IBC: Moratorium Granted U/s. 96 Cannot Be Extended To Proceedings With Respect To A Borrower Declared Wilful Defaulter- Gujarat HC

The Gujarat High Court has observed that the intention of moratorium granted under Section 96 of the Insolvency and Bankruptcy Code, 2016 (IBC) cannot be extended to the proceedings with respect to a borrower, who had been declared as a Wilful Defaulter.

The High Court has also held that the Writ Courts while exercising the jurisdiction under Article 226 of the Constitution cannot be in a position to act as an expert body, sitting in the armchair of the financial experts as to what should have been the business prudence, and it cannot be the subject-matter of judicial scrutiny.

The Bench of Justice A.S. Supehia observed that “...The proceedings of declaring the borrower, as per the master circular as a Wilful Defaulter, are in absolutely different realm than the recovery proceedings of debt and hence, the provision of Section 96 of the IBC cannot be extended to the petitioner, which has been declared as Wilful Defaulter.... Thus, the proceedings of Wilful Defaulter cannot be equated to the recovery of debt and hence, the moratorium under Section 96 of the IBC cannot frustrate the action of the respondents declaring the petitioner as a Wilful Defaulter.”

“It is further observed that the conclusion reached by the experts, particularly in the field of finance and banking cannot be substituted with a view of the Court and interference in such matters in the writ jurisdiction would not be called for unless it is demonstrably perverse or illegal or contrary to the admitted facts. It is further held if the decision, which is decided on the touchstone of reasonable person examining the plea of the debtor from the point of view of lender then such decision arrived at by the WDRC cannot be substituted with a view of the Court.” added the Bench.

Advocate Aditya Gupta appeared for the petitioner and Advocate BH Bhagat appeared for the respondent- IDBI Bank.

In this case, the petitioner has assailed the order of the Wilful Defaulter Identification Committee (WDIC) and the communication, by which the petitioner was declared as “Wilful Defaulter”.

The petitioner company was engaged in the business of trading, including grading of various items like graded non-coking steam coal, POY chips, POY/FDY Yarn, Pet Films etc. Due to inadequate cash-flows, on account of non-realization of trade receivables, the account of the petitioner company turned into a Non-Performing Asset (NPA) in the books of various consortium members banks, including the respondent-Bank.

Thereafter, the account of the petitioner company was red-flagged, and an internal investigation was carried out by Canara Bank. And after the investigation, WDIC declared the petitioner as Wilful Defaulter.

The Counsel for the petitioner submitted that he had been granted an interim moratorium under Section 96 of the IBC and therefore, no proceedings could be initiated for any debt.

The High Court noted that the petitioner was equating his case of having been declared as Wilful Defaulter to the proceedings in respect of any debt as provided under Section 96 of the IBC and said that “The intention of the moratorium, granted under Section 96 of the IBC cannot be extended to the proceedings with respect to a borrower, who has been declared as a Wilful Defaulter. The interim moratorium under Section 96 of the IBC can be referred only to the debt.”

Further, the Court also said that the petitioner had been given sufficient opportunities to put up his case but has miserably failed to satisfy the Court. Moreover, the Court could not interfere with the expert opinion of the Committees by venturing itself into the case and find faults with the aspect of such findings of the Committees.

“The entire exercise of both the committees, including calling upon the forensic report cannot be ignored and the impugned orders cannot be set aside merely on the ground that the petitioner was not supplied the Forensic Audit Report (FAR) in wake of the fact that he was already made aware of the relevant irregularities on illegalities committed by him, which was unearthed by the FAR.” expressed the Court.

Concluding it, the Court said that the petitioner had miserably failed to satisfy the allegations made against him regarding the diversion, routing and siphoning of the funds and instead, he was blaming the respondent committees for not supplying of the FAR.

Accordingly, the writ petition was dismissed.

Cause Title- Jagdish Prasad Saboo v. IDBI Bank Limited.  

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