Supreme Court: Personal Debts of Company Directors Not Shielded by IBC Moratorium

Supreme Court: Personal Debts of Company Directors Not Shielded by IBC Moratorium

In a significant ruling, the Supreme Court of India has clarified that the moratorium imposed under Section 14 of the Insolvency and Bankruptcy Code (IBC) does not shield directors or officers of a company undergoing Corporate Insolvency Resolution Process (CIRP) from personal liability.

Upon the company's admission into the Corporate Insolvency Resolution Process (CIRP), the National Consumer Disputes Redressal Commission (NCDRC) refused to allow the execution of a decree against both the company and its directors/officers. The Apex Court, however, held that the moratorium protection under Section 14 of the IBC only applies to the company, not its directors/officers. Consequently, the decree against the directors/officers can be executed even during the moratorium period.

The Supreme Court bench of Justices Abhay S. Oka and Ujjal Bhuyan ruled that the Section 14 moratorium imposed on a company undergoing CIRP does not shield its directors or officers from individual enforcement actions. While the company's debts are temporarily frozen, existing legal orders against the directors/officers remain enforceable, provided they are otherwise accountable.

At the heart of the case lies a complaint filed with the NCDRC by the Homebuyers' Association (Appellant Association) against M/s Ansal Crown Infrabuild Pvt. Ltd. (Developer Company), pertaining to a project they developed.

The NCDRC issued a ruling requiring the Developer Company to complete the project and transfer ownership of assigned units to the Appellant Association members by a designated deadline. Furthermore, the consumer panel provided homebuyers with the option to opt for a full refund of their investments with interest instead of accepting possession of their apartments.

Obtaining execution of the NCDRC order necessitated the Appellant Association to file a formal application with the Commission.

Subsequently, a separate action invoking Section 9 of the IBC was filed with the National Company Law Tribunal (NCLT) to initiate CIRP against the Developer Company. Upon reviewing the petition, the NCLT approved the commencement of CIRP and enacted a moratorium under Section 14 of the IBC, temporarily halting all debt recovery actions against the company.

In pursuance of the NCDRC order, the Appellant Association filed an execution application seeking its enforcement against the Developer Company and specific individuals, including directors and officers of the company. However, the NCDRC refused to execute the order, ruling that the moratorium imposed by the NCLT under Section 14 of the IBC rendered the decree unenforceable.

Dissatisfied with the NCDRC's decision, the Appellant Association lodged an appeal before the Supreme Court. Their argument centred on the lack of any explicit bar within the IBC against pursuing legal action against directors/officers of a company under moratorium.

In reaching its decision, the Supreme Court drew upon precedent established in two prior judgments. In P. Mohanraj vs. Shah Bros. Ispat (P) Ltd., (2021) 6 SCC 258, the Court clarified that the Section 14 IBC moratorium solely applies to the corporate debtor itself. Building on this principle, Anjali Rathi and others vs. Today Homes and Infrastructure Pvt. Ltd. and Ors, (2021) SCC OnLine SC 729, further affirmed that the individual liability of directors and officers within a company undergoing CIRP persists despite the moratorium's operation. Consequently, the Court concluded that the protections afforded by the moratorium do not extend to these individuals.

“Therefore, we are of the view that 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 ruled.

The Supreme Court set aside the NCDRC's order denying execution of its earlier ruling. They remitted the execution application back to the NCDRC, instructing them to proceed with execution against the remaining parties involved in the application, excluding the Developer Company itself while allowing the appeal.