This article is written by Taniksha Gupta pursuing a Paralegal Associate Diploma. This article has been edited by Ojuswi (Associate, Lawsikho).
This article has been published by Sneha Mahawar.
Table of Contents
Introduction
The expression moratorium is not defined in the Insolvency and Bankruptcy Code, 2016 (“IBC”). It refers to a period during which no court deliberations for recovery, enforcement of security interests, sale or transfer of assets, or cessation of vital contractual agreements against a corporate debtor can be initiated or pursued. The scope and execution of the moratorium have left creditors perplexed about the admissibility of such processes against corporate debtors, particularly in quasi-criminal circumstances like cheque bouncing cases. Since such processes are permitted during the moratorium, creditors get two chances to collect their debts (i.e., in the insolvency proceedings as well as by initiating cheque bounce proceedings).
This article attempts to explain the concept of a moratorium and its impact on parallel proceedings.
Moratorium: Section 14
First, consider the spirit of the letter embedded in the aforementioned provision. The Insolvency and Bankruptcy Code of 2016, Section 14, reads as follows:
“14 (1) 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:
- the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgement, decree or order in any court of law, tribunal, arbitration panel or other authority;
- transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein;
- any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;
- the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.
14(2) The supply of essential goods or services to the corporate debtor as may be specified shall not be terminated or suspended or interrupted during moratorium period.
14(2A) Where the interim resolution professional or resolution professional, as the case may be, considers the supply of goods or services critical to protect and preserve the value of the corporate debtor and manage the operations of such corporate debtor as a going concern, then the supply of such goods or services shall not be terminated, suspended or interrupted during the period of moratorium, except where such corporate debtor has not paid dues arising from such supply during the moratorium period or in such circumstances as may be specified.
14(3) The provisions of sub-section (1) shall not apply to:
- such transactions, agreements or other arrangements as may be notified by the Central Government in consultation with any financial sector regulator or any other authority;
- a surety in a contract of guarantee to a corporate debtor.
14(4) The order of moratorium shall have effect from the date of such order till the completion of the corporate insolvency resolution process:
Provided that where at any time during the corporate insolvency resolution process period, if the Adjudicating Authority approves the resolution plan under sub-section (1) of section 31 or passes an order for liquidation of corporate debtor under section 33, the moratorium shall cease to have effect from the date of such approval or liquidation order, as the case may be.”
Moratorium on Initiation of Liquidation Proceedings
According to Section 33(5) of the IBC “Subject to section 52, when a liquidation order has been passed, no suit or other legal proceeding shall be instituted by or against the corporate debtor: Provided that a suit or other legal proceeding may be instituted by the liquidator, on behalf of the corporate debtor, with the prior approval of the Adjudicating Authority.”
According to the interpretation of Section 33, there is no moratorium on the continuing of lawsuits. According to Section 33(5) of the IBC, if the liquidator wishes to institute a new suit or legal proceeding, he must obtain special approval from the adjudicating authority. Nevertheless, the liquidator can continue to explore or defend an existing proceeding without requesting approval from the adjudicating officer, thanks to the powers granted to him under Section 35(1)(k) of the IBC. It will be useful to refer to the parent Companies Act, which prohibits not only the filing of “suits or other legal proceedings,” but also their continuance.
Meaning & Definition
The Oxford dictionary defines the term as “a legal authority to debtors to postpone payment.” The term ‘moratorium’ is defined as “a cessation of an activity for an agreed period of time” in the Cambridge Dictionary. “A legally approved period of delay in the fulfilment of a legal obligation or the payment of a debt; a waiting period specified by an authority; or a suspension of activity,” according to Merriam Webster Dictionary.
The Insolvency and Bankruptcy Code, 2016 (IBC) explains a moratorium as a period during which no judicial proceedings for recovery, enforcement of security interests, sale or transfer of assets, or cancellation of key contracts against the Corporate Debtor can be launched or continued. The moratorium applied on initiation of an insolvency procedure is discussed in Section 14 of the Insolvency and Bankruptcy Code of 2016, as well as its impact on any process. It has been elevated to a position of prominence since it suspends many simultaneous insolvency actions filed against the corporation.
