Delhi High Court: Creditors cannot be given preferential treatment towards satisfaction of a compromise decree during moratorium September 24, 2019
Published in: Between The Lines
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Ms. Ajita Patnaik
Ms. Batul Barodawala
Mr. Drushan Engineer
Ms. Ishita Mishra
Ms. Rhea Sethi
The Delhi High Court (“DHC”) has, in the case of Ved Prakash Abbot v. Kishore K. Avarsekar and Others (decided on August 09, 2019) held while dismissing a contempt petition that pending moratorium under the Insolvency and Bankruptcy Code, 2016 (“IBC”), creditors cannot be given preferential treatment towards satisfaction of a compromise decree.
Ved Prakash Abbot (“Petitioner”) had filed a suit for recovery of dues against a Company (“Company”) owned by Kishore K. Avarsekar (“Respondent”). However, the parties reached a compromise and a compromise decree was passed that recorded the terms of the same, where the Company was directed to pay a sum of INR 10,19,763 in monthly instalments. However, on June 20, 2017 an interim resolution professional was appointed, as an application under Section 10 of the IBC for initiation of the corporate insolvency resolution process (“CIRP”) was made. Thus, moratorium was imposed as per Section 14 of the IBC. Subsequently, the cheque for the second instalment was dishonoured. On March 20, 2018 an application for liquidation was passed and a liquidator was appointed. Further, a contempt petition was filed by the Petitioner where it was alleged that the Company and the Respondent have committed a contempt of the compromise decree by not repaying the sum in the manner provided.
Whether the compromise decree could be honoured in view of the initiation of the CIRP as per the IBC?
The Petitioner argued that there was a wilful disobedience of the compromise decree previously passed. The Petitioner further submitted that even prior to the appointment of the interim resolution professional and initiation of moratorium as per Section 14 of the IBC, the Respondents defaulted on two of the payments due and therefore it could be inferred that the Respondents reflected no intention to abide by the terms of the compromise decree. It was further contended that Section 14 of the IBC does not have any impact on the contempt proceedings before a High Court under Article 215 of the Constitution of India and the Contempt of Courts Act, 1971. The Delhi High Court’s judgement in the case of E.D. v. Axis Bank (decided on April 02, 2019) was interpreted and analysed where it was held that provisions of Section 14 of the IBC are not applicable to a statutory authority under the Prevention of Money Laundering Act, which would apply to the instant case. Other judgements such as Delhi Development Authority v. Skipper Construction Company (Private) Limited and Others [(1996) 4 SCC 622] and Jyoti Limited v. Kanwaljit Kaur Bhasin [32 (1987) DLT 198] were referred to in order to state that as per the principle of ‘lifting the corporate veil’ the directors and other officers in-charge have been previously held responsible for the acts and/or omissions of companies.
The Respondent’s main argument was centred on the definition of ‘civil contempt’ as per Section 2(b) of the Contempt of Courts Act, 1971. Section 2(b) of the Contempt of Courts Act, 1971 is reproduced below:
“(b) “civil contempt” means wilful disobedience to any judgement, decree, direction, order, writ or other process of a court or wilful breach of an undertaking given to a court;”
The Respondent thereby argued that in order to qualify as a contempt of court, there shall have to be a ‘wilful’ disobedience or breach. The Respondent further stated that prior to the initiation of the CIRP, it was not in a financial position to repay the amounts. After initiation of the CIRP, an interim resolution professional was appointed who took over the management of the Company and was vested with the power of the board of directors of the Company.
The Respondent contended that he had certainly not benefited from the Company going under the CIRP as he actually lost control of the Company with the appointment of the interim resolution professional. The Respondent further submitted that the Petitioner is entitled to the satisfaction of the decree only through the route of proceedings under the aegis of the IBC. Further, paying the Petitioner’s dues before paying the dues owed to the 328 other operational creditors would amount to preferential treatment of a particular creditor. The Respondent cited the Supreme Court’s judgement in the case of Ashok Paper Kamgar Union v. Dharam Dhoda and Others [(2003) 11 SCC 1] wherein it was held that ‘wilful’ in Section 2 of the Contempt of Courts Act, 1971 means an act or omission done voluntarily and intentionally with the specific intent to do something the law forbids or with an intent to omit to do something that the law requires to be done. The Respondent stated that in view of the CIRP being initiated, the lack of payment is not wilful, voluntary or intentional.
OBSERVATIONS OF THE DHC
The DHC, while weighing the arguments made by the parties referred to the judgement of the Supreme Court in the case of B.K. Kar v. High Court of Orissa [AIR 1961 SC 1367] wherein it was held that mere unintentional disobedience is not enough to hold anyone guilty of contempt. Although disobedience might have been established, absence of wilful disobedience on the part of the contemnor will not hold him guilty unless the contempt involves a degree of fault or misconduct. It was further held that the Respondent was justified in not giving preferential treatment to the Petitioner towards satisfaction of the compromise decree, and that the principal of lifting of corporate veil is not applicable. The DHC also held that the criminal proceedings can continue despite of moratorium granted under the IBC.
DECISION OF THE DHC
The DHC stated that the Respondent is not guilty of contempt of court as the Company had not wilfully disobeyed the compromise decree. However, it was further clarified that if in the future the Company is revived or any fresh cause of action arises in favour of the Petitioner, the judgment rendered by the DHC will not come in the way of the Petitioner seeking a remedy available to him in law.
Vaish Associates Advocates View
This judgement clarifies a pertinent question of law that the imposition of moratorium and commencement of CIRP shall override previous payment obligations including compromise decrees, and that on institution of the CIRP under the IBC, a corporate debtor is justified in not giving preferential treatment to a party towards satisfaction of a previous payment obligation, such as a compromise decree.
This judgement follows other judgements that have been passed recently where the primacy of the IBC over other legislations have been upheld. More importantly, this judgement recognizes the provisions and functioning of the IBC in holding that once a company is under the provisions of the CIRP, the promoter and the board of directors do not have any control over the operations of the company.