Introduction

The National Company Law Appellate Tribunal (“NCLAT”) in Mr. Ashish Chaturvedi v. Inox Leisure Limited¹ has clarified that if an application is filed under the provisions of Insolvency and Bankruptcy Code, 2016 (“Code”), the penalties can only be imposed under the Code and not the Companies Act, 2013 (“Act”).

Background

An application under Section 9 of the Code made by Inox Leisure Limited was admitted against E–Z Barter Private Limited (“Corporate Debtor”) vide order dated 5.12.2018 and Corporate Insolvency Resolution Process (“CIRP”) was initiated against the Corporate Debtor along with appointment of Interim Resolution Professional (“IRP”). IRP moved two applications under Section 19(2) and Section 60(5) of the Code, alleging that the directors of the Corporate Debtor, Mr. Ashish Chaturvedi and Mr. Sanjay Kapoor (“Ex–Directors”) had withdrawn a sum of Rs. 32,00,000/- during moratorium whereas the Ex-Directors claimed that they had issued a post-dated cheque to one Mr. Kewal Kishan for a loan owed. The Adjudicating Authority being the National Company Law Tribunal (“NCLT”) allowed both the applications and imposed a fine on Ex-Directors of Rs. 5,00,000/- each under Section 128(6) of the Act. Hence the Ex-Directors filed an appeal to set aside the order dated 9.11.2020 passed by the Adjudicating Authority in IA No. 1253/2020 in IB–643/(ND)/2018. Since the Corporate Debtor is under the liquidation process, NCLAT directed the Liquidator to join as a respondent and to provide relevant books and records to IRP.   

Contentions

Only one contention was made before the NCLAT on behalf of Ex-Directors being the Adjudicating Authority imposed the penalty of Rs. 5,00,000/- on the Ex-Directors under Section 128(6) of the Act even though it did not have the jurisdiction to impose any such penalty on the Ex-Directors under the Act.

The contentions made on behalf of Liquidator are as follows:

• The Liquidator asked for the physical documents, valuation report and financial information regarding the assets of the Corporate Debtor from IRP and Ex-Directors. Even after sending repeated reminders, the Liquidator did not receive the required information from the Ex-Directors.
• It was also brought to notice that the cooperation of the Ex-Directors was not received at the time of filing the preliminary report and the first quarter report as well.
• The Ex-Directors were directed by the Adjudicating Authority vide order dated 9.11.2020 in I.A. 2025 of 2020 to pay Rs. 5,00,000/- each and Rs. 32,00,000/- along with interest of 12% per annum, which they failed to do.

Judgment

The Principal Bench of NCLAT observed that it is evident that the Ex-Directors not only failed to provide the financial records and information as demanded by the IRP and Liquidator multiple times, but also have not complied with the order of the NCLT. Such defiance cannot be condoned and should be dealt with strictly in accordance with Chapter VII (Offences and Penalties) of the Code.

It was noted that since the application was filed under the provisions of the Code, any order or penalty should have also been imposed under the Code. The NCLAT also noted that an opportunity of being heard to Ex-Directors ought to have been given before imposing any penalty. 

Conclusion

Thus, although the NCLAT agreed that the Ex-Directors ought to be penalised, in view of the penalty imposed under the Act and not the Code, the Principal Bench at NCLAT set aside the impugned order while directing the NCLAT to provide an opportunity to Ex-Directors of being heard, and to then take appropriate actions under the provision of the Code.

Footnote

1 Judgment dated 14^th February 2022 in Company Appeal (AT) (Insolvency) No. 1103 of 2020

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.