CS+LLB

This article has been written by Bhanwati  pursuing a Diploma in Law Firm Practice: Research, Drafting, Briefing and Client Management course from LawSikho.

This article has been edited and published by Shashwat Kaushik.

Introduction

A moratorium is one of the key concepts in the Insolvency and Bankruptcy Code (IBC) and the Corporate Insolvency Resolution Process (CIRP). In the Insolvency and Bankruptcy Code of 2016, the term “moratorium” is not defined, but according to the code, its main aim is to pause debt collection actions by creditors, giving them a reasonable time for renegotiating their contract. During this period, both the creditor and the debtor cannot pursue any legal action. This legal pause is defined as a moratorium.

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Definitions

According to the Black’s Law Dictionary, a moratorium is the temporary legal cessation of work temporarily until the resolution of the problem, such as debt or other activities.

Under the law

The Adjudication Authority (AA) imposed a moratorium according to Section 14(1) of IBC (The Insolvency of the Bankruptcy Code 2016. This include:

  1. No new legal proceeding or the continuation of existing legal proceedings can be taken against the debtor, nor can any judgements or orders by courts and tribunals be enforced.
  2. The debtors cannot use, sell, transfer, collateralise, or dispose of their assets or rights.
  3. No action can be taken regarding the debtor’s property security interests, including the SARFAESI ACT, 2002.
  4. No owner or lessor can recover any property that is in the debtor’s possession.

In the case of Shiv Kumar Tulsian and another vs. Union of India (1990), the Supreme Court of India provided a significant interpretation of the term “interim moratorium.” The court defined an interim moratorium as an authorised postponement or suspension of debt payment for a specific period. This legal measure is typically implemented to offer temporary relief to debtors facing financial difficulties and prevent immediate enforcement actions by creditors.

The interim moratorium serves as a crucial tool in managing debt crises and safeguarding the interests of both debtors and creditors. It allows debtors to gain some breathing space, enabling them to reorganise their finances, explore restructuring options, and negotiate more favourable repayment terms. By temporarily halting debt payments, the interim moratorium prevents creditors from taking immediate legal actions such as asset seizures or bankruptcy proceedings. This provides an opportunity for debtors to work towards a sustainable solution while protecting their assets and maintaining their business operations.

The Supreme Court recognised the importance of balancing the rights of debtors and creditors in granting interim moratoriums. The court emphasised that the grant of an interim moratorium should be carefully considered and subject to specific conditions and safeguards. These conditions may include the submission of a viable debt restructuring plan by the debtor, the provision of security by the debtor to protect the interests of creditors, and regular monitoring of the debtor’s financial situation to ensure compliance with the moratorium’s terms.

The interim moratorium acts as a bridge between the immediate financial crisis and the long-term resolution of debt issues. It provides debtors with an opportunity to stabilise their financial position, negotiate with creditors, and develop a feasible repayment plan. By granting interim moratoriums, the court facilitates a structured approach to debt resolution, promoting economic recovery and minimising the negative impact of financial distress on both debtors and creditors.

In summary, the Supreme Court’s definition of an interim moratorium as an authorised postponement of debt payment in Shiv Kumar Tulsian and another v. Union of India (1990) underscores the significance of this legal measure in addressing debt crises. It allows debtors to gain temporary relief, preventing immediate enforcement actions by creditors and facilitating a more sustainable resolution of debt issues. The court’s interpretation ensures a balanced approach that protects the interests of both debtors and creditors while promoting economic recovery and financial stability.

Aim of insolvency code

The main aim of the Insolvency Code is to protect the value of the insolvency estate from those who might decrease it. It also ensures that the proceedings are conducted in a proper and fair manner.

The key principles of the Insolvency Code and the collective nature of insolvency proceedings are collective, meaning the interests of all creditors are protected during the moratorium period. This relaxation period protects and secures the value of the assets during the corporate insolvency resolution process. According to the legislature, moratorium provisions make the estate stress-free, allowing it to entirely focus on resolving its insolvency in the case of Lanco Infratech Limited through its interim Resolution Professional vs. Isolloyd Engineering Technologies Limited (2017).

According to Section 14 of the Insolvency and Bankruptcy Code (IBC) of India, once the Corporate Insolvency Resolution Process (CIRP) commences, an automatic moratorium is imposed. This moratorium prohibits any legal action against the debtor’s estate, including any lawsuits, foreclosures, or debt collection activities. The purpose of this moratorium is to provide a breathing space for the debtor to reorganise its finances and negotiate with its creditors.

