All about Moratorium under IBC including judicial pronouncements

Decoding the Code
Chapter-3 : CIRP
Topic-2: Time Limit, Moratorium & Public Announcement

All about Moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 including judicial pronouncements

The idea of moratorium is that it facilitates the continued operation of the business of the corporate debtor to allow it breathing space to organise its affairs so that a new management may ultimately take over and bring the corporate debtor out of financial sickness, thus benefitting all stakeholders, which would include workmen of the corporate debtor.1

1. Introduction

As soon as the application of CIRP is admitted under Section 7, 9 or 10 of the Code, a moratorium in terms of Section 14 of the Code is to be declared by the adjudicating authority and a public announcement under Section 13 is made stating the last date for submission of claims and the details of the interim resolution professional who shall be vested with the management of the corporate debtor and be responsible for receiving claims. The Adjudicating Authority, upon being satisfied that the resolution plan meets the requirements under section 30(2), approves the resolution plan and if any person is aggrieved by the said order, it can file an appeal before the NCLAT under section 32 read with section 61 of the IBC. Upon the resolution plan being approved by the Adjudicating Authority under section 31 of the IBC, the moratorium order passed by the Adjudicating Authority under section 14 of the IBC ceases to have its effect. The said moratorium is initiated on the date when the application under section 7 of the IBC for initiation of the insolvency process is admitted. During this period, institution of fresh suits or proceedings is prohibited and continuance of already instituted suits and proceedings is also suspended.

Since the enforcement of the Insolvency and Bankruptcy Code, 2016 (‘IBC’ or ‘the Code’), the moratorium term has been constructed by various forum of judiciaries in numbers of judgments. This part of Decoding the Code elaborates the moratorium term and important judicial pronouncements on the Moratorium.

Hon’ble Supreme Court in Swiss Ribbons Pvt. Ltd. & anr. Vs. Union of India & Ors. [2019] ibclaw.in 03 SC held that the moratorium imposed by Section 14 is in the interest of the corporate debtor itself, thereby preserving the assets of the corporate debtor during the resolution process. The timelines within which the resolution process is to take place again protects the corporate debtor‘s assets from further dilution, and also protects all its creditors and workers by seeing that the resolution process goes through as fast as possible so that another management can, through its entrepreneurial skills, resuscitate the corporate debtor to achieve all these ends.

This part of the Decoding the Code decodes:

  • Legal content & purpose
  • What is term Moratorium-analysis of Sec. 14(1)
  • Logic behind Explanation to Sec. 14(1)
  • Outside the purview of the Moratorium (sub-sec. 2, 2A & 3)
  • Commencement & effective period of the Moratorium(Sub-sec. 4)
  • Punishment for contravention (Sec. 74)
  • Insolvency Law Committee recommendations

2. Legal wording, meaning and purpose of the Moratorium

The term moratorium is not defined under the Code. Definition of the word in the Oxford dictionary is “a legal authorization to debtors to postpone payment“. In Cambridge Dictionary the expression ‘Moratorium’ has been defined to mean “a stopping of an activity for an agreed amount of time”.  In Merriam Webster Dictionary to mean “legally authorized period of delay in the performance of a legal obligation or the payment of a debt; a waiting period set by an authority; or a suspension of activity”.

The moratorium 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.  Under section 13(1)(a) of the Code, the adjudicating authority is required to impose a moratorium for matters referred to in section 14.

The purposes of the moratorium include keeping the corporate debtor’s assets together during the insolvency resolution process and facilitating orderly completion of the processes envisaged during the insolvency resolution process and ensuring that the company may continue as a going concern while the creditors take a view on resolution of default and the moratorium on initiation and continuation of legal proceedings, including debt enforcement action ensures a stand-still period during which creditors cannot resort to individual enforcement action which may frustrate the object of the CIRP.

