Introduction
The Insolvency and Bankruptcy Code, 2016 (“IBC”) does not define the term “moratorium.” It designates a time frame in which proceedings in court for asset sales or transfers, enforcement of security interests, recovery, or termination of important contracts against a corporate debtor are precluded. Creditors are confused about the validity of such actions against corporate debtors due to the scope and implementation of the moratorium, especially in situations where there are elements of quasi-criminal activity such as cheque bouncing. Since these procedures are allowed during the moratorium, creditors have two opportunities to collect their money (via both the insolvency process and the start of a cheque bounce procedure).
Section 14: Moratorium
First, think about the letter’s spirit, as it is enshrined in the previously mentioned clause. Section 14 of the Insolvency and Bankruptcy Code of 2016 says the following:
14 (1) Subject to the requirements of sub-sections (2) and (3), the adjudicating authority must, by order, proclaim a moratorium to outlaw the following, specifically:
- the filing of lawsuits against the corporate debtor or the continuation of ongoing legal actions or proceedings, including the enforcement of any verdict, decree, or order in any court, tribunal, arbitration panel, or other authority;
- transferring, burdening, alienating, or getting rid of any of its assets, along with any related legal rights or beneficial interests, by the corporate debtor;
- 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 Securitization 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, suspended, or interrupted during the 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 until the completion of the corporate insolvency resolution process:
provided that where, at any time during the corporate insolvency resolution process period, the adjudicating authority approves the resolution plan under sub-section (1) of section 31 or passes an order for liquidation of the 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 the Initiation of Liquidation Proceedings
A lawsuit or other legal action cannot be brought by or against the corporate debtor after a liquidation order has been issued, per Section 33(5) of the IBC. However, the liquidator may bring a lawsuit or other legal action on the debtor’s behalf with the adjudicating authority’s prior approval.
There is no ban on the filing of new lawsuits, as per the reading of Section 33. The adjudicating authority must grant the liquidator specific permission to initiate a new lawsuit or legal procedure, as per Section 33(5) of the IBC. However, the adjudicating officer need not provide permission for the liquidator to pursue or defend an ongoing proceeding, given 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 and Definition
“A legal authority to debtors to postpone payment” is how the Oxford Dictionary defines the phrase. According to the Cambridge Dictionary, a “moratorium” is “a cessation of an activity for an agreed period.” Merriam-Webster defines a waiting period as “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.”
A moratorium is defined as a period during which no court procedures for recovery, enforcement of security interests, sale or transfer of assets, or cancellation of important contracts against the corporate debtor may be started or continued. This definition is provided by the Insolvency and Bankruptcy Code, 2016 (IBC). The moratorium that is in place before an insolvency procedure is started 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.
The issuance of an order proclaiming a moratorium forbids the execution of any verdict, decision, or order in any court of law, tribunal, or arbitration panel, as well as the commencement of new lawsuits or the continuation of ongoing suits or processes against the corporate debtor. To ensure that the already financially struggling corporate debtor maximises asset realisation and achieves a speedy settlement without having to worry about asset payout in parallel proceedings, the moratorium establishes a “calm period.”
Objective
The objectives of the moratorium are to ensure that the company can continue operating as a viable enterprise while creditors decide on a default settlement, to keep the corporate debtor’s assets together during the insolvency proceedings, and to facilitate the organised completion of the procedures envisioned throughout the insolvency proceedings. A posture is ensured in part by the suspension of the beginning and end of judicial proceedings, including debt regulatory action. The moratorium shields corporate debtors from ongoing claims that can be pending before several authorities, in addition to protecting them from new recovery claims made during the IRP. The goal of the moratorium in IBC was described by the Supreme Court in Innoventive Industries Ltd. v. ICICI Bank Ltd. as “to enable the debtors with a breathing span in which he is to attempt to reorganise his business.”
Proceedings under Writs
Most parallel processes initiated by or against the corporate debtor are normally suspended by a moratorium; however, there is a special exception given for writ petitions filed in the Supreme Court or the High Courts according to Article 32 or Article 226 of the Indian Constitution. The simple reading of the provision permits such an exception even though the article does not specifically permit it. The courts have interpreted these types of petitions to be essentially unaffected by the moratorium restrictions because they deal with fundamental rights and powers. Any cases filed or pending before the Supreme Court under Article 32 of the Indian Constitution, as well as any orders made according to Article 136 of the Indian Constitution, would remain unaffected by the moratorium. The embargo will have no impact on any High Court’s powers under Article 226 of the Indian Constitution.
The appellant in Canara Bank v. Deccan Chronicle Holdings Limited appealed to the NCLAT against the impugned ruling of the adjudicating officer that barred action for refund of monies, and the NCLAT confirmed this. The appellant contended that the adjudicating authority was powerless to exempt the Supreme Court and the High Court from its purview. A suit or case that is now pending before the Supreme Court of India under Article 32 or Article 136 of the Indian Constitution shall remain unaffected by the “moratorium,” the NCLAT declared. The embargo will not affect the High Court’s authority under Article 226 of the Indian Constitution.
Proceedings under Arbitration
Arbitral proceedings are subject to Section 14(1)(a), which forbids the implementation of any verdict, decree, or order. The Hon’ble Delhi High Court, however, was faced with a unique dilemma in Power Grid Corporation of India Limited v. Jyoti Structures Limited when assessing an application for a stay of a money decree granted in favour of Jyoti Structures Ltd. that Power Grid Corporation of India filed under Section 34 of the Arbitration and Conciliation Act, 1996. While the section 34 petition was ongoing, a financial creditor launched a Corporate Insolvency Resolution Process against Jyoti Structures.
