IBC does not shield promoters from legal proceedings: SC

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The Supreme Court has clarified that the Insolvency and Bankruptcy Code which has provided a ray of hope to homebuyers left helpless by non-delivery of apartments, won’t shield directors and promoters of erring real estate companies who would have to face legal proceedings, The Times of India has reported.

“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 (promoters/directors) 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,” said a bench comprising justices Abhay S Oka and Ujjal Bhuyan.

The apex court bench was hearing a plea of homebuyers of Ansal Crown Heights in Faridabad in the National Capital Region. A plea of the petitioners filed against officials of the company for refund was earlier rejected by National Consumer Disputes Redressal Commission on the ground that the real estate firm was under IBC proceedings. The justices clearly stated that directors/officers of a company cannot claim protection due to the moratorium under Section 14 of the bankruptcy code.

Section 14 of IBC states that a moratorium means prohibition of institution of suits, execution of judgments, transferring/disposing of assets and recovery of property in possession among other things.

Appearing on behalf of the homebuyers advocates Bishwajit Bhattacharyya and Chandrachur Bhattacharyya argued that there was no prohibition on proceedings against the directors/officers of the company and it was the subject-matter of moratorium under Section 14 of the bankruptcy code.

In the current dispute, National Consumer Disputes Redressal Commission earlier directed the company to construct the flats within a time frame or refund the money to homebuyers waiting to get the property. After the NCDRC issued its order, Ansal Crown Heights went under IBC proceedings. The homebuyers responded by petitioning the NCDRC for refund of their money. This plea was turned down by the consumer rights body since the company was under the IBC proceedings.

The apex court set aside the order of the NCDRC and referred to its earlier judgments on the issue. The bench stated that the petitioner could not be prevented by the moratorium under IBC from initiating proceedings against the promoters.

The bench said, “This court approved the view taken in the case of P Mohanraj that notwithstanding the moratorium, the liability, if any, of the directors/officers will continue. This court, therefore, permitted the appellants to expressly proceed against the promoters of the company though there was a moratorium under Section 14 of the IBC affecting the company… Therefore, we set aside the impugned judgments and orders and remit the execution application to the National Commission. The execution will continue against the opposite party in the execution application. It is open for the opposite party to raise a contention that they are not bound to implement the order sought to be executed. They are entitled to file additional objections along with documents raising the issue of executability as against them.”