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One of the ultimate goals of the Insolvency and Bankruptcy Code, 2016 (IBC) is to provide a mechanism for the timely resolution of corporate debtor’s insolvency in order to maximize the value of its assets, to facilitate credit facility and to strike a balance between the interest of all the stakeholders. To achieve this goal, Section 14 calls for a “moratorium” which is a period during no legal proceedings to recover money, enforce any security interest, sale or transfer of assets or termination of essential contracts can be initiated or continued against a corporate debtor (“CD”). But the moratorium provision as entailed in Section 14(1)(a) of IBC has gone through vast judicial scrutiny and interpreted in different manner to achieve the above-mentioned goal of IBC.

Continuing with the judicial development of the IBC and interpretation of Section 14(1)(a) of IBC, notices issued by the Supreme Court (“SC”) in Malayan Banking Berhad v. Ushdev International Ltd., hold great importance, wherein one of the issues before the court  is whether suits filed “by the corporate debtor” are covered under moratorium under Section 14(1)(a) or not.

Facts of the case

Malyan Banking Berhad filed a review petition before the Bombay HC titled Malayan Banking BHD v. Ushdev International Ltd. seeking review of an order dated July 7, 2019 by Bombay High Court in Notice of Motion filed by Malayan Banking Berhad in a suit initiated by Ushdev International Ltd. During the pendency of the Notice of Motion, a case against Ushdev International Ltd. was admitted by the National Company Law Tribunal (“NCLT”), Mumbai for initiating Corporate Insolvency Resolution Process (“CIRP”) against the same. In view of the CIRP proceedings, Bombay HC vide order dated July 7, 2019 adjourned the proceeding of Notice of Motion sine die considering moratorium.

In review petition, Bombay HC vide order dated September 16, 2019 held that the Notice of Motion would fall within the term “proceeding” mentioned under Section 14(1)(a) of IBC as it seeks rejection of a suit initiated by corporate debtor, which is itself under CIRP and therefore under moratorium. Thus, Bombay HC upheld its order dated July 7, 2019.

This order dated September 16, 2019 by Bombay HC was challenged before the Supreme Court before a Special Leave Petition (“SLP”), to which SC ordered to issue notice for the same.

Conundrum

The notice issued by the SC points out that there exists a legal lacuna regarding the application of moratorium upon proceedings initiated by the CD. This is due to the fact that Section 14(1)(a) of IBC explicitly states that the proceedings “against the corporate debtor” are to be stayed, yet proceeding filed “by the corporate debtor” are also stayed. Hence creating a murky legal situation so as to application of moratorium, thus leading to Malayan Banking Berhad filing an SLP before the SC.

Judicial Trend

A similar anomaly occurred in the case of Power Grid Corporation of India Ltd. v. Jyoti Structures Ltd. before Delhi HC, wherein the court while interpreting Section 14(1)(a) of the IBC, outlined the criteria required to assess the application of moratorium to proceedings initiated by the CD which are:

“The nature of the proceedings has to be considered; and

it has to be observed whether such proceedings are in the favor of the Corporate Debtor or against the Corporate Debtor.”

Delhi HC ruled that if the above factors were in the favour of the CD, staying proceedings initiated by the same during the moratorium would cause harm to the CD and would go against the mandate of the IBC. Court reasoned that under the moratorium period, a blanket stay shall not be put on all proceedings, rather proceedings initiated by the CD should be continued if the same benefits the CD. Thus, proceedings which do not endanger, diminish, dissipate, or adversely impact the assets of the corporate debtor shall be continued if initiated by the CD.

Delhi HC while interpreting the same, observed that the legislative intent behind Section 14(1)(a) is to restrict the application of moratorium to proceedings against the CD and not to the proceedings filed by the CD which is visible from the narrow interpretation of the phrase “against the corporate debtor” in Section 14(1)(a) as compared to the wider interpretation of the phrase “by or against the Corporate Debtor” in Section 33(5) of IBC.

Delhi HC recently affirmed the above-mentioned interpretation in SSMP Industries Ltd. v. Perkan Food Processors Pvt. Ltd. where the court was asked to decide on whether adjudication of a suit filed by the CD and counter claim filed in the same could be continued during moratorium period, wherein Delhi HC following the precedent set in Power Grid Corporation of India did not the stay the proceeding and held that assets of the CD were not under any threat till the adjudication of the counter claim and that moratorium would come into effect only when the counter claim is adjudicated upon. And the amount to be paid/recovered has been determined or when the execution proceedings are filed against the CD and the following were subject to the prevalent situation. Court also opined that with regard to the applicability of moratorium on proceedings initiated by the CD, intent and purpose behind its imposition must be satisfied and a restricted approach cannot be followed.

Similar approach has been followed in Jharkhand Bijli Vitran Nigam Ltd. v. IVRCL Ltd. (Corporate Debtor) wherein National Company Law Appellate Tribunal, New Delhi (“NCLAT”) was tasked to decide on whether a claim filed by the CD and a counter claim filed in the same arbitral proceedings could be continued within the moratorium period. NCLAT while adjudging the same held that claim of CD along with the counter claim to be heard by the arbitral, as the same is not barred by IBC and held that if the decision goes against the CD and if some liability arises on part of the CD, then in such the recovery cannot be made during the period of moratorium.

The above interpretation is backed by Allahabad HC in Trading Engineers International Ltd. v. U.P. Power Transmission Corpn. Ltd.

There appears to be two views with regard to the application of moratorium on the proceedings initiated by the CD, wherein one view is that moratorium covers all proceedings including filed “by” or “against” the CD but the other view (the one taken in Power Grid Corporation of India) is that moratorium includes only proceedings filed against the CD and if the proceedings are filed by the CD, then moratorium would be applicable only after taking into consideration the benefit to the CD.

Analysis of the above interpretation

While the wide interpretation put forward by the Delhi HC in Power Grid Corporation of India and NCLAT in Jharkhand Bijli Vitran with regards to applicability of moratorium, the legislative intent was to restrict the applicability and meaning of moratorium under Section 14(1)(a) of the IBC, which in a way works in the benefit of the CD but there appears to be some pitfalls of this interpretation as enlisted:

Delay – While the enactment of the IBC was to expedite the CIRP or liquidity of the CD, if proceedings are allowed to be continued, this can result in delay of the entire process and may even breach the statutory mandated time-lines.

Financial Stress – While the object of the CIRP is to make the CD come out of its stressed finances and resume operations back on track but with continued proceedings, additional litigation expenses would further deteriorate the financials of the CD.

Over burdening the judiciary – If courts are asked to determine whether a proceeding is in favour of the CD or not it would be equivalent to making an assessment based on a sketchy understanding of the proceeding which could be prejudicial to the parties involved and would lead to overlapping to judicial powers and functions.

Recommendations & Conclusions

While the interpretation carried down by Delhi HC and the criteria identified are laudatory yet there exist factors including the status and the stage of the proceedings which should also be considered and a strict deadline should also be set for the adjudication of any pending proceedings filed by the CD so as to put into practise this interpretation.

This interpretation is undoubtedly in consonance with the goals of the IBC and works in the benefit of the CD but require strict judicial standards to identify which proceedings need to be stayed and which should not. It is essential to adopt a balanced approach while adhering to strict rules when determining whether the corporate debtor’s proceedings can be decided upon during the moratorium period as the same would benefit the CD, its creditors and associated parties. It would be interesting to observe how SC decides this issue, but the current interpretation seems to be the best way forward.

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[Mr. Ritik Jhanwar and Kanishka Aswal are third-year B.Com. LLB (Hons.) and BSW LLB (Hons.) student at Gujarat National Law University]

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