When an order declaring a moratorium is issued, it prohibits the institution of new litigation or the continuation of existing suits or procedures against the corporate debtor, including the execution of any judgement, decision, or order in any court of law, tribunal, or arbitration panel. The moratorium creates a “calm period” to guarantee that the already economically challenged corporate debtor maximises asset realisation and achieves a rapid resolution without being concerned about asset disbursement in simultaneous processes.
Purpose
The moratorium’s goals involve retaining the corporate debtor’s assets together throughout the insolvency proceedings, enabling the organised finalisation of the procedures envisioned throughout the insolvency proceedings, and making sure that the firm can resume as a viable business whilst creditors decide on a default settlement. The moratorium on the onset and resumption of judicial proceedings, which include debt regulatory action, helps to ensure a stance. The Moratorium protects corporate debtors not only from new recovery claims during the IRP but also from current claims that may be pending before multiple authorities. The apex court in Innoventive Industries Ltd v. ICICI Bank Ltd characterised the objective after the moratorium in IBC as “to allow the debtors with a breathing span in which he is to attempt to reorganise his business.”
Proceedings under Writs
Normally, a moratorium suspends most parallel proceedings brought by or against the corporate debtor, but when it comes to writ petitions filed in the Supreme Court or the High Courts under Article 32 or Article 226 of the Indian Constitution, a specific exception is made. Despite the fact that the article does not expressly allow for such an exception, the plain reading of the provision does. The essence of such petitions, as construed by the courts, is that they are impervious to the moratorium provisions because they concern constitutional powers and rights. The moratorium will not affect any cases brought or pending before the Supreme Court under Article 32 of the Indian Constitution, or any orders issued under Article 136 of the Indian Constitution. The embargo will have no impact on any High Court’s powers under Article 226 of the Indian Constitution.
The same was confirmed in the case of Canara Bank v. Deccan Chronicle Holdings Limited, where the appellant appealed to the NCLAT against the impugned order of the adjudicating Officer barring action for reimbursement of funds. The Appellant argued that the Adjudicating Authority lacked the ability to exclude the High Court and the Supreme Court from its jurisdiction. The NCLAT ruled that the ‘moratorium’ will not impact any suit or case that is now proceeding before the Supreme Court of India under Article 32 or Article 136 of the Indian Constitution. The High Court’s jurisdiction under Article 226 of the Indian Constitution would not be impacted by the moratorium.
Proceedings under Arbitration
Section 14(1)(a), which prohibits the execution of any order, judgement, or decree, also applies to arbitral procedures. However, in Power Grid Corporation of India Limited v. Jyoti Structures Limited, the Hon’ble Delhi High Court had to answer a peculiar question while evaluating an Application filed by Power Grid Corporation of India under Section 34 of the Arbitration and Conciliation Act, 1996 for the stay of a money decree granted in favour of Jyoti Structures Ltd. A financial creditor filed a Corporate Insolvency Resolution Process against Jyoti Structures while the section 34 petition was pending.
The Delhi High Court had to decide whether the term “proceedings” in Section 14(1)(a) of the IBC refers to all legal proceedings or is to be interpreted stringently to refer to a specific form of civil procedure, namely “debt recovery action,” which could have the effect of dispersing or reducing the debtor’s assets throughout the resolution process time frame. In this decision, the DHC concluded, among other things, that the phrase “proceedings” does not mean “all proceedings,” and that a moratorium would not extend to proceedings for the benefit of the corporate debtor. The reasoning behind this is that the assets of the corporate debtor should not be put under any further stress during the insolvency procedure.
The Hon’ble Delhi High Court used a purposive interpretation to say that “the IBC’s goal was dual: a Corporate Debtor could preserve its assets from further dissipation and strengthen its financial position by using the standstill time in Moratorium. In this context, it was determined that staying the execution of an arbitral judgement that would increase the Corporate Debtor’s financial corpus would be contrary to the IBC. As a result, it was determined that the term actions as used in section 14(1)(a) did not include all proceedings, and therefore Section 14 of the IBC would not apply to proceedings involving the Corporate Debtor.”
In the case of P Mohanraj & Ors v. Shah Brothers Ispat Pvt Ltd., the Supreme Court of India held that the position in the Delhi High Court judgement “does not state the law correctly that 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 be payable by the corporate debtor.” As a result, it is generally widely accepted that a proceeding under Section 34 of the Arbitration and Conciliation Act, 1996 is forbidden while the corporate debtor is subject to a moratorium.
