This article is written by Shivam Singhal who is pursuing a Certificate Course in Insolvency and Bankruptcy Code from LawSikho.

Introduction

Insolvency and Bankruptcy Code, 2016 (“IBC/Code”) which received presidential assent on 25th May, 2016 is considered as the game-changer in the ‘debt recovery of the distressed entities’ regime. The Code subsumed several insolvency laws which were considered redundant and had several flaws in them. The present Code came into force with an objective to realise the maximum value of any distressed entity through expertise and strategies.

One of the most important features of the Code is the concept of ‘moratorium’. Section 14 of the Code talks about the moratorium and its effect on any proceeding. Moratorium has been put on a very high pedestal as it suspends several parallel proceedings which are filed against the company under insolvency proceedings. Section 14 (1) of the IBC says that:

Subject to provisions of sub- sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely:

(a) the institution of suits or continuation of pending suits or proceedings against corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority. 

The moratorium provides the ‘calm period’ which is to ensure that the already economically distressed corporate debtor maximises realisation of the assets. Further, the moratorium should also ensure a fruitful resolution without worrying the disbursal of further assets in parallel proceedings, if any. 

This article shall discuss and analyse several such proceedings which are suspended during the enforcement of a moratorium. Before indulging into the different types of proceedings a basic understanding of the concept and objective of moratorium is necessary. 

Objective of Moratorium

The Hon’ble Supreme Court referring to the Report of Insolvency Law Committee of February 2020 iterated the objective of the moratorium which is to “form a scheme which shields the corporate debtor from pecuniary attacks against it in the moratorium period so that the corporate debtor gets breathing space to continue as a going concern in order to ultimately rehabilitate itself.”i.e the moratorium provides a defense to the corporate debtor by creating a bar on several parallel proceedings and allows corporate debtor to maximise the value of the company without further encumbrances.

Further, the legislative intent behind introducing the provision of moratorium was to bar termination or suspension of several grants such as licenses, permits, quotas, concessions by the Government authorities as these grants are fundamental to the operation of any company and to realize the maximum value of any company as a going concern. 

As we discuss the importance of moratorium in any insolvency proceeding, a careful look at the effect of moratorium on parallel proceedings under different legislations is required.

Proceedings under Section 138 of Negotiable Instruments Act (“NI Act”), 1881

Until recently, proceedings under Section 138 of NI Act, 1881 was an exception to the moratorium when the NCLAT in the case of Shah Brothers Ispat Pvt Ltd vs P Mohanraj & Ors, allowed Section 138 of NI Act proceedings to continue during the moratorium.

However, on appeal to the Supreme Court, the Apex Court in a three judge bench ruling, held that where an order of moratorium is passed by the Adjucating Authority in an insolvency petition, in such cases parallel proceedings under Section 138 of the Negotiable Instrument Act,1881 shall be suspended. The Supreme Court of India gave emphasis on the legislative intent of moratorium behind such a decision and stated that it is now a settled position that the parallel proceedings under Section 138 of NI Act shall not be allowed to continue. In an explanation of Chapter XVII of the Negotiable Instruments Act, 1881, the apex court held that it is clear that a quasi-criminal proceeding that is contained in Chapter XVII of the Negotiable Instruments Act would, given the object and context of Section14 of the IBC, amount to a “proceeding” within the meaning of Section14 (1)(a), the moratorium therefore attaching to such proceeding”.

Thus, the Supreme Court deferred from the NCLAT’s reasoning and interpretation of Section 138 of NI Act,1881 in Shah Brothers judgement and settled the conflicting position on effect of moratorium on Section 138 of NI Act,1881 proceedings.

Proceedings under Prevention of Money Laundering Act, 2002 (PMLA) 

PMLA was enacted keeping in mind the international commitments to ensure prevention of money laundering for illegal activities. Interestingly, both PMLA and IBC provides for the non-obstante clauses which provides for the overriding effect over other laws applicable inconsistent with them. Hence, a peculiar contention came up with IBC vis-à-vis PMLA. In the case of Sterling Sez Infrastructure Ltd. vs. Deputy Director, Directorate of Enforcement, Prevention of Money Laundering Act NCLT Mumbai discussed the conflict between the two acts, wherein the property of the Corporate Debtor was attached by the authorities vide the powers of PMLA. Later, application for initiation of corporate insolvency resolution process was filed by the financial creditor under Section 7 of IBC.

