment or Gazette notification, cannot be treated as law or binding on judicial interpretation."

"The principle of audi alteram partem does not require an elaborate discussion of every ground raised when the statutory provisions themselves conclusively bar the claim."

"The appellate authority is confined to the grounds raised and cannot delve into the conduct of parties or procedural delays before the adjudicating authority."

"The legal actions already initiated against a Personal Guarantor under Section 95 of the I & B Code, 2016, with an interim moratorium in place under Section 96, preclude any other Financial Creditor from initiating fresh proceedings during the moratorium."