Advocate Honey Satpal*

Honey Satpal

Everyone rushes to drill the well and if they know that the well is about to dry they will rush more to get those last drops. Moratorium banns to drill the wells which are about to dry. Moratorium is said to be the main plank of the rescue culture. With regard to the law of Insolvency and Bankruptcy in India, the company (‘Corporate Debtor’) has the protection of moratorium under Section 14 of the Code since the day of admission of application under section 7 or 9 or 10 of the Insolvency and Bankruptcy Code, 2016. Moratorium is supposed to give a breathing space to the Insolvency Professional to plan for the revival of the Corporate Debtor. The Section 14 of the Code reads as under:

Section 14. Moratorium –

(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:—

(a) 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;

(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 lessor where such property is occupied by or in the possession of the corporate debtor.

(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.

(3) The provisions of sub-section (1) shall not apply to (a) such transactions as may be notified by the Central Government in consultation with any financial sector regulator (b) a surety in a contract of guarantee to a corporate debtor.

(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.

Therefore, the section not only enables the Insolvency Professional to conduct the insolvency resolution proceedings without bearing the pressure from the creditors but also stays the proceedings which are meant to recover debt or endanger, diminish, dissipate or impact the assets of the corporate debtor in any manner whatsoever. The Hon’ble Delhi High Court in its judgment dated 11.12.2017 in Power Grid Corporation of India Ltd. v. Jyoti Structures Ltd. 246 (2018) DLT 485 (“Power Grid”) while construing the scope of s. 14(1)(a) of the IBC, has held,

10. In the light of above purpose or object behind the moratorium, Section 14 of the Code would not apply to the proceedings which are in the benefit of the corporate debtor, like the one before this court in as much these proceedings are not a ‘debt recovery action’ and its conclusion would not endanger, diminish, dissipate or impact the assets of the corporate debtor in any manner whatsoever and hence shall be in sync with the purpose of moratorium which includes keeping the corporate debtor’s assets together during the insolvency resolution process and facilitating orderly completion of the process envisaged during the insolvency resolution process and ensuring the company may continue as a going concern.

UK Insolvency Law: Interim & Permanent Moratorium

The UK Insolvency law which is governed by the Insolvency Act, 1986 introduces to the company in financial distress with five statutory procedures which is

a) Administration

b) Voluntary Arrangement

c) Scheme of arrangement

d) Receivership &

e) Liquidation

The first three proceedings deal with the revival of the company whereas the other two deal with disposal of the assets of the company. An application to court for an administration order triggers an interim moratorium till an administrative receiver has been appointed to protect the assets of the Company from the actions of creditors. An interim moratorium temporarily stays the rights of creditors to institute insolvency proceedings and other legal processes. [1]

The Interim Moratorium remains in place until:

  • The application for the appointment of an administrator is granted or dismissed; or
  • The administrator is appointed after the notice to appoint has been served; or
  • Five business days pass after the filing of a notice of intention without an administration being appointed.

Once a company enters administration a permanent moratorium applies which runs until the administration has been completed.

Interim Moratorium in India:

The Insolvency and Bankruptcy Code, 2016 in Section 96 under its Chapter III of Part III provides that on filing of an application either by debtor who commits a default under section 94 or on application by creditor under section 95, will trigger the interim moratorium to stay the pending proceedings and to bar initiation of any legal action in respect of any debt.

(1) When an application is filed under section 94 or section 95—

(a) an interim-moratorium shall commence on the date of the application in relation to all the debts and shall cease to have effect on the date of admission of such application; and

(b) during the interim-moratorium period—

(a) any legal action or proceeding pending in respect of any debt shall be deemed to have been stayed; and

(b) the creditors of the debtor shall not initiate any legal action or proceedings in respect of any debt.

(2) Where the application has been made in relation to a firm, the interim-moratorium under sub-section (1) shall operate against all the partners of the firm as on the date of the application.

(3) The provisions of sub-section (1) shall not apply to such transactions as may be notified by the Central Government in consultation with any financial sector regulator.

The provisions of Part III, titled as ‘Insolvency Resolution and Bankruptcy for Individuals and Partnership Firms’ of the Code are yet to be notified. Thought, the Hon’ble Supreme Court in Civil Appeal No. 3595 of 2018, SBI vs. V. Ramakrishnan & Anr. had analyzed the difference in language between Section 14, 96 and 101 to observe that the moratorium under section 14 applies on the debtors whereas under section 96 and 101 it applies on debts. The Part II of the Code under section 14 does not talk about interim moratorium on the debtors and is triggered on admission of application under Section 7 or 9 or 10 of the Code.

