This article is written by Dnyaneshwari Patil from RTMNU Babasaheb Ambedkar College of Law, Nagpur. In this article, she discusses the scope and procedure under Indian Bankruptcy Code regarding the moratorium. The extension of the moratorium period and the time limit mentioned under Section 12 of the IBC with the help of several cases. 

Introduction

The Insolvency and Bankruptcy Code, 2016 (IBC) was formulated to consolidate the scattered insolvency procedures. It provides for a speedy resolution and supports the National Company Law Tribunal (NCLT) by creating the functionaries like Resolution Professionals (RP), Information Utilities (IUs), and Insolvency Resolution Professional Agencies (IRAs). Before the enactment of IBC, multiple legislations led to a multiplicity of proceedings and caused grievances to the parties, and sometimes led to evasion of the proceedings. Therefore, it became indispensable to bring all the laws under one umbrella, and thus the Insolvency and Bankruptcy Code 2016 was introduced. Another feature of IBC is its time-bound resolution process. It is mainly concerned with reviving the sick companies within a period of 180 days and also provides a one-time extended period of 90 days. The moratorium period focuses on the benefits of the company and unsecured creditors rather than just secured creditors. The moratorium period’s purpose is to give the debtor a chance to focus on reviving the company from the losses and reconstructing the company. Thus, the Hon’ble Supreme Court in Innoventive Industries Ltd. v. ICICI Bank (2017) observed that the intention behind the levying moratorium period was to provide the debtors with some breathing spell in which they could reorganise their business.

Scope of IBC Moratorium

The sole reason the period of moratorium is initiated is to distribute the assets in an equitable way to the creditors and also the debtors. It also has provisions regarding initiation of arbitral claims, breach of contractual obligation, already initiated action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), seeking of debt recovery by banking institutions and violation of fundamental rights which are not only in the context of bankruptcy. The inception of Section 238 has an overriding effect of the IBC on other provisions. Thus in Innoventive Industries vs. ICICI Bank, the Supreme Court held that when there is a direct clash between the state act’s moratorium provision, the moratorium provision under the IBC has the overriding effect due to the non-obstante clause. It is clear from Section 14 and Section 13 of IBC that any action taken under the SARFAESI Act and Recovery of Debt and Bankruptcy Act, 1993 (DRT Act) would be suspended without affecting the limitation period for filing the same.

Regarding the status of the secured creditors, the creditors could relinquish their security and be a part of the liquidation process; however, they will be given higher preference in the distribution or, the secured creditor can refuse to be a part of the liquidation process and enforce its security interest according to the provision of the IBC.

In J.M. Financial Asset Reconstruction Co. v. Indus Finance Ltd (2017), the NCLT declared the moratorium period. Consequently, the secured creditor challenged the staying of the sale of an asset as it was in accordance with the provision of the SARFAESI. The question was whether the IBC provisions were intended to overrule the provisions of the SARFAESI. The NCLT, Mumbai bench, held that the sale was not ultimately concluded as only 25% of the payment was made, and the completion of the sale could not be completed during the moratorium period.  Although the creditor would be forced to wait, its right to security would be intact.

Thus, IBC will have the effect notwithstanding anything inconsistent in addition to that, contained in any other law for the time being in force, including D.R.T. Act, 1993; SARFAESI Act, 2002; money suit, etc.

Procedures under IBC

The adjudicating authority declares the moratorium period according to Section 14 of the IBC with the admission of the insolvency application, the same is publicly announced, which contains the last day within which the claims should be made and the information regarding the interim resolution professional. The management of the affairs of the corporate debtor goes to the interim resolution professional who protects and preserves the value of the property of the corporate debtor and manages its operation as a going concern under the direction of the Committee of the Creditors (CoC) appointed under Section 21 of the IBC code. Decisions by this Committee are to be taken by a vote of not less than 75% of the voting share of the financial creditors. Then after considering the feasibility and viability of the plan, the interim resolution professional is given the power under Section 28 of the Code to carry out the resolution process. Thus the interim resolution professional has the broad authority to raise finances, create security interests, etc., subject to the prior approval of the Committee of Creditors. Apart from the major roles of the resolution professionals appointed by the tribunal, one of the other aspects that the resolution professional has to keep in mind is to consider the time factor. Until the company is in the moratorium period, the resolution plan by the resolution professional has to be submitted within the period. However, submitting the resolution plan within such a short period, the resolution professional has to consider several things so that the debtors are brought back to a stable position; therefore it becomes evident that the resolution professional should seek an extension of time to be able to submit the resolution plan. Section 12 of the Code mentions the time limit for completing a corporate debtor’s insolvency and resolution process. One hundred and eighty days are given within which the Corporate Insolvency Resolution Process (CIRP) shall be complete.