2.1 Legal content of provisions related to the moratorium under the Code reproduced here before Decoding the Section 14:

Declaration of moratorium and public announcement

13. (1) The Adjudicating Authority, after admission of the application under section 7 or section 9 or section 10, shall, by an order—

(a) declare a moratorium for the purposes referred to in section 14;
(b) cause a public announcement of the initiation of corporate insolvency resolution process and call for the submission of claims under section 15; and
(c) appoint an interim resolution professional in the manner as laid down in section 16.

(2) The public announcement referred to in clause (b) of sub-section (1) shall be made immediately after the appointment of the interim resolution professional.”

“Moratorium

14. (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 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 under the Securitisation 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.

2Explanation.-For the purposes of this sub-section, it is hereby clarified that notwithstanding anything contained in any other law for the time being in force, a license, permit, registration, quota, concession, clearance or a similar grant or right given by the Central Government, State Government, local authority, sectoral regulator or any other authority constituted under any other law for the time being in force, shall not be suspended or terminated on the grounds of insolvency, subject to the condition that there is no default in payment of current dues arising for the use or continuation of the license or a similar grant or right during moratorium period.

(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(2A) Where the interim resolution professional or resolution professional, as the case may be, considers the supply of goods or services critical to protect and preserve the value of the corporate debtor and manage the operations of such corporate debtor as a going concern, then the supply of such goods or services shall not be terminated, suspended or interrupted during the period of moratorium, except where such corporate debtor has not paid dues arising from such supply during the moratorium period or in such circumstances as may be specified.

4(3) The provisions of sub-section (1) shall not apply to —

(a) 5 such transactions, agreements or other arrangement as may be notified by the Central Government in consultation with any financial sector regulator or any other authority;]

(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.

 

3. What is the term Moratorium used under the Code – Interpretation of Sub-section (1) of Section 14

The provisions of section 14(1) of the Code are very wide and appear to be a complete bar against the institution or continuation of suits or any legal proceedings against a corporate debtor on the declaration of moratorium by the adjudicating authority. Sub-section (1) of the Section 14 is reproduced here:

Section 14(1):

(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 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 under the Securitisation 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.

Hon’ble Supreme Court in landmark judgment, P. Mohanraj & Ors. Vs. M/S. Shah Brothers Ispat Pvt. Ltd. (2021) ibclaw.in 24 SC, held that the expression “or” occurs twice in the first part of Section 14(1)(a) – first, between the expressions “institution of suits” and “continuation of pending suits” and second, between the expressions “continuation of pending suits” and “proceedings against the corporate debtor…”. The sweep of the provision is very wide indeed as it includes institution, continuation, judgment and execution of suits and proceedings. It is important to note that an award of an arbitration panel or an order of an authority is also included. This being the case, it would be incongruous to hold that the expression “the institution of suits or continuation of pending suits” must be read disjunctively as otherwise, the institution of arbitral proceedings and proceedings before authorities cannot be subsumed within the expression institution of “suits” which are proceedings in civil courts instituted by a plaint (see Section 26 of the Code of Civil Procedure, 1908). Therefore, it is clear that the expression “institution of suits or continuation of pending suits” is to be read as one category, and the disjunctive “or” before the word “proceedings” would make it clear that proceedings against the corporate debtor would be a separate category. What throws light on the width of the expression “proceedings” is the expression “any judgment, decree or order” and “any court of law, tribunal, arbitration panel or other authority”. Since criminal proceedings under the Code of Criminal Procedure, 1973 [“CrPC”] are conducted before the courts mentioned in Section 6, CrPC, it is clear that a Section 138 proceeding being conducted before a Magistrate would certainly be a proceeding in a court of law in respect of a transaction which relates to a debt owed by the corporate debtor.(p14)

Further, Hon’ble Court held that clause (b) of Section 14(1) also makes it clear that during the moratorium period, any transfer, encumbrance, alienation, or disposal by the corporate debtor of any of its assets or any legal right or beneficial interest therein being also interdicted, yet a liability in the form of compensation payable under Section 138 would somehow escape the dragnet of Section 14(1). 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 from 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.

