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Moratorium: Suspension of Proceedings or Not?

A moratorium is a stay or suspension of an activity or a law. In a legal framework, it may denote to the temporary suspension of a law to permit a legal trial to be carried out. In direction to deliver a “Calm Period” to the Corporate Debtor, provisions of Moratorium has been introduced in the Insolvency and bankruptcy code (IBC). The source of the moratorium section in IBC may be sketched back to former legislation, in Section 446 of the Companies Act, 1956 and in Section 22(1) of the Sick Industrial Companies Act, 1984, similar limitations used to be present. The intent after the moratorium in IBC was defined by the apex court in the case of Innoventive Industries Ltd v. ICICI Bank Ltd[1]“to provide the debtors a breathing spell in which he is to seek to reorganize his business.” The moratorium in IBC starts from the Insolvency Commencement date and is in force till the Corporate Insolvency Resolution Process (CIRP) period and throughout such period no judicial proceedings for recovery, enforcement' of security' interest, sale or transfer of assets, or termination' of essential contracts can take place against the Corporate Debtor.

In this work, only effect of moratorium on Indian Constitution, Sec 138 of Negotiable Instrument Act and Sec 34 of Arbitration and Conciliation act will be discussed and emphasis will be placed on whether proceedings under above mentioned laws are stopped by Sec 14 of IBC or not.

Section 14 of Insolvency and bankruptcy code[2]read as:
(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,[i] 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 in the Securitization 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 such transactions as may be notified by the Central Government in consultation with any financial sector regulator.
(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 in sub-section (1) of section 31 or passes an order for liquidation of corporate debtor in section 33, the moratorium shall cease to have effect from the date of such approval or liquidation order, as the case may be.

The language of Section 14 is clear and the moratorium in favor of the Corporate Debtor is also absolute. The intent of the legislature behind such moratorium is to grant a calm period for insolvency resolution Debtor can negotiate in the assessment of viability without any fear of recovery enforcement mechanisms implemented by the Creditors.

The Supreme Court in Innoventive Industries Ltd v. ICICI Bank Ltd[3]observed that, during the moratorium period, no claim for recovery of debt (existing or new) can be pursued. Clearly, the “calm period” is essentially provided so that the debtor scan negotiate with the creditors to forego a part of the debtor to restructure the payment schedule of the debt. During this “calm period”, no judicial proceedings for recovery, enforcement of security interest, sale or transfer or assets, or termination of essential contracts can take place against the corporate debtor.

Whether moratorium will suspendor stay all the proceedings against Corporate Debtor?

Article 32,136 and 226 of Indian Constitution:

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[4]categorically carved out an exception holding that the moratorium will not affect any proceedings' initiated or pending before the Supreme Court in Article 32 of the Constitution of India or where an order is passed in Article 136 of the Constitution of India. The NCLAT also concluded that the moratorium will not affect the powers of any High Court in Article 226 of the Constitution of India.

Sec 138 of Negotiable Instrument (NI) Act, 1891:

Now the second issue which will arise is whether the moratorium will also cover the proceedings against the directors of the Corporate Debtor in Section 138 of the NI Act. NCLT in Shah Brothers Ispat Pvt. Ltd v. P. Mohanraj & Ors[5] answered this question in negative “Section 138 is a penal provision, which empowers the court of competent jurisdiction to pass order of imprisonment or fine, which cannot be held to be proceeding or any judgment or decree of money claim. Imposition of fine cannot be held to be a money claim or recovery against the Corporate Debtor nor order of imprisonment, if passed by the court of competent jurisdiction on the Directors, they cannot come within the purview of Section 14.In fact no criminal proceeding is covered in Section 14 of I&B Code.”

Arbitration proceedings in Sec 34 of Arbitration and Conciliation Act,1996:

In the matter of, the Power Grid Corporation of India Limited Vs. Jyoti Structures Limited,[6] a petition was filed in Section 34 of the Arbitration and Conciliation Act, 1996 (Arbitration Act) for setting aside the arbitral award, in the nature of a pure money decree, passed in favor of the corporate debtor herein. During the pendency of the above arbitration proceedings, an insolvency application was filed against the corporate debtor, which was admitted by the NCLT, Delhi, consequent to which a moratorium was declared in Section 14 of IBC.

The question which therefore arose before the Hon'ble Delhi High Court was whether the proceedings in Section 34 of the Arbitration Act must bestayed in Section 14 of IBC or not.

It was then held that the term ‘proceedings referred to in Section 14 of IBC does not mean all proceedings and it is restricted to debt recovery actions against the assets of the corporate debtor. Further, continuation of proceedings in Section 34 of the Arbitration Act does not harm the corporate debtors assets, thereby, is not prohibited in the moratorium provision of Section 14. It was also held that the use of the term ‘against the corporate debtor in Section 14(1) (a) of IBC in comparison with ‘by or against the corporate debtor used in Section 33(5) of IBC clarifies that the former has restrictive meaning and applicability, as opposed to the latter.

Finally, proceedings in Section 34 of the Arbitration Act come into play before the execution of an award; i.e. once objections are framed in the said provision, the party may proceed to execution of the award, and in the event that the said objections are settled against the corporate debtor, its enforceability against the corporate debtor shall fall within the purview of Section 14(1)(a) of IBC and the said proceedings can be carried out by the interim resolution professional, thereby ensuring that the reins of the corporate debtor are not controlled by oppressive management.

From the provisions of the IBC and on the basis of the Bankruptcy Law Report, it comes to light that the moratorium is per se for actions related to commercial claims alone, the window for revival of the Corporate Debtor is very limited and during that period there should be a strict calm period and absolute moratorium  in all cases where the primary liability is that of the Corporate Debtor. Section 14 imposes serious restrictions on the rights of the third party against filing of suits or proceedings or taking coercive action against the corporate debtor for recovery of debt.

[1]2010 (1) SCC 407
[2]Insolvency and Bankruptcy Code, 2016.
[3]Ibid 1
[4]Company Appeal (AT) (Insolvency) No. 147 of 2017
[5]Company Appeal (AT) (Insolvency) No. 306 of 2018.
[6][2018] 142 CLA 285 (Del.)  

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