Further, as per Regulation 40, the resolution professional may move an application before the adjudicating authority seeking extension of the period described above and which can be extended only if the Adjudicating Authority is satisfied that the subject matter of the case is such that the corporate insolvency resolution process cannot be completed within 180 days, but the extension cannot be for more than 90 days. Further, provided that any extension of the period of corporate insolvency resolution process under Section 12 shall not be granted more than once. Before seeking the extension of time from the tribunal, the resolution professional has to seek permission from the creditor committee by passing the resolution in a meeting of creditors, which hold 66% (before 75%) of voting shares to give consent.

There are instances where the NCLT observed that the resolution process should be completed before the maximum time prescribed. Thus, in SBI vs Jet Airways (India) Ltd.(2019), the NCLT Mumbai bench observed that the corporate debtor being the largest private-sector airline with a vast workforce and serving both domestic and international market, and due to their divulgence in an important sector it pertains to national importance. Hence the NCLT directed the RP and members of CoC to expedite the matter and try to finalise the resolution plan on the fast track mode. They should not wait for the completion of the statutory period of 180/270 days timeline permissible under IBC.   

The inherent power of the NCLT to impose a moratorium before the initiation of the CIRP

NUI Pulp and Paper Industries Pvt. Ltd. v. M/s. Roxcel Trading GMBH

In this 2019 case, an operational creditor filed an application under Section 9 against the corporate debtor. At the request of the Corporate Debtor, time was allowed by the Court to file a reply affidavit. However, the Court also passed an interim order restraining the Corporate Debtor and its Directors from alienating, encumbering or creating any third party interest on the assets of the Corporate Debtor, the same was opposed by the appellant, saying that the Adjudicating Authority has no jurisdiction and the power under Rule 11 cannot be exercised. Thus, it was held that the Adjudicating Authority doesn’t need to await hearing of the parties for passing the order of ‘Moratorium’ under Section 14. Therefore, to avoid the misuse of the tribunal process by anyone or for meeting the ends of justice, the adjudicating authority has the inherent power to impose a moratorium and pass such an interim order.

Extension of moratorium period under Section 12 of IBC : case analysis

The application under section 12(2), (3) for extension of the time period 

Quantum Limited v. Indus Finance Corporation Limited

In this 2018 case, the question arose whether the application for extension of the time period under Section 12 filed after the expiry of 180 days can be granted? It was held by the NCALT, New Delhi, that there is no provision stipulating that application for the extension of time period be filed within 180 days, including the last day that is the 180^th day. The CoC instructs the resolution professional to file an application for such extension, the Adjudication Authority in the interest of justice and to ensure that the resolution process is completed following all the procedures, time should be granted by the Adjudicating Authority who is empowered to extend such period up to 90 days beyond 180th day. The rejection of the application for the extension of the time period was not based on the grounds that the CoC or the resolution professional had not justified their performance during the 180 days; therefore, it was the duty of the Adjudicating Authority to grant extension so that suitable resolution plan could be approved instead of going for liquidation which is a last resort.

Panna Pragati Infrastructure Pvt. Ltd. and Another v. Amit Pareek & Ors.

In this case, the appellant informed the CoC that he desired to file a second resolution plan, which was filed on 14 February 2020, well within the timeline of 180 days. However, it was submitted two days after the submission of the revised plan of a successful resolution applicant. The RP rejected the second revised plan due to the impending expiry of 180 days. Consequently, the appellant filed an application for directing the RP to take on record and consider the revised offer; the Adjudicating Authority rejected the same because the CoC has already approved the Resolution Plan of the highest bidder with 100% voting. Thus, the question arose that when in exceptional circumstances, the timeline prescribed under IBC can be relaxed to allow a prospective resolution applicant to submit a second revised resolution plan? The Court held that the RP was wrong in rejecting the revised plan by the appellant as it was the duty of the RP to present the same before the CoC, considering that the ordinary timeline period of 180 days was still subsisting. Therefore, the contention of the respondent regarding the non-extension of time is not in tune with the law interpreted in “Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and Ors.” Therefore, the impugned orders were set aside, and the appeal was allowed.

R.P. of SEL Manufacturing Company Ltd. v. Committee of Creditors of SEL Manufacturing Ltd. & Ors.