But in its recent order passed in Company Appeal (AT) (Insolvency) No. 644/2019, NUI Pulp and Paper Industries Private Limited Vs. M/S Roxcel Trading GMBH, the Hon’ble National Company Law Appellate Tribunal held that once an application under section(s) 7 or 9 or 10 is filed with Adjudicating Authority, it is not necessary for the Adjudicating Authority to await hearing of the parties for passing order of ‘Moratorium’ under Section 14 of the ‘I&B Code’ and it may pass ad-interim order before admitting any application under Sections 7 or 9 or 10 of the ‘I&B Code’ by exercising its powers conferred under Rule 11 of the National Company Law Tribunal Rules, 2016, to ensure that one or other party may not abuse the process of the Tribunal or for meeting the end of justice. Whereas, once the application is admitted, then the order of ‘Moratorium’ under Section 14 will follow, taking away the right of the Board of Directors of the ‘Corporate Debtor’ to take any decision on behalf of the ‘Corporate Debtor’ prohibiting others from taking any action against the ‘Corporate Debtor’ which is different from interim order. On the other hand, if application under Sections 7 or 9 or 10 is rejected, the interim order will automatically stands vacated. In the case supra the NCLT while exercising its powers under Rule 11 of the NCLT Rules, 2016, restrained the Corporate Debtor and its Directors from alienating, encumbering or creating any third party interest on the assets of the Corporate Debtor till further orders on an apprehension that the ‘Corporate Debtor’ may abuse the process of the ‘I&B Code’ to deny the creditors from its legitimate rights on admission of the application under Section 9.

Interim Order Under Rule 11 of NCLT Rules Vs Interim Moratorium

The NCLAT in the order supra upheld the discretion of NCLT to pass ad-interim order after filing an application under section 7 or 9 or 10 and before admission while exercising inherent power under Rule 11 of NCLT Rules in order to meet the end of justice.

a. Whether NCLT Rules, 2015 Applicable On The Proceedings Of Cases Under The Code:

This has been a discussion for quite some time as to whether the National Company Law Tribunal Rules, 2016 will equally be applicable for the proceedings before NCLT under the provisions of the Insolvency and Bankruptcy Code, 2016. The National Company Law Tribunal has been constituted under section 408 of the Companies Act, 2013 to exercise and discharge such powers and functions as are, or may be, conferred on it by or under Companies Act, 2013 or any other law for the time being in force. As per section 424 of the Companies Act, 2013 the NCLT or NCLAT are empowered to regulate their own procedure. The Central Government in exercise of the powers conferred on it under section 469 of the Companies Act, 2013 framed the National Company Law Tribunal Rules, 2016.

The Rule 10 of The Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 provides that till time the rules of procedure for conduct of proceedings under the Code are notified, the application made under sub-section (1) of section 7, sub-section 1 of section 9 or sub-section 1 of section 10 of the Code shall be filed before the Adjudicating Authority in accordance with rules 20, 21, 22, 23, 24 and 26 of Part III of the National Company Law Tribunal Rules, 2016. The Adjudicating Authority is enjoined to apply the NCLT Rules for filing of the Applications and is not restricted to exercise the other regulations of proceedings prescribed under NCLT Rules for the cases filed under IBC.

The Hon’ble Supreme Court in CIVIL APPEAL NO.23988 OF 2017 B.K. Educational Services Private Limited vs. Parag Gupta & Associates while deciding the question on application of Limitation Act on the matters under the Code had observed that :

“…It is important to notice that the NCLT is set up to discharge such powers and functions that are conferred on it not merely under the Companies Act but also under “any other law for the time being in force”.

11. Given the fact that the “procedure” that would apply to the NCLT would be the procedure contained inter alia in the Limitation Act, it is clear that the NCLT would have to decide applications made to it under the Code in the same manner as it exercises its other jurisdiction under the Companies Act. This being the position in law, it is clear that when various provisions of the Companies Act were amended by the Eleventh Schedule to the Code, it was unnecessary to apply and adapt Section 433 of the Companies Act to the Code, as was done to various other Sections of the Companies Act.”

Therefore, it is conspicuous that NCLT shall apply the same rules of procedure as laid down in NCLT Rules, 2016 for the matters under the IBC. Thus, the NCLT is empowered to exercise the inherent power to make such orders while exercising its jurisdiction under the provisions of Code as may be necessary:- (i) to secure the ends of justice; and (ii) to prevent abuse of process of the Tribunal.

The exercise of inherent power by the NCLT has been recognized by the Hon’ble Supreme Court in Writ Petition (Civil) No. 99 of 2018 in Swiss Ribbon Pvt. Ltd & Anr. Vs Union of India while answering the question whether an application be withdrawn on the settlement proposal by a party before constitution of the committee of creditors. The Hon’ble Apex Court held that :

“…….We make it clear that at any stage where the committee of creditors is not yet constituted, a party can approach the NCLT directly, which Tribunal may, in exercise of its inherent powers under Rule 11 of the NCLT Rules, 2016, allow or disallow an application for withdrawal or settlement. This will be decided after hearing all the concerned parties and considering all relevant factors on the facts of each case.”

b. When NCLT Can Exercise Its Inherent Jurisdiction:

The rule 11 of NCLT Rules, 2016 is exactly identical in language and spirit with section 151 of the CPC. It is settled principle of law that the inherent power is not a provision of law to grant any substantive relief but it is only a procedural provision to make orders to secure the ends of justice and to prevent abuse of process of the Court. In Vinod Seth v. Devinder Bajaj and Another (2010) 8 SCC 1, it was held as under:-

“28. As the provisions of the Code are not exhaustive, Section 151 is intended to apply where the Code does not cover any particular procedural aspect, and interests of justice require the exercise of power to cover a particular situation. Section 151 is not a provision of law conferring power to grant any kind of substantive relief. It is a procedural provision saving the inherent power of the court to make such orders as may be necessary for the ends of justice and to prevent abuse of the process of the court. It cannot be invoked with reference to a matter which is covered by a specific provision in the Code. It cannot be exercised in conflict with the general scheme and intent of the Code. It cannot be used either to create or recognise rights, or to create liabilities and obligations not contemplated by any law.

