Effect Of Moratorium Enshrined In IBC, 2016

The primary rationale of Section 14 of IBC is to try and maximize the value of the corporate debtor such that it may continue its operations while its future survival is being apprised by the insolvency resolution process

The Bankruptcy Law Reforms Committee, in its Report, recommended 2 (two) phases of resolution, upon commencement of the insolvency resolution process. Firstly, a combined intercession to evaluate the viability of the debt during a 'calm period' where the creditors' interest is preserved, without impeding the running of the corporate debtor.

It was proposed that the said 'calm period' may be implemented by passing a 'moratorium' on all recovery actions or filing of new claims against the corporate debtor and by enabling an insolvency professional to manage and operate the corporate debtor. Consequently, it was suggested that if the deliberations do not result in a feasible solution, the corporate debtor would be considered as unviable and would be deemed bankrupt.

Legal Position

The above proposals found their rightful place as laws in the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as IBC). The 'calm period' referred to above was introduced in IBC by way of Section 14, which provides that 'on the insolvency commencement date, the National Company Law Tribunal (NCLT), shall, by order declare moratorium in relation to:

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

(b) transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein;

(c) 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;

(d) the recovery of any property by an owner or less or where such property is occupied by or in the possession of the corporate debtor.

In light of the above provision, it becomes necessary to understand the meaning of the word 'moratorium'. As per the Oxford Dictionary, the term 'moratorium' means 'temporary prohibition of an activity'. The said definition seems to be reflective of the intention of the Bankruptcy Law Reforms Committee which had recommended that a provision relating to a 'calm period' be introduced to the IBC. However, there is a quandary in relation to the interpretation of Section 14 of IBC, since it is unclear whether 'all proceedings' by or against the corporate debtor would be halted by virtue of the said provision, or whether the provision intends to limit itself to a few 'proceedings'.

• Interpretation by courts:

In the Alchemist Asset Reconstruction Company Limited Vs. Hotel Gaudavan Private Limited (2018) 145 SCL 428, the Hon'ble Apex Court affirmed the decision of NCLT, Delhi and held that once a moratorium is imposed under IBC, any proceeding initiated against the corporate debtor is non-est in law.

In another matter, the Power Grid Corporation of India Limited Vs. Jyoti Structures Limited 246 (2018) DLT 485, the Hon'ble Delhi High Court had to adjudicate on a dispute relating to the above confusion. In the above case, a petition was filed under Section 34 of the Arbitration and Conciliation Act, 1996 (Arbitration Act) for setting aside the arbitral award, in the nature of a pure money decree, passed in favor of the corporate debtor herein. During the pendency of the above arbitration proceedings, an insolvency application was filed against the corporate debtor, which was admitted by the NCLT, Delhi, consequent to which a moratorium was declared under Section 14 of IBC.

The question which therefore arose before the Hon'ble Delhi High Court was whether the 'proceedings' under Section 34 of the Arbitration Act must be stayed under Section 14 of IBC or not. While adjudicating the matter, the Hon'ble High Court held that the object of IBC is to ensure that the corporate debtor is provided relief during the 'standstill' period so that its assets are not diminished, and alternatively, it can also use the said period to fortify its financial position. If the said arbitral award is not executed, the corporate debtor would be unable to recover its dues, which counters the very basis of IBC, and hence, it would not fall within the embargo imposed in Section 14 of IBC.

It was then held that the term 'proceedings' referred to in Section 14 of IBC does not mean 'all proceedings' and it is restricted to debt recovery actions against the assets of the corporate debtor. Further, continuation of proceedings under Section 34 of the Arbitration Act does not harm the corporate debtor's assets, thereby, is not prohibited under the moratorium provision of Section 14. It was also held that the use of the term 'against the corporate debtor' in Section 14(1) (a) of IBC in comparison with 'by or against the corporate debtor' used in Section 33(5) of IBC clarifies that the former has restrictive meaning and applicability, as opposed to the latter.

Finally, proceedings under Section 34 of the Arbitration Act come into play before the execution of an award; i.e. once objections are framed under the said provision, the party may proceed to execution of the award, and in the event that the said objections are settled against the corporate debtor, its enforceability against the corporate debtor shall fall within the purview of Section 14(1)(a) of IBC and the said proceedings can be carried out by the interim resolution professional, thereby ensuring that the reins of the corporate debtor are not controlled by oppressive management.

The origin of the moratorium section under IBC may be traced back to erstwhile legislations, in the sense that under Section 446 of the erstwhile Companies Act, 1956 and under Section 22(1) of the Sick Industrial Companies Act, 1984, similar restraints used to exist. Further, the above judgment of the Hon'ble Delhi High Court is analogous to the decision of the Hon'ble Apex Court in Shree Chamundi Mopeds Vs. Church of SIT Ann, AIR 1992 SC 1439, wherein, while interpreting Section 22(1) of the Sick Industrial Companies Act, 1984, it was held that Section 22(1) seeks to advance the object of the statute by ensuring that a 'proceeding' having an effect on the working and finances of a sick industrial company shall not be filed or continued.

It may not be amiss to mention herein that the National Company Law Appellate Tribunal in the case of State Bank of India Vs. V. Ramakrishnan and Anr. Company Appeal (AT) (Insolvency) No. 213 of 2017, decided on 28th February 2018, had held that the moratorium protection under Section 14 of IBC extends even to personal guarantees in relation to the corporate debtor.

Conclusion

The decisions of Courts while interpreting Section 14 of IBC are rather enlightening since although IBC was always touted as a creditor-centric code, it has been held that the moratorium provision was framed to ascertain that the corporate debtor is not burdened with additional stressed assets. It must be borne in mind that the primary rationale of Section 14 of IBC is to try and maximize the value of the corporate debtor such that it may continue its operations while its future survival is being apprised via the insolvency resolution process.

Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.