In this 2019 case, The CIRP was initiated against ‘SEL Manufacturing Company Limited’ (Corporate Debtor). During the pendency of the case, the ‘Promoters’ moved before the High Court and then to the Hon’ble Supreme Court; the matter, for a certain reason, stayed by one or other order passed by both the courts. Therefore, on CoC’s instance, the RP filed an application before the Adjudicating Authority for exclusion of more than 100 days. However, the Adjudicating Authority rejected the prayer and filed the present appeal before the NCLAT, Delhi. It was held that the matter was stayed for about more than one year by both the High Court and Supreme Court through an interim order. Therefore, it is a fit case for exclusion of a certain period under Section 12, or else the impugned order rejecting the period of exclusion might result in ‘Liquidation’. Further, 90 days of exclusion was allowed for completion of the resolution process.

Excluding specific days for the purpose of counting the total period of 180/270 days.

Quinn Logistics India Pvt. Ltd. v. Mack Soft-Tech Pvt. Ltd.

In this 2018 case, the exception was carved out regarding exclusion of certain periods from the counting of the total period of 270 days of resolution process due to some occurrence of unforeseen circumstances or if the facts and circumstances justify exclusion. The exceptions mentioned under orders are:

1. If the corporate insolvency resolution process is stayed by a court of law or the Adjudicating Authority or the Appellate Tribunal, or the Hon’ble Supreme Court.
2. If no ‘Resolution Professional’ is functioning for one or another reason during the corporate insolvency resolution process, such as removal.
3. The period between the date of order of admission/moratorium is passed and the actual date on which the ‘Resolution Professional’ takes charge for completing the corporate insolvency resolution process.
4. On hearing a case, if an order is reserved by the Adjudicating Authority, the Appellate Tribunal, or the Hon’ble Supreme Court, finally pass an order enabling the ‘Resolution Professional’ to complete the corporate insolvency resolution process.
5. If the corporate insolvency resolution process is set aside by the Appellate Tribunal or order of the Appellate Tribunal is reversed by the Hon’ble Supreme Court, and the corporate insolvency resolution process is restored.
6. Any other circumstances which justify the exclusion of a certain period. However, excluding the period, if a further period is allowed, then the total number of days cannot exceed 270 days which is the maximum time limit prescribed under the Code.

Velamur Varadan Anand v. Union Bank of India & Anr.

In this 2018 case, the application was admitted on 16th August 2017. The same was intimated to the RP. However, he took charge on 14th September 2017. Relying on the Quinn logistic Pvt. Ltd. (supra), the NCLAT was directed to exclude the 30 days for the purpose of counting CIRP. Further, it allowed the RP to complete the CIRP by 15^th June 2018.

Mr Abhilash Lal & Axis Bank Ltd v. Seven Hill Healthcare Pvt Ltd & Anr.

In this 2017 case, the applicant filed an application for extension/exclusion of the time period of the CIRP as the corporate debtor was being used as a hospital during the COVID times by the government authorities. Due to this, the authorities were not able to proceed to the site for inspection, which is needed for the resolution plans. Therefore, the adjudicating authority held that extension of the time period would benefit the stakeholder instead of going for liquidation. It approved the extension of the period by 90 days.

Sudip Bhattacharya, Resolution Professional of Reliance Naval and Engineering Ltd.

In this appeal, the appellate tribunal upheld the order passed by NCLT, Ahmedabad Bench, which granted 90 days of extension to the RP to complete the CIRP  beyond 180 days but declined to exclude the lockdown period of 25th March 2020, till 31st August 2020 on the ground that 90 days period of the extension was still in hand.

The Insolvency and Bankruptcy Code (Amendment) Act, 2019 and the cap on corporate insolvency resolution process

Two provisos were inserted under Section 12(3) of the Code by way of Amendment 2019. It mandated that the CIRP should be concluded within 330 days from the commencement of the insolvency procedure. These 330 days include an ordinary timeline of 180 plus a one-time extension of up to 90 days if granted by the Adjudicating Authority, time taken in legal proceedings in relation to the CIRP of the corporate debtor. However, the Hon’ble Court struck down the term “mandatory” in the Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and Ors. (2019). In this, the Court held that the term “mandatory” is manifestly arbitrary under Article 14 of the Constitution of India and is an unreasonable restriction on the litigant’s right to carry on business under Article 19(1)(g) of the Constitution. However, the completion of CIRP within 330 days is the general rule defining the outer limit, but the same can be extended only in exceptional cases. 

