Kerala High Court provided for date of application for commencement of Individual or firm Insolvency under section 96 of IBC, 2016?
Introduction
We have been well aware of the facts that the matter relating to Insolvency and Bankruptcy has been governed by the Insolvency and Bankruptcy Code, 2016. The Act has provided for the two adjudicating authorities namely the national company law tribunal and Debt recovery tribunal as the case may be. The provision for the moratorium is quite distinctive from Section 14 of the Insolvency and Bankruptcy Code, 2016, and defined under section 96 and 101 of the code which has been discussed in the latter part of this article.
Meaning of the Section 96 of IBC, 2016
As per the Section 96 of the Insolvency and Bankruptcy Code, 2016 provides that When an application is filed under section 94 (debtor who commits a default) or section 95 (by the creditor):
(a) an interim moratorium shall commence on the date of the application in relation to all debts and shall cease to have effect on the date of admission of such application; and
(b) during the interim-moratorium period –
(i) Any pending legal action or proceeding in respect of any debt shall be deemed to have been stayed; and
(ii) the creditors of the debtor shall not initiate any legal action or proceedings in respect of any debt.
Relevant Case Law
Recently, In the case of Jeny Thankachan vs Union of India on 17 November 2023 before the Kerala High Court decided the question issue whether the filing of the application before the NCLT shall be construed as the date of filing for the commencement of the Interim Moratorium.
The issues in the writ petition have started, The petitioner has defaulted in the repayment of the loan, taken from IndusInd Bank Limited (the Bank). The Bank simultaneously has filed Miscellaneous Case No.372/2023 on the files of the Chief Judicial Magistrate, invoking Section 13 & 14 of the Act, 2002 after categorizing the petitioner as a Non-Performing asset the magistrate passed an order dated May 5, 2023, and appointed an advocate for assisting in the order passed by the magistrate.
On August 2023, the petitioner filed an application under section 96 of the IBC, 2016, and NCLT assigned a dairy number to the NCLT assigned diary number 1386/2023 to the application submitted by the Petitioner. Further, The petitioner submits that any action to foreclose, recover or enforce any security interest under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, and any legal action or proceedings in respect of any debt shall be deemed to have been stayed as per Section 96(b) of the IBC, 2016, on the petitioner filing an application under Section 94 of the IBC 2016 before the NCLT.
The respondent has submitted that while applying the ratio laid in the case of State Bank of India v. B. Ramakrishnan (“Ramakrishnan Case”), it was held that moratorium under Section 14 of IBC, 2016, on admission of insolvency petition would not be extended to a personal guarantor of the corporate debtor. Considering the above case, the petitioner has contended that interim moratorium under Section 96 of IBC would not be applicable to the Petitioner in the present case, who is the personal guarantor of the Corporate Debtor. The Respondent also asserted that since the application filed by the Petitioner under Section 94 of IBC was not assigned a regular case number by the NCLT, the provisions under Section 96 of IBC did not even apply to the Corporate Debtor.
Kerala High Court after hearing the arguments of both parties held that, the operations under section 96 and 101 have serious repercussions and shall be given a strict interpretation because the interim moratorium prohibits the below-mentioned actions during the period of Interim Moratorium:
(i) Any pending legal action or proceeding in respect of any debt shall be deemed to have been stayed; and
(ii) the creditors of the debtor shall not initiate any legal action or proceedings in respect of any debt.
It has stated that the Mere uploading of an application under Section 96 of the IBC 2016 cannot be taken as filing of an application. The filing of an application as contemplated under Section 96 should be defect less and devoid of any procedural lapses. Only when an application is filed without any defects and satisfying the statutory procedural requirements of filing and the adjudicating authority numbers the application. Then, it can be a legal and acceptable filing of application.
In the case of the petitioner, As long as the petitioner’s application is not duly numbered by the NCLT, the interim moratorium contemplated under Section 96(1)(b)(i) cannot come into operation.
The High Court has also provided that, the petitioner is not entitled to urge the overriding effect of IBC, 2016 based on the facts of the case for yet another reason. As far as the proceedings under the SARFAESI Act, 2002 initiated by the Bank, the petitioner has proceeded against in his capacity as guarantor to the financial advance by the LLP as the petitioner is a sleeping partner of the Limited Liability Partnership as per the judgment in State Bank of India v. Ramakrishnan and another and the proceeding under the SARFAESI Act, 2002 cannot be challenged by the petitioner.
The section 238 of the IBC, 2016 which provides for the overriding effect on the provisions mentioned in the SARFAESI Act, 2002, can only be claimed in case if there is any repugnancy between the provisions mentioned under both the Act.
Conclusion
The Kerala High Court has beautifully clarified the date of the application under section 96 and provided that the date of application shall be the date where the application made to the adjudicating authority which is defect less and devoid of any procedural lapses is made to the adjudicating authority and the relevant case number is allotted to such an application by such adjudicating authority but mere filing of such application shall not be construed as the date of the application for the purpose of section 96.
Apart from this, the respondent has claimed protection under the Section 238 of IBC, 2016 which provides the overriding over the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. The overriding effect shall be given only in the case where there is any repugnancy between the provisions of the IBC 2016 and the provisions of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, there is no question of IBC, 2016 overriding the provisions of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 in totality.
The court has lastly given their preference to the Judgement of the supreme court State Bank of India v. Ramakrishnan and another stating that the personal guarantors is not allowed to apply under the Section 96 of the IBC, 2016.
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