The NCLT upheld the primacy of IBC by relying on the interpretation of the objective and purport of IBC which is the resolution of the Corporate Debtor by maximizing the value that can be received by the creditors and stakeholders and thereby upholding the importance of moratorium under section 14 of the code. The importance of moratorium was also emphasized in the case of Punjab National Bank vs Deputy Director, Directorate of Enforcement, Raipur where it was held that if a moratorium under IBC is in effect then the attachments of assets of the corporate debtor under PMLA cannot be made. 

Proceedings under Arbitration

Bar on arbitration proceeding during the moratorium period under IBC has long been a bone of contention. With divergent views of High Courts, the position of suspension of arbitral proceedings was fairly ambiguous. Let us look at the relation between several arbitral proceedings and moratorium under IBC

1. Bar on Section 34 of Arbitration and Conciliation Act, 1996 Proceedings 

The position of suspension of arbitral proceedings under Section 34 of the was fairly ambiguous. In a Delhi High Court judgement it was held that the Section 34 proceeding for an application for setting aside arbitral award shall not be barred due to moratorium. The court stated that by reading of Section 14(1) of IBC it is evident that ‘proceedings’ shall not include every proceeding. Careful exclusion of the term ‘by or against the corporate debtor’ implies that awards which benefits the corporate debtor shall not be hit by the Section 14 of IBC provisions. Therefore continuation of proceedings under section 34 of the Arbitration and Conciliation Act,1996  which do not result in endangering, diminishing, dissipating or adversely impacting the assets of corporate debtor are not prohibited under section 14(1) (a) of the code.

The Supreme Court of India in the case of P Mohanraj & Ors vs Shah Brothers Ispat Pvt Ltd.  held that the position in Delhi High Court judgement “does not state the law correctly as it is clear that a Section 34 proceeding is certainly a proceeding against the corporate debtor which may result in an arbitral award against the corporate debtor being upheld, as a result of which, monies would then be payable by the corporate debtor.” Thus it is now a settled position that Section 34 of the Arbitration and Conciliation Act, 1996 shall be barred during the continuance of moratorium against the corporate debtor.

2. Bar on counterclaims proceedings

This peculiar question on the sustainability of counter claims in an arbitration during moratorium came before the NCLAT in the case of Jharkhand Bijli Vitran Nigam Ltd. vs IVRCL (Corporate Debtor) & Anr. wherein the question arises whether a counter claim can proceed during the continuance of moratorium especially when the adjudicating authority under the Code allowed the corporate debtor to pursue the claim. The appellate tribunal held that the claims can be proceeded however the tribunal held that if, on determination, it is found that the Corporate Debtor is liable to pay certain amount, in such case, no recovery can be made during the period of moratorium.

Interestingly this judgement differs from the views taken in cases like P Mohanraj and K.S Oils Ltd where a general bar on arbitral proceedings during the continuation of moratorium was placed. Therefore it can be easily concluded that the clear position of law on arbitration proceedings vis-à-vis moratorium under IBC is not available. 

Proceedings under Writs

Usually moratorium places a suspension on most of the parallel proceeding which is by or against the corporate debtor but when it comes to writ petitions either under Article 32 or Article 226 of the Constitution of India for the Supreme Court and the High Courts respectively a clear exception is created. Although the bare reading of the provision doesn’t not provide for any such exception. However, the nature of such petitions as interpreted by the courts that the constitutional powers and rights are immune to the moratorium provisions.

The same was held in the case of Canara Bank vs. Deccan Chronicle Holdings Limitedwhere the appellant filed an appeal to the NCLAT against the impugned order passed by the adjudicating Authority for creating a bar on the proceedings for the recovering of amount. Appellant contended that Adjudicating Authority does not have authority to exclude the jurisdiction of courts including the High Court and the Supreme Court. NCLAT held that ‘moratorium’ shall not affect any suit or case which is pending before the Supreme Court of India pursuant to Article 32 of the Constitution of India or pursuant to Article 136 of the Constitution of India. The jurisdiction of the High Court under Article 226 of the Constitution of India would also not be impaired by the moratorium. 

Conclusion

The intent behind the inclusion of moratorium under IBC and non obstante clause under section 238 of IBC is to provide a breathing space to the distressed corporate debtor and to put a cork on further depletion of the debtor’s resources and assets. The period of moratorium also allows the corporate debtor to formulate the best suitable resolution plan as the provisions of IBC and to realise the maximum value of company’s assets. Keeping in mind the same reasoning courts have upheld the supremacy of moratorium under IBC in various parallel proceedings. There are few lacunas and conflicts still pending which needs to be addressed by the courts however the current position puts moratorium provisions on higher pedestal as compared to several other legislations.

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