Moratorium- Moratorium as per the Oxford dictionary means “A Legal authorization to debtors to postpone payment”.
Moratorium has been defined in the Black’s Law dictionary as, “Delay in performing an obligation or taking an action legally authorized or simply agreed to be temporary”.
Section 14 as Per Insolvency And Bankruptcy Code, 2016 (IBC, 2016)
Subject to provisions of sub-sections (2) and (3), on the insolvency commencement dae, 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 off 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 (54 of 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.
Commencement of Moratorium
The Moratorium, as envisaged in the Insolvency and Bankruptcy Code comes into effect immediately after the application under section 7, 9 or 10 of the Code, as the case may be, is admitted by the adjudicating authority. The day the insolvency application is admitted and moratorium is applied is referred to as the ‘Insolvency Commencement Date’.
Objective of Moratorium
The moratorium in terms of Insolvency and Bankruptcy Code, 2016 (‘IBC’) means a period wherein no judicial proceedings for recovery, enforcement of security interest, sale or transfer of assets, or termination of essential contracts can be instituted or continued against the Corporate Debtor.
UNDERSTANDING OF SECTION 14(1)(a) THROUGH JUDGEMENTS
In Sanjeev Shirya’s case[1], proceedings were initiated by the lenders before the Debt Recovery Tribunal (“DRT”), arraying guarantors also as parties. Whilst the proceedings before the DRT were pending, the corporate debtor (“LML“), voluntarily filed an application before the National Company Law Tribunal (“NCLT”) for initiation of the corporate insolvency resolution process and thereby an order declaring moratorium under section 14 of the Code came to be passed. LML along with the guarantors immediately applied to the DRT seeking a stay of the proceedings. Although a stay in favour of LML was granted, a stay in favour of the guarantors was rejected, against which rejection a Writ Petition was filed by the guarantors before the Allahabad High Court. The Allahabad High Court held in favour of the guarantors.
Although the ambit of section 14 covers the initiation and continuation of any proceedings, the NCLAT has in its judgment of Canara Bank v. Deccan Chronicle Holdings Limited [2] categorically carved out an exception holding that the moratorium will not affect any proceedings initiated or pending before the Supreme Court under Article 32 of the Constitution of India or where an order is passed under Article 136 of the Constitution of India. The NCLAT also concluded that the moratorium will not affect the powers of any High Court under Article 226 of the Constitution of India.
With the coming into effect of the Code also, the Sick Industrial Companies Act, 1958 (“SICA”) has been repealed. Under section 22 of SICA, the institution or continuation of suits or legal proceedings against a sick company were subject to liberty being obtained from the Board for Industrial and Financial Reconstruction (“BIFR”) (the Adjudicating Authority under SICA). No such provision for obtaining liberty is provided under section 14 of the Code.
Conclusion
The language of section 14 of the Code also is wide enough to include legal proceedings of any nature within its ambit. The intention of the legislature in relation to section 14(1)(a) is to ensure that after the declaration of moratorium, there is a standstill period during which the creditors cannot resort to individual enforcement action which would frustrate the very object of the corporate insolvency resolution process.
In times to come it will be interesting to see if judicial pronouncements carve out any exceptions for certain legal proceedings from the applicability of section 14(1)(a) of the Code, as in the case of Canara Bank Vs DCHL.
In Shah Brothers Ispat case[3]A two-member bench comprising of Justice S.J. Mukhopadhaya, Chairperson and Justice Bansi Lal Bhat, Member (Judicial), allowed an appeal filed against the order of the National Company Law Tribunal, Chennai whereby the appellant was directed to withdraw the complaint case filed under Section 138 of the Negotiable Instruments Act, 1881.
The appellant had filed a complaint case under Section 138 against the defendants before the Metropolitan Magistrate after initiation of Corporate Insolvency Resolution Process and the order of moratorium. The respondents-Directors moved the NCLT which directed the appellants to withdraw the case treating it as a proceeding filed after order of moratorium with observations that such action amounts to misuse of power. Aggrieved thus, the appellant approached the Appellate Tribunal. The question that arose for consideration was ‘whether the order of moratorium covers a criminal proceeding under Section 138 of the NI Act which provides punishment of imprisonment or imposition of fine’.