Ritu Rastogi Resolution Professional Benlon India Ltd v. Riyal Packers

In this 2020 case, an appeal was filed regarding an impugned order declining extension of the time period of the CIRP process beyond 330 days. The RP was requesting just a 15- 20 days extension. It was contended by the appellant that due to basic information not being received within time by the RP, therefore, the process could not be completed. The NCLAT held that the case would come under an exceptional circumstance, and departure from the general rule of 330 as an outer limit under Section 12 can be allowed. If the appeal is denied, then it would have profound implications imperilling the legitimate interests of all stakeholders. Consequently, it might lead to liquidation, which has to be avoided at all costs.

Pioneer Rubchem Pvt. Ltd v. Vivek Raheja Resolution Professional, Trading Engineers (International) Ltd.

In this 2020 case, the extension of the time period beyond 330 days was declined by the NCLAT and held that all attempts should be made to complete the CIRP within 270 days even though the directory provision provides for completion of the judicial process up to 330 days. Further, it was held that if the appeal were allowed, it would open a floodgate for such applications & will derail CIRP & the purpose of IBC, not only in this case but in other cases also; therefore, the appeal was dismissed.

End of the moratorium period

Section 14(4) mentions the time period the moratorium is effective, i.e. until the completion of the CIRP or on the approval of a resolution plan by the Adjudicating Authority or on a resolution of the Committee of Creditors to liquidate the Corporate Debtor, whichever is earlier. If the CIRP is not completed within the time period mentioned under Section 12, then the Adjudicating Authority may initiate the Liquidation procedure. When the liquidation procedure is initiated, as per the provision of the IBC, the Company will be wound up, and the steps will be taken for distribution of proceeds to creditors. In such a situation, the adjudicatory authority will direct the Corporate Debtor to initiate the liquidation process according to the manner mentioned in chapter III (Section 33). Similarly, a public announcement regarding the same shall be issued, and such order is required to be sent to the authority with which the Corporate Debtor is registered. Thus, the moratorium period is not indefinite, under Section 14(4) and therefore, “ the order of moratorium does not continue indefinitely, but has effect only from the date of the order declaring moratorium till the completion of the corporate insolvency resolution process which is time-bound, either culminating in the order of the Adjudicating Authority approving a resolution plan or in liquidation”. ( P. Mohanraj & Ors. vs M/S Shah Brothers Ispat Pvt. Ltd.).

After completing the moratorium period, if any claims of the creditors involve a disputed question that the RP or the adjudicatory authority cannot solve, then the creditors can approach any court of competent jurisdiction or apply to an appropriate forum once the period of moratorium is completed. For the financial and operational creditors whose claims are being settled by the adjudicatory authority or the Appellate Tribunal, the judgment is binding on both the creditors in terms of Section 31 of the Code.  If their total claims stand satisfied, they cannot avail any remedy under Section 60(6) of the Code. Suppose the corporate debtor or its officials violate the provision of the moratorium. In that case, he can be imprisoned for a minimum three years period, which can be extended to five years. Such officials can also be fined a minimum of Rs 100,000 but not more than Rs 300,000. Similarly, those officials of creditors authorising such infringement can be jailed for one year. The same can be extended to five years and can also be fined a minimum of Rs 100,000, with the maximum penalty of up to Rs 10 million. (Section 74)

Conclusion

It is apparent that the creditors have faith that the company will survive, and its revival is possible until the last moment. The moratorium period gives breathing time to the corporate debtor so that it can reorganise its business. For this, adequate time is required to take into consideration measures for the same. Thus, the CoC, in their meeting, passed a resolution empowering the RP to apply to the concerned authority for the extension of the time period. When the concerned authority thinks it is fit in such a case to extend time, the same is granted. The progress of the resolution process is also evident for the tribunal while considering whether the extension should be granted or not. Thus, the role of the tribunal is vital in clearing out the ambivalences.

References

• https://www.livelaw.in/analysis-extension-moratorium-period-ibc/
• https://www.mondaq.com/india/insolvencybankruptcy/495202/the-insolvency-and-bankruptcy-code-2016–new-road-and-new-challenges
• https://ibclaw.in/all-about-the-moratorium-under-ibc-including-judicial-pronouncements/
• https://ibclaw.in/analysis-on-time-limit-under-section-12-of-the-code-for-completion-of-cirp/
• https://taxguru.in/corporate-law/important-judgments-related-ibc-2016-oct-dec-2020.html

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