Proceeding under the Negotiable Instruments Act
The Hon’ble High Court of Calcutta refused to quash the criminal charge under Section 138 of the NI Act simply because of a moratorium announced under Section 14 of the Code in MBL Infrastructure Ltd. & Anr. v. Sri Manik Chand Somani, holding that:
“The declaration of a moratorium does not prevent criminal proceedings under Section 138/141 of the Negotiable Instruments Act from continuing.”
The Hon’ble Bombay High Court declared in Tayal Cotton Pvt. Ltd. v. The State of Maharashtra that the concept of ejusdem generis must be considered and held that as a result, adopting this principle of interpretation, it is impossible to give any other interpretation to this provision in Section 14 of the Code then that it merely forbids a suit or a procedure of a similar character and does not include any criminal proceeding.
Lately, processes under Section 138 of the Negotiable Instruments Act, 1881, were an exemption to the moratorium, when the NCLAT permitted Section 138 of the NI Act processes to operate throughout the moratorium in the case of Shah Brothers Ispat Pvt Ltd v P Mohanraj & Ors.
On appeal to the Supreme Court, the Apex Court decided in a three-judge bench decision that where the Adjudicating Authority issues a moratorium order in an insolvency petition, concurrent processes under Section 138 of the Negotiable Instrument Act, 1881 are halted. The Supreme Court of India emphasised the legislative meaning behind such a ruling, stating that it is now a settled position that parallel procedures under Section 138 of the NI Act will not be allowed to proceed. The Apex court held in an explanation of Chapter XVII of the Negotiable Instruments Act, 1881, that “it is clear that a quasi-criminal proceeding under 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), and that the moratorium would therefore attach to such proceeding.”
Thus, in the Shah Brothers’ decision, the Supreme Court deferred to the NCLAT’s rationale and interpretation of Section 138 of the NI Act,1881 and resolved the contradictory positions on the effect of the moratorium on Section 138 of the NI Act,1881 proceedings. After reviewing the plethora of decisions cited by the parties, the Hon’ble Supreme Court of India concluded that Section 14’s scope is broad and that proceedings brought under Sections 138/141 of the NI Act against a corporate debtor will be subject to the moratorium imposed by Section 14(1)(a) of the IB Code.
Tax Proceedings
Pre-assessment and post-assessment tax operations have to be separated into two groups. While assessment deliberations are regarded to be beyond the scope of the moratorium, tax recovery proceedings will indeed fall under the umbrella of the moratorium. This difference may appear to be improper, but in proceedings under the income tax act and some other analogous acts, such as sales tax, excise, and so on, prosecutions for determining the rights or obligations of businesses and other participants may have to be ascertained first by officials created specifically under the specific statute, so when it gets to recover dues, the winding-up court should be considered. The legislation aimed for the assets of a company in liquidation to be handled in one location by the NCLT, which would be the perfect situation to disburse the finances of the companies adequately.
While the tax authorities may resume the evaluation proceedings to ascertain the amount of their assertion, execution, distress, or recovery is not permitted. Statutory authorities fall under the definition of “operational creditors” (Section 5(20) of the IBC), and as a result, they must file a claim with the liquidator in the appropriate form to recover their debts. The liquidator will authenticate their claim and pay them only in compliance with Section 53 of the IBC’s priority system.
Conclusion
It has become apparent that after a moratorium has been announced, any process that could harm the company’s cash or assets cannot be allowed to take place. The purpose of the moratorium provision in the Insolvency and Bankruptcy Code, 2016 is to give the troubled corporate debtor some breathing room and to prevent further deterioration of the debtor’s assets and resources. The moratorium phase also enables the corporate debtor to devise the most appropriate resolution plan in accordance with the IBC’s rules and to recover the highest benefit of the company’s assets. In different parallel processes, courts have affirmed the primacy of the moratorium under the IBC using the same argument. There are a few gaps and disagreements that need to be resolved by the courts, but the existing stance puts moratorium provisions on a level higher than numerous other pieces of legislation. After reviewing a few case laws and the rationale of the courts throughout the parallel processes, it is clear that there is still some uncertainty that has to be resolved, as the concept of what moratorium and what procedures will come under the purview of section 14 must be examined. There is little doubt that the rule is broad and significantly more powerful, but there are a few concerns that will need to be addressed over time.
References
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