It is pertinent to note that Section 14 of the Insolvency and Bankruptcy Code, 2016 prohibits any proceeding or judgment or decree of money claim against the corporate debtor after the order of moratorium which is passed on the insolvency commencement date. The Appellate Tribunal observed that Section 138 is a penal provision; the imposition of a fine cannot be held to be a money claim or recovery against the Corporate Debtor. As such, the said section is not covered within the purview of Section 14 I&B Code. In fact, no criminal proceeding is covered under the section. It was held that the NCLT failed to appreciate the law, and therefore, the order impugned was set aside.
UNDERSTANDING OF SECTION 14(1)(b) AND PROCEEDING AGAINST GUARANTOR AND ITS ASSETS THROUGH JUDGEMENTS
The interpretation, scope and extent of moratorium are debatable issues. However, the tribunals have had the occasion to deal with such issue and one such occasion arose in the matter of Schweitzer Systemetek[4], wherein NCLT, Mumbai has held that moratorium will not be applicable to the Guarantors and Section 14 is clear that the moratorium will only cover the properties of Corporate Debtor as the Guarantors are not covered in terms of Section 14 of IBC and the aforesaid view of the NCLT has also been upheld by the Appellate Tribunal.
The similar issue again traversed recently in the matter of Veesons Energy Systems Pvt. Ltd.[5], wherein the NCLT, Chennai has passed an order restraining the Financial Creditor from proceeding against the Guarantor of the Corporate Debtor during the moratorium period.
One might argue that the judgments passed in both the matters are conflicting. However, if we examine the facts, both the judgments operate in different spheres. In the matter of Schweitzer Systemetek, the properties held by the Guarantors of the Corporate Debtor were also being attached pursuant to the admission of an Insolvency Petition against the Corporate Debtor.
Therefore, the NCLT, Mumbai concluded that in terms of moratorium, the properties held by the Guarantor of the Corporate Debtor is not liable to be attached, whereas, in the matter of Veesons Energy Systems, the Tribunal in an application filed by the Guarantor of the Corporate Debtor had restrained the Financial Creditor in proceeding against such Guarantor during the moratorium on the reason that it will result in creating a charge on the assets of the Corporate Debtor which shall amount to encumbering the properties of the Corporate Debtor and in violation of Section 14(1) (b) of the IBC.
On the contrary, it results only in transfer of rights vis-à-vis Creditor and Guarantor. If the Creditors will proceed against the Guarantors then it will result in thwarting the discussion or decision on revival of the Corporate Debtor and shifting the primary liability from Corporate Debtor to the Guarantor.
In addition, once a resolution plan is sanctioned, approved by Committee of Creditors and affirmed by NCLT, then as per Section 31(1) of the IBC, the Resolution Plan is binding on the Corporate Debtor and its Employees, Members, Creditors, Guarantors and other Stakeholders involved in the resolution plan.
It is significant to state that the terms and conditions of the Resolution Plan are also very important as the same will decide the future course of action, if a Creditor consents for a waiver of a part of the debt in the resolution plan then automatically, the liability of the Guarantor will also be considered as waived or if, a Creditor schedules a repayment plan with the principal borrower then until and unless, the default as per the repayment plan is not triggered, the liability qua Guarantors cannot be invoked. For the same reasons, to avoid any prolixity or overlapping, the Allahabad High Court also in the matter Sanjeev Shriya V. State Bank of India & Ors.[6] stayed the proceedings against the Guarantors till the finalization of Corporate Insolvency Resolution Process or till the NCLT approves the resolution plan under sub section (1) of Section 31 or passes an order for liquidation of Corporate Debtor under Section 33, as the case may be. Therefore, the moratorium should be absolute and apply to all cases where the primary liability is that of the Corporate Debtor.
UNDERSTANDING OF SECTION 14(1)(c) THROUGH CASE LAWS
In the case J.M. Financial Asset Reconstruction Company Vs. Indus Finance Ltd.[7] it was held by NCLT, Mumbai bench that 14(1)(c) of Insolvency & Bankruptcy Code operates in the following manner:
Notwithstanding clause under Section 238 of the Code will have effect on any other law inconsistent with the provisions of the Code, SARFAESI Act also being an Act dealing with creditor and debtor relation and operation of law in both the enactments being on the same field, Insolvency & Bankruptcy Code will prevail over SARFAESI Act.
Section 14 having categorically mentioned that declaration of moratorium will prohibit enforcement of security interest created by the Corporate Debtor in respect of its property including any action under SARFAESI Act, 2002, it can’t be said that sale in progress will not remain under suspension during the moratorium period.