The Delhi High Court was faced with the decision of whether Section 14(1)(a) of the IBC’s term “proceedings” refers to all court cases or, under strict interpretation, only to certain types of civil procedures, such as “debt recovery actions,” which may have the effect of dividing up or decreasing the debtor’s assets throughout the resolution process. The DHC found in this decision, among other reasons, that a moratorium would not apply to procedures for the corporate debtor’s benefit and that the term “proceedings” does not mean “all proceedings.” This is justified by the idea that the corporate debtor’s assets shouldn’t be further stressed during the insolvency process.
The Delhi High Court, Honourable, employed a purposeful 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 the moratorium. In this context, it was determined that staying the execution of an arbitral judgment 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.”
The Delhi High Court’s position “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,” the Supreme Court of India ruled in the case of P Mohanraj & Ors v. Shah Brothers Ispat Pvt Ltd. Because of this, it is commonly acknowledged that while the corporate debtor is under a moratorium, a process under Section 34 of the Arbitration and Conciliation Act, 1996, is prohibited.
Proceedings under the Negotiable Instruments Act
In MBL Infrastructure Ltd. & Anr. v. Sri Manik Chand Somani, the Hon’ble High Court of Calcutta declined to set aside the criminal charge under Section 138 of the NI Act merely because of a moratorium declared under Section 14 of the Code, ruling that:
“Criminal proceedings under Sections 138/141 of the Negotiable Instruments Act may continue notwithstanding the declaration of a moratorium.”
In the case of Tayal Cotton Pvt. Ltd. v. The State of Maharashtra, the Bombay High Court held that the principle of ejusdem generis must be taken into consideration. Consequently, the court adopted this interpretation, holding that this provision in Section 14 of the Code cannot be interpreted in any other way than that it simply prohibits a suit or similar procedure and does not include any criminal proceeding.
Recently, the NCLAT allowed processes under Section 138 of the Negotiable Instruments Act, of 1881, to continue during the moratorium, therefore creating an exemption to the moratorium. in the case of Shah Brothers Ispat Pvt Ltd v P Mohanraj & Ors.
Following an appeal to the Supreme Court, the Apex Court determined in a three-judge bench judgement that concurrent proceedings under Section 138 of the Negotiable Instrument Act, 1881 are suspended in cases where the Adjudicating Authority makes a moratorium order in connection with an insolvency petition. In highlighting the legislative intent behind this decision, the Supreme Court of India said that it is now a well-established principle that duplicate proceedings under Section 138 of the NI Act will not be permitted to continue. “It is clear that a quasi-criminal proceeding under Chapter XVII of the Negotiable Instruments Act would, given the object and context of Section 14 of the IBC, amount to a proceeding,” the Apex court ruled in explaining Chapter XVII of the Negotiable Instruments Act, 1881, within the meaning of Section14 (1)(a), and that the moratorium would therefore attach to such proceeding.”
In the Shah Brothers case, the Supreme Court therefore settled the conflicting views about the impact of the moratorium on Section 138 of the NI Act, 1881 proceedings by deferring to the NCLAT’s reasoning and interpretation of the statute. The Hon’ble Supreme Court of India determined 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 after reviewing the numerous decisions cited by the parties.
Tax Court Cases
Tax actions that are both pre- and post-assessment must be divided into two categories. Tax collection proceedings will be covered by the moratorium, even though assessment discussions are thought to be outside its purview. The winding-up court should be taken into consideration when it comes to recovering dues because, although this distinction may seem inappropriate, in proceedings under the Income Tax Act and some other comparable acts, such as sales tax, excise, and so forth, prosecutions for determining the rights or obligations of businesses and other participants may have to be made first by officials created specifically under the specific statute. The Act intended for the NCLT to handle a company’s assets in liquidation at a single location, which would be the perfect situation to disburse the finances of the company adequately.
Although the assessment process may be continued by the tax authorities to determine the extent of their claim, execution, distress, or recovery is not allowed. Statutory authorities must submit a claim in the proper format to the liquidator to recover their debts because they are considered “operational creditors” under Section 5(20) of the IBC. Only following Section 53 of the IBC’s priority system would the liquidator validate their claim and provide payment to them.
Conclusion
It has become evident that any procedure that could jeopardise the company’s finances or assets cannot be permitted to proceed following the announcement of a moratorium. The Insolvency and Bankruptcy Code, 2016’s moratorium clause serves to both provide some breathing room for the struggling corporate debtor and stop the debtor’s assets and resources from further depreciating. In compliance with the IBC’s regulations, the corporate debtor can also design the best resolution plan during the moratorium phase to maximise the value of the company’s assets. Judges in multiple concurrent procedures have upheld the precedence of the IBC’s moratorium based on the same rationale. Although the courts still need to resolve a few misunderstandings and discrepancies, the current position elevates moratorium measures above many other pieces of legislation. The concept of what moratorium and what procedures would come under the jurisdiction of section 14 must be addressed, and after looking through a few case laws and the judges’ reasoning throughout the parallel processes, it is evident that there is still some doubt that needs to be resolved. The rule is undoubtedly much more powerful and wide than it was previously, but some issues will need to be resolved in the future.
Adv. Khanak Sharma