Moratorium Will Be Imposed on All Proceedings Irrespective of Nature: NCLT Mumbai
Summary: National Company Law Tribunal (NCLT), Mumbai, in Vineet K Chaudhary Vs Regional P.F Commissioner, held that Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC) imposes a moratorium on all proceedings against the corporate debtor, irrespective of whether they are judicial, quasi-judicial, or assessment in nature. The case arose when proceedings were initiated under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 against KSS Petron Private Limited despite a moratorium being imposed after commencement of the corporate insolvency resolution process (CIRP). The provident fund authorities proceeded with inquiries and issued recovery orders and notices demanding over ₹34 crore, even after liquidation had been ordered. The liquidator challenged these actions, arguing that they violated the moratorium. The NCLT agreed, observing that the moratorium serves to shield the corporate debtor from pecuniary proceedings so as to allow resolution or liquidation without disruption. Referring to Supreme Court rulings, including P. Mohanraj v. Shah Brothers Ispat Pvt. Ltd., the Tribunal noted that Section 14 does not permit parallel recovery actions that impose financial liabilities on the debtor. Accordingly, the orders and recovery notices were set aside, while clarifying that employees and workmen could still file claims through the IBC framework. The decision reinforces that moratorium applies uniformly to all proceedings without exception.
HELD THAT : Section 14 (Moratorium) of the Insolvency and Bankruptcy Code, 2016 (“IBC“) does not differentiate between assessment, quasi-judicial or judicial proceedings and moratorium is imposed on all proceedings irrespective of its nature.
BRIEF FACTS:
1. M/s Ravi Infrastructure and Projects (“Operational Creditor”) had filed a petition under Section 9 (Application for initiation of corporate insolvency resolution process by operational creditor) of the IBC seeking initiation of Corporate Insolvency Resolution Process (“CIRP“) against KSS Petron Private Limited (“Corporate Debtor“).
2. Admitting the petition of the Operational Creditor, the Adjudicating Authority initiated CIRP against the Corporate Debtor in its order dated August 1, 2017, and a moratorium was imposed under Section 14 (Moratorium) of the IBC.
3. Thereafter, pursuant to issuance of the resolution professional’s public announcement, the Assistant Provident Fund Commissioner and Recovery Officer and the Regional Provident Fund Commissioner (“Respondent”) submitted its claim on June 22, 2018 for an amount INR 47,25,682/- for the period from March 2012 to October 2015 and June 2015 to March 2017.
4. The resolution professional admitted the claim of the Respondent under the list of creditors of the Corporate Debtor.
5. Subsequently, the Respondent initiated inquiry under Section 7A (Determination of moneys due from employers) of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (“EPF Act”) based on a report prepared by an enforcement officer.
6. The said inquiry was initiated through notice dated January 30, 2019 for the period from April 2015 to December 2018.
7. Despite being informed of the pendency of the CIRP against the Corporate Debtor and imposition of moratorium by the resolution professional, the Respondent continued its proceeding and issued summons on June 04, 2019 and July 02, 2019 under Section 7A (Determination of moneys due from employers) and 14B (Power to recover damages) of the EPF Act. In the meanwhile, the Adjudicating Authority had passed an order for liquidation of the Corporate Debtor on June 28, 2019.
8. Thereafter, the Respondent had passed orders dated July 05, 2019 (“Orders”) under:
I) Section 7A (Determination of moneys due from employers) of the EPF Act demanding a payment to the tune of INR 14,40,58,888/-;
II) Section 7Q (Interest payable by the employer) of the EPF Act demanding a payment to the tune of INR 6,43,84,526/- towards interest component; and
III) Section 14B (Power to recover damages) of the EPF Act demanding a payment to the tune of INR 13,02,25,964/- towards damages and penalty.
9. The Respondent also issued notices dated June 28, 2020 and July 7, 2020 seeking recovery of the amounts mentioned in the Orders (“Recovery Notices”).
10. On account of the foregoing, Mr. Vineet K. Chaudhary, the liquidator of the Corporate Debtor (“Applicant”) preferred an application challenging the Recovery Notices and the Orders passed by the Respondents.
ISSUE
Whether Section 14 (Moratorium) of the IBC differentiates between assessment, quasi-judicial or judicial proceedings.
ARGUMENTS
CONTENTIONS RAISED BY THE APPLICANT:
The Applicant submitted that the Orders and Recovery Notices have been passed in violation of the moratorium imposed under Section 14 (Moratorium) of the IBC.