Once the CIRP begins, the interim resolution professional (IRP) assumes control over the debtor’s estate. The IRP is a licensed professional appointed by the insolvency professional agency (IPA) to oversee the CIRP and ensure that it is conducted in a fair and transparent manner. The IRP’s duties and responsibilities include:

  • Assessing the debtor’s financial condition and viability.
  • Preparing a resolution plan for the debtor, in consultation with the creditors.
  • Negotiating with the creditors to reach a consensus on the resolution plan.
  • Overseeing the implementation of the resolution plan.
  • Distributing the proceeds of the resolution plan to the creditors and other stakeholders.

The IRP is also responsible for protecting the interests of all stakeholders in the CIRP, including the creditors, the debtor, and the employees. The IRP must act in a fair and impartial manner and must avoid any conflict of interest.

The automatic moratorium and the appointment of the IRP provide a structured and orderly framework for resolving corporate insolvency in India. The CIRP aims to maximise the value of the debtor’s estate for the benefit of all stakeholders and to prevent the liquidation of viable businesses.

The Adjudicating Authority (AA) has the authority to accept or reject the CIRP application within 14 days of its filing under Sections 7(4), 9(5) and 10(4) of the IBC.

Third-party interests

Under Section 227 of the Insolvency and Bankruptcy Code (IBC), the Central Government holds the authority to appoint Financial Service Providers (FSPs) to oversee the liquidation process of companies undergoing insolvency proceedings. This specific section aims to safeguard the interests of third parties involved in the liquidation process and ensure their assets are protected.

During the interim moratorium period, which commences from the date of the insolvency commencement order, no third-party funds, property, or other assets are included in the insolvency resolution process. This means that the assets of third parties, such as creditors, suppliers, and customers, are not subject to the control of the insolvency resolution professional or the liquidator appointed to oversee the insolvency proceedings.

The Central Government carefully selects the FSPs based on their qualifications, experience, and track record in handling complex financial transactions. These FSPs are responsible for taking care of the assets of third parties during the liquidation process. They work closely with the liquidator to identify, secure, and manage third-party assets to ensure they are not inadvertently affected or compromised during the insolvency proceedings.

The FSPs play a crucial role in protecting the rights and interests of third parties involved in the liquidation process. They work to ensure that third-party assets are not used to pay off the debts of the insolvent company and that any distributions made during the liquidation process are fairly and equitably allocated among the various stakeholders.

Overall, Section 227 of the IBC serves as a safeguard for third-party interests during the liquidation process. It ensures that the assets of third parties are protected and managed responsibly by qualified and experienced FSPs appointed by the Central Government. This provision helps maintain confidence in the insolvency resolution process and encourages the participation of third parties in the liquidation of insolvent companies.

Corporate insolvency resolution process (CIPR)

In Chapter II of Part III, under Section 12 of the IBC, the CIRP can be initiated by the creditor or the debtor themselves. There are strict deadlines for CIRP, binding every step from the filing of the application to the completion of the process. In Part III under Section 96 of the IBC, the code refers to the period from the filing of the application until the application is accepted, during which no legal action can be taken against the debtor.

As per Section 80(1) of the IBC, when a debtor files the Fresh Start, an interim moratorium begins from the day of filing. According to a 2021 IBBI Research Initiative, the total time for completing the process is typically 180, including 90 days extended, as provided under Section 12(1) of the IBC. During this process, the moratorium takes effect, imposing a legal ban on actions against the estates and ensuring the continuous essential supplies needed to run the company.

After the application is submitted and accepted, an interim moratorium process takes place for 30 days. The main aim of this process is to form the Committee of Creditors (CoC). Once the committee is formed, it must conduct a meeting to decide on the interim resolution process. They will either approve of the continuation of an interim resolution professional or appoint a new resolution professional, which requires 66 percent of the majority vote.

The CIRP is managed entirely by resolution professionals. The debtor’s operations continue, and with the approval of the CoC, the resolution plan is submitted to the adjudicating authority for final approval. The CIRP must be complete within the 330 days, which include the extension time period, as stipulated under  Section 12(2) of the IBC.

Case laws

SMBC Aviation Capital Limited vs. Go Airlines (India) Limited (2023)

This case is the most highlighted case, which showed the loopholes in the Indian insolvency laws. There is a conflict between the lessors and the airline. GoFirst Airline filed the application under Section 10 of the IBC for voluntary insolvency. Some of the aircraft lessees terminate their lease agreements to claim the leased planes after filing the application in court.