UNDERSTANDING OF SECTION 14(2) THROUGH JUDGEMENT
“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.”
Regulation 32 of Insolvency & Bankruptcy (CIRP) Regulation, 2016
“Essential Supplies
The essential goods and services referred to in section 14(2) shall mean-
(1) electricity;
(2) water;
(3) telecommunication services; and
(4) information technology services,to the extent these are not a direct input to the output produced or supplied by the corporate debtor.
Illustration– Water supplied to a corporate debtor will be essential supplies for drinking and sanitation purposes, and not for generation of hydro-electricity.”
[8]Case: Uttarakhand Power Corporation Limited v. ANG Industries Limited.
The National Company Law Appellate Tribunal (“NCLAT”) had the opportunity to answer some questions in relation to section 14(2). The Uttarakhand Power Corporation Limited (“UPCL”) disconnected electricity to the corporate debtor for non-payment of dues. Subsequently, an application for CIRP was moved under section 10 of the Code and the same was admitted. The Insolvency Resolution Professional (“IRP”) then filed an application for restoration of electricity under section 14(2) and the same was allowed by the National Company Law Tribunal (“NCLT”). The question before the NCLAT was whether corporate debtor is required to clear the dues pending at the stage of admission of CIRP before moving under section 14(2). The NCLAT held that the corporate debtor need not clear pending dues but is required to pay at regular intervals for electricity consumed subsequent to the order passed pursuant to section 14(2). As regards pending dues, the NCLAT held that it will be open for UPCL to submit the claim before the IRP
UNDERSTANDING OF SECTION 14(3) OF CODE
Before Ordinance
“The provisions of sub-section (1) shall not apply to such transaction as may be notified by the Central Government in consultation with any financial regulators;”
After Ordinance
“The provisions of sub-section (1) shall not apply to —
(a) such transaction as may be notified by the Central Government in consultation with any financial regulator;
(b) a surety in a contract of guarantee to a corporate debtor”
Effect through Ordinance
After amending the code by central government through ordinance the assets of corporate guarantors or personal guarantors of the corporate debtor will not get the protection of stay provisions under section 14. Though co-extensiveness of the liability of the surety with that of the principal debtor is a cardinal principle imbibed in the law of contracts, there were some rulings which extended the roof of section 14 to the assets of guarantors too. This explicit exclusion will reinforce the principle and will enable the creditors to initiate action against the guarantors of the corporate debtor.
UNDERSTANDING OF SECTION 14(4) OF CODE
| DURATION OF MORATORIUM | The Corporate Insolvency Resolution Process is time bound and the relief of moratorium is available to the Corporate Debtor only during the Corporate Insolvency Resolution Process period i.e. for a period of 180 days which can further be extended to 90 days but not thereafter and even the period of 180 days is also not absolute because the Committee of Creditors anytime within such period may conclude to liquidate the Corporate Debtor and the moratorium will cease to have its effect |
[1] Sanjeev Shriya V. State Bank of India, Writ – C No. – 30285 of 2017
[2] Canara Bank V. Deccan Chronicle Holdings Limited, Company Appeal (AT) (Insolvency) No. 147 of 2017- http://nclat.gov.in/final_orders/Principal_Bench/2017/insolvency/14092017AT1472017.pdf
[3] [Shah Brothers Ispat (P) Ltd. v. P. Mohanraj, Company Appeal (AT) (Insolvency) No. 306 of 2018, dated 31-07-2018].
[4] M/s Schewitzer Systemtek India Private Ltd. V. Phoenix ARC Pvt. Ltd., T.C.P. No. 1059/ I&BP/NCLT/MB/MAH/2017
[5] Mr. V. Ramakrishnan Vs. M/s Veesons Energy Systems Pvt. Ltd. & State Bank of India IA 05/2017 in CP/510/IB/CB/2017
[6] Writ – C Nos. 30285 and 30033 of 2017 Sanjeev Shriya and Ors. vs. State Bank of India and Ors. (06.09.2017 – ALLHC)
[7] J.M. Financial Asset Reconstruction Company vs. Indus Finance Ltd. (26.09.2017 – NCLT – Mumbai)
[8] NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI Company Appeal (AT) (Insolvency) No. 298 of 2017- http://www.nclat.nic.in/final_orders/Principal_Bench/2018/insolvency/24012018AT2982017_.pdf
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