In order to support its submissions, the Applicant relied on the following judgements:
- Anand Rao Korada v. Varsha Fabrics Private Limited and Others [AIR 2020 SC 222]wherein the Hon’ble Supreme Court (“SC”) rejected the orders passed by the Hon’ble High Court of Odisha which had directed for carrying out auction of assets of the corporate debtor during moratorium.
- Dewan Housing Finance Limited v. SEBI [Appeal No. 206 of 2020], wherein the learned Securities Appellate Tribunal, Mumbai while quashing the show cause notice and assessment orders which were issued after moratorium, had held that where a moratorium had been declared under Section 14 (Moratorium) of the IBC, the Securities and Exchange Board of India (being the authority in the said matter) would have no jurisdiction to institute any proceedings.
The Applicant further contended that the Respondent had failed to provide details such as names and provident fund numbers of the employees and workmen in respect of whom the alleged provident fund dues were being claimed. The Applicant had also averred that in absence of details of identified employees and workmen, no dues could exist.
Lastly, the Applicant urged that no claims had been submitted by the Employee Provident Fund (“EPF”) authorities towards claiming any dues under the EPF Act and that in the event of any claims being submitted by such authority, the Applicant would deal with it in accordance with the provisions of the IBC and the law enunciated by the Courts.
CONTENTIONS RAISED BY THE RESPONDENT:
The Respondent countered the application made by the Applicant that challenged the Recovery Notices and the Orders, by submitting that determination of the amounts of provident fund dues are assessment proceedings and are not barred under Section 14 (Moratorium) of the IBC. It is only on completion of the said assessment proceedings that a claim can be filed under the provisions of the IBC.
It was further submitted that the dues of the Respondent were required to be paid in priority over all dues provided under Section 11 (Priority of payment of contributions over other debts) of the EPF Act, as the said dues are excluded from the liquidation estate under Section 36 (Exclusions to liquidation estate assets) of IBC.
Moreover, the dues claimed by the Respondent were social welfare dues and actions have been taken for the benefit of the employees and workmen.
OBSERVATIONS OF THE NCLT
The NCLT observed that the purpose of imposition of a moratorium had been expounded in the case of P. Mohanraj and Others v. Shah Brothers Ispat Private Limited [Civil Appeal No.10355 Of 2018] (“Mohanraj Case”), wherein the SC had held that moratorium is imposed to shield the corporate debtor from pecuniary attacks to enable it to get a breathing space so that it can continue as a going concern to ultimately rehabilitate itself.
Section 14 (Moratorium) of IBC imposes complete prohibition on the institution of suits or continuation of proceedings against the corporate debtor, including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority.
The NCLT further observed that Section 14 (Moratorium) of the IBC does not differentiate between any proceedings, whether they are assessment, quasi-judicial or judicial in nature. In fact, a moratorium is imposed on all proceedings irrespective of the nature.
IN THE INSTANT CASE, the proceedings initiated by the Respondent are not mere assessment proceedings but legal proceedings. The initiation of proceedings by the Respondent would entail imposition of a pecuniary liability on the corporate debtor and that is exactly what is prohibited by the IBC.
Moreover, claims during CIRP are required to be filed within fourteen (14) days from the date of appointment of the interim resolution professional in terms of Regulation 6 (Public Announcement) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.
Thus, a claim which is not alive on the insolvency commencement date, cannot indirectly be permitted to be ascertained, as it would lead to numerous proceedings against the corporate debtor which would in turn frustrate the object of the IBC and the completion of the CIRP in time.
The NCLT further observed that the Applicant had rightly pointed out that the Respondent had passed Orders in haste without identifying the name of any employee or workman in respect of whom the alleged provident fund dues were being claimed.
DECISION OF THE SUPREME COURT
In view of entirety of the foregoing, the NCLT set aside the Orders passed by the Respondent as the said Orders were in violation of the moratorium imposed under Section 14 (Moratorium) of the IBC. Consequently, the Recovery Notices that sought recovery of the amounts mentioned in the said Orders were also set aside.\
The NCLT further held that setting aside of the Orders passed by the Respondent would not curb employees or workmen from filing their respective claims, if any, with the Applicant under the provisions of the IBC, in respect of dues towards provident fund, pension fund and gratuity fund and that the Applicant would be duty bound to prioritize the payments of the social welfare dues.