In other words there cannot be any exercise of inherent power on an issue which is otherwise dealt with or provided for in the Code or which is contrary to the intentions of the legislature.

It is a settled law that the inherent power of the court is in addition to and complementary to the powers expressly conferred under the Code but that power will not be exercised if its exercise is inconsistent with, or comes into conflict with any of the powers expressly or by necessary implication conferred by the other provisions of the Code.

Rule 11 of the NCLT Rules has not been codified with intention to create a new procedure or any new right or obligation. [2] This rule is a procedural provision to secure the end of justice or to prevent the abuse of process of the court/tribunal.

In the facts of the present case, the NCLT exercised inherent jurisdiction by passing an ad-interim order restraining the Corporate Debtor and its Directors from alienating, encumbering or creating any third party interest on the assets of the Corporate Debtor till further orders without giving any party a substantive relief.

c. Whether The NCLT Has Inherent Powers To Order For Interim Moratorium Before Admitting An Application U/S 7 Or 9 Or 10 Of IBC:

The power to pass an order declaring the interim moratorium must be a statutory provision such as the provision of moratorium under section 14 of the Code. The order passed in NUI pulp is not an order of moratorium which otherwise also could not be passed while invoking the inherent jurisdiction. It was an ad-interim order restraining the Corporate Debtor and its Directors from alienating, encumbering or creating any third party interest on the assets of the Corporate Debtor till further orders. The interim moratorium would protect the assets from creditor action until the application under section 7 or 9 or 10 is admitted. This will also be a stay on enforcement of security, all legal processes, goods held under leasing, hire purchase, conditional sale or retention of title agreements may not be repossessed and the landlords may not exercise their right of forfeiture in relation to premises let to the company.

BLRC On Interim Moratorium:

The BLRC in its interim report presented as ‘Approach Paper’ on Insolvency Code while suggesting improvements in rescue and liquidation provisions of Companies Act, 2013 where under Section 253(1) on an application filed by the secured creditor the NCLT determines whether company may be declared a sick company and decide to put a moratorium under section 253(2), recommended thatIn order to prevent a precipitous break-up of a viable company before the NCLT decides on an application for a moratorium, there should be an automatic interim moratorium in place till such determination (or for a maximum/non-extendable period of thirty days, whichever is earlier).”

Interim Report of The Bankruptcy Law Reform Committee February, 2015 referred to Schedule B1 of the IA 1986 (UK) provides for an interim moratorium applicable during the period between the filing of an application to appoint an administrator or giving of notice of intention to appoint an administrator and the actual appointment of such administrator. Further, the IA 1986 provides for an automatic moratorium on insolvency proceedings. The moratorium on insolvency proceedings is broad in nature. Further, there is an automatic moratorium on enforcement of security over the company’s property, repossession of goods in the company’s possession under a hire-purchase agreement (defined to include retention of title arrangements), exercise of a right of forfeiture by a landlord by peaceable re-entry and institution of legal proceedings against the company. The moratorium in these cases can be lifted with the approval of the administrator or the consent of the court.[3]

The fear of misuse of the provision by the Corporate Debtor by initiating the rescue proceedings with intention to take advantage of the interim moratorium solely was also negated by BLRC given the possibility of displacement of management.[4]

Take Away:

As recommended in the BLRC ‘Approach paper’ over improvement of rescue & liquidation provisions of Companies Act, 2013 and framing of Insolvency Code that instead of leaving it at the judicial discretion, the legislature may either introduce provision providing for automatic interim moratorium till the Application for initiation of corporate insolvency resolution process under section 7 or 9 or 10 or there may be certain principles/grounds for the NCLT to decide for granting the interim moratorium so that it is not left at the discretion of NCLT which may be developed on case by case basis.

[1] https://www.insolvencydirect.bis.gov.uk/technicalmanual/Ch49-60/Chapter%2056-1/Part%205/Part%205.htm#56.1.51

[2] Ram Prakash Agarwal and Another v. Gopi Krishan (dead through LRs.) and Others (2013) 11 SCC 296. https://indiankanoon.org/doc/115295457/

[3] https://www.finmin.nic.in/sites/default/files/Interim_Report_BLRC_0.pdf

[4] https://www.finmin.nic.in/sites/default/files/Interim_Report_BLRC_0.pdf

* Author is a practicing advocate in Delhi dealing with corporate matters including matters of Insolvency and Bankruptcy

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