During the case, the NCLT stated that “there is no provision in the IBC that grants the NCLT the power to impose an interim moratorium.” Under Section 14(1) of the IBC,the NCLT admitted the application but it did not address the merits of the interlocutory application (IA).

Section 14 of the IBC only provides for an absolute moratorium on the corporate debtor. To impose a moratorium, the NCLT previously used the inherent powers under Rule 11 of the National Company Law Tribunal Rules, 2016 (NCLT Rules).

Ms. Sangita Arora vs. ifci Ltd. (2021)

This case raised the issue before the appellate tribunal regarding whether the application under Section 96 of the IBC should be considered filed on the date it is e-filed or the date it is officially registered and numbered by the registry.

The appellant, a personal guarantor, provided a personal guarantee to IFCI Bank to secure loan money for the debtor and Supertech Limited. IFCI filed for insolvency under Section 95 of the IBC against the appellant on the date of June 2, 2021 and the application was registered on August 9, 2021.

PNB Housing Finance Ltd. (PNBHFL), another financial creditor, filed a similar application under Section 95 on July 24, 2021 and it was registered on August 2,2021.

In the IFCI application, the order appointed a Resolution Professional (RP). The appellant appealed to the National Company Law Appellate Tribunal (NCLAT). Referencing the case Krishna Kumar Basia vs. State Bank of India, 2022 , the appellate tribunal clarified that the e-filing date of the application will be considered rather than the date of registration by the registry.

Committee of Creditors of Essar Steel India Limited Through Authorised Signatory vs. Satish Kumar Gupta & Ors. (2019)

In the case of Committee of Creditors of Essar Steel India Limited Through Authorised Signatory vs. Satish Kumar Gupta & Ors. (2019), the court scrutinised the word “mandatory” within the context of the Insolvency and Bankruptcy Code (IBC). The court deemed the use of the word “mandatory” as problematic and suggested its removal. This suggestion stemmed from the concern that the word “mandatory” could be interpreted as arbitrary under Article 14 of the Constitution of India, which prohibits discrimination and guarantees equality before the law. The court reasoned that the strict interpretation of “mandatory” could unreasonably restrict the fundamental right of an individual to conduct business, as enshrined in Article 19(1) of the Constitution.

In the IBC, the Corporate Insolvency Resolution Process (CIRP) plays a crucial role in addressing corporate insolvency. Generally, the CIRP should be completed within 330 days from the date of filing the application, including any extension granted during legal proceedings. However, the court acknowledged that exceptional circumstances, such as delays attributable to the adjudicating authority (AA) or the National Company Law Appellate Tribunal (NCLAT), could extend the CIRP beyond 330 days. These exceptional extensions serve as a safeguard to ensure that the CIRP is conducted fairly and justly, without compromising the rights of stakeholders.

Nevertheless, the court emphasised that the 330-day limit should be strictly adhered to in the absence of exceptional circumstances. This emphasis stems from the understanding that prolonged CIRP proceedings could have detrimental effects on the company’s operations, stakeholders, and the overall economy. If the CIRP is not completed within the 330-day timeframe or any justifiable extension granted, the company will be deemed to have entered liquidation. Liquidation involves winding up the company’s operations and distributing its assets among creditors, effectively ending the company’s existence as a going concern.

Nui Pulp And Paper Industries Pvt Ltd vs. Roxcel Trading Gmbh (2019)

The NCLAT gave the interim order of the third-party interest in its assets, preventing the  corporate debtor and its directors from selling and mortgaging them. This restriction will remain in place until the application is rejected or accepted by the court. The creditors feared that the corporate debtor might plan to transfer the interests to another party. Therefore, the NCLT has the inherent power under Rule 11 of the NCLT to impose an interim moratorium.

Conclusion

In summary, an interim moratorium is an important element of IBC and CIRP. It provides a legal purse for debt collectors actions, allowing the creditors and debtors some time to renegotiate their agreement. The moratorium ensures that insolvency proceedings are conducted properly and fairly, as well as protecting the value of the insolvency estate and the interests of the creditors. The process is managed by resolution professionals, who have to follow strict deadlines and rules. Several key case laws give direction for future insolvency proceedings. have highlighted the importance and application of the interim moratorium.

 References

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