CONCLUSION:
Through this Judgement, the NCLT examined the legality of the Orders and Recovery Notices issued by the Respondent and if the said Orders and Recovery Notices were issued in breach of moratorium period under Section 14 of the IBC.
The Judgment upheld the view laid down in the Mohanraj Case, wherein the SC held that “…While section 14(1)(a) refers to monetary liabilities of the corporate debtor, Section 14(1)(b) refers to the corporate debtor’s assets, and together, these two clauses form a scheme which shields the corporate debtor form pecuniary attacks against it in the moratorium period so that the corporate debtor gets breathing space to continue as a going concern in order to ultimately rehabilitate itself. Any crack in this shield is bound to have adverse consequences, given the object of Section 14, and cannot, by any process of interpretation, be allowed to occur.”
Therefore, the principle emerging from this Judgement is that Section 14 of the IBC does not differentiate between assessment, quasi-judicial or judicial proceedings and moratorium is imposed on all proceedings irrespective of its nature.
FOOTNOTE:
| The Insolvency and Bankruptcy Code (also known as IBC) has enumerated various concepts and has also prescribed the terms which have been used under the code.
SECTION 14, THE BARE LANGUAGE OF ACT, TALKS ABOUT MORATORIUM: Sub-section (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 judgment, 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. (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 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. (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. EXPLANATION: After admitting the application for insolvency process u/s 7 or u/s 9 or u/s 10, The Adjudicating Authority (i.e. NCLT) shall order (i) to declare a moratorium, (ii) to cause a public announcement of the initiation of the insolvency process and (iii) to appoint an Interim Resolution Professional in the matter. SUB SECTION (1) OF SECTION 14: The moratorium is declared by the Adjudicating Authority (AA) for prohibiting all of the following actions/suits/matters, namely: 1. Any kind of initiation of suits against the corporate debtor or continuation of suits, including the execution of any order/judgment/decree in any court of law/tribunal/arbitration panel or any authority. Which means, once the moratorium declared by the AA (NCLT), any fresh proceedings suits or continuation of suits shall be stopped. One cannot file any new suits against that debtor until the NCLT orders so to do. 2. Disposing off or transferring or alienating or encumbering any of assets of corporate debtor. Which means once the moratorium has declared, the corporate debtor cannot sale/transfer/dispose off any of its assets. Further he also cannot give his legal rights to do so nor can he create any beneficial interest for the purpose of disposing off any assets during that moratorium. 3. Any action with respect to security interest created by the corporate debtor in respect of his property including any action under SARFAESI Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002). 4. Any property which is in possession of or occupied by corporate debtor and such property is to be transferred to or recovered by owner or lessor. Which means, any property which is being enjoyed by the corporate debtor or occupied or in possession of the corporate debtor and such property is to be recovered by the owner or lessor. Hence in such case, it is prohibited to transfer or give up the possession of such property to the owner or lessor. SUB SECTION (2) OF SECTION 14: The supply of essential goods or services to the corporate debtor shall not be suspended or interrupted or terminated during moratorium period. This provision gives relief to the corporate debtor since he also has a constitutional right to do the business and life of liberty. Nonetheless he has also been kept in umbrella with some restriction during moratorium period. SUB SECTION (3) OF SECTION 14: This provision is an exception to the sub-section (1) of section 14 above, which states, Section 14(1) shall not apply to (a) such transactions as may be notified by the Central Govt. in consultation with any financial regulator, and (b) a surety in a contract of guarantee to corporate debtor. Which means a surety in a contract (such contract which gives surety and it is not directly related to such contract) of guarantee. Thus, these are exception and the moratorium restriction shall not apply in this case. SUB SECTION (4) OF SECTION 14:The order of moratorium shall have effect from the date of its order till the completion of insolvency process. This means, the order of moratorium shall be effective as and when the AA (NCLT) passes an order stating moratorium and shall be effective till the insolvency process gets complete. Provided, it is to be noted that at any time during CIRP (insolvency process), if the AA (NCLT) approves the resolution plan under section 31(1) 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 order. That means, such order of moratorium under section 14(4) shall not have effect if the AA (NCLT) looks the matter under section 31(1) or section 33. |
SOURCE:
1. https://www.vaishlaw.com/section-14-of-the-insolvency-and-bankruptcy-code-does-not-differentiate-between-assessment-quasi-judicial-or-judicial-proceedings/
2. https://www.legalserviceindia.com/legal/article-1186-concept-moratorium-section-14-insolvency-and-bankruptcy-code.html
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