Supreme Court: Insolvency shield is for firm, not promoters

NEW DELHI: Promoters of real estate companies use pending insolvency proceedings as a shield to protect themselves in court cases filed by homebuyers for not giving possession of flats, but Supreme Court on Monday clarified that a moratorium against the corporate debtor does not give protection to promoters and directors, and proceedings can continue against them.A bench of Justices Vikram Nath and Sandeep Mehta quashed an order passed by the National Consumer Disputes Redressal Commission by which a consumer complaint against promoters and directors of a Bengaluru-based real estate company was stayed in view of insolvency proceedings against the company. The court allowed the plea of homebuyers who challenged the NCDRC order.Moratorium to preserve assets of corporate for resolution: Supreme CourtSection 14 of Insolvency and Bankruptcy Code provides that once insolvency process begins and a moratorium is declared, the continuation of pending suits and proceedings against the corporate debtor, including execution proceedings, comes to an automatic halt. The object of this moratorium is to preserve the assets of the corporate debtor during the insolvency resolution proceedings and to facilitate an orderly resolution.Explaining the provision, the bench said it was not open either to the adjudicating authority or the court to enlarge its ambit beyond what the statute contemplated, and a plain reading of the provision made it clear that the moratorium operated against the corporate debtor alone.“No other category, whether it be any subsidiary company, any managers/directors, personal guarantors etc, can be added to it unless specifically provided,” it said.Homebuyers had moved SC through advocate Chandrachur Bhattacharya, contending that promoters of the company could not claim protection of the moratorium. Accepting their plea, the court said the protective sweep of a moratorium must remain within the four walls as carved out by the statute.“It ought not be expanded in a manner that stultifies remedies envisaged under the Consumer Protection Act, unless expressly provided. Code is to facilitate the resolution process and not to eclipse the statutory remedies,” the bench said while reviving the proceedings against promoters of Mantri Technology Constellation Pvt Ltd.“In the present case, respondent no. 1 (company) alone is the corporate debtor against whom the CIRP has been initiated. No independent moratorium or independent protection operates in favour of respondent nos. 2 to 7 (promoters and directors). In the absence of any legal bar against continuation of proceedings qua the said respondents, NCDRC was not justified in rejecting appellants’ prayer to proceed with the complaint against the rest of the respondents,” the bench said.Get the latest India News and Live updates. Download the TOI app.