Hon’ble Delhi High Court in Power Grid Corporation Of India Ltd Vs. Jyoti Structures Ltd. [2017] ibclaw.in 12 HC has interpreted terms “proceedings” “including” and “against the corporate debtor” used under Section 14 as under:

(i) ‘proceedings‘ under Sec. 14(1)(a) do not mean ‘all proceedings’;
(ii) the term ‘proceeding’ would be restricted to the nature of action that follows it i.e. debt recovery action against assets of the corporate debtor;
(iii) the use of narrower term ‘against the corporate debtor’ in section 14(1)(a) as opposed to the wider phase ‘by or against the corporate debtor’ used in section 33(5) of the code further makes it evident that section 14(1)(a) is intended to have restrictive meaning and applicability.
(iv) term ‘including‘ is clarificatory of the scope and ambit of the term ‘proceedings‘;

Hon’ble Supreme Court in Dena Bank Vs. C. Shivakumar Reddy and Anr. (2021) ibclaw.in 69 SC held that the provisions of the IBC are designed to ensure that the business and/or commercial activities of the Corporate Debtor are continued by a Resolution Professional, post imposition of a moratorium, which would give the Corporate Debtor some reprieve from coercive litigation, which could drain the Corporate Debtor of its financial resources. This is to enable the Corporate Debtor to improve its financial health and at the same time repay the dues of its creditors.

3.1 All the proceedings pending before all court automatically stop and the RP is not required to take any further step

In the matter of Haravtar Singh Arora Vs. Punjab National Bank & Ors. [2018] ibclaw.in 83 NCLAT  it is contended before the NCLAT that during the period of Moratorium cases pending against the Corporate Debtor has not been stopped by the Resolution Professional. NCLAT held that such submission cannot be accepted as in terms of Section 14 of the Code, all the proceedings pending before all court against the Corporate Debtor automatically comes to halt and cannot be decided. Therefore, the Resolution Professional is not required to take any further step.

NCLAT in Mrs. Madhurima Mridul & Anr. Vs. Raj Infrastructures Development (India) Pvt. Ltd. & Ors. (2018) ibclaw.in 191 NCLAT held that if any suit or other case has been filed by the Appellant (allottee of land) against the Corporate Debtor and pending before a Court of Competent Jurisdiction, may be taken up on completion of Moratorium period.

3.2 Initiation of CIRP against a subsidiary of a Corporate Debtor (under CIRP) will not be hit by Section 14(1)(a) moratorium

In Axis Bank Limited Vs. Alok Infrastructure Limited (2018) ibclaw.in 22 NCLT, the Learned Counsel appearing on behalf of the Corporate Debtor submits that a Petition filed by State Bank of India against M/s. Alok Industries Ltd., which is the holding Company of this Corporate Debtor, was admitted by NCLT, Ahmedabad on 18.07.2017. Consequently, an Insolvency Resolution Professional has taken control over Alok Industries Ltd., thereafter the committee of Creditors of Alok Industries Ltd. approved a resolution plan on 20.06.2018 and the resolution plan is pending for approval before NCLT, Ahmedabad. The Counsel further submits that initiation of CIRP against subsidiary of holding Company which is under CIRP amounts to enforcement action or coercive action as contemplated under Section 14(1)(a) of the Code and hence the Petition deserves to be rejected.

NCLT held that the Section 14(1)(a) of the Code speaks about moratorium for prohibiting institution of suits or continuation of pending suits against the Corporate Debtor including execution of any judgment, etc. It does not speak about initiation of CIRP against the subsidiary of the Corporate Debtor. Initiation of CIRP against a subsidiary of a Corporate Debtor (under CIRP) will not be hit by Section 14(1)(a) moratorium by any stretch of imagination. Further, in the eyes of law a subsidiary company is a distinct entity just like how a holding company is a distinct legal entity. In view of this the contention of the Corporate Debtor herein is far-fetching and cannot be accepted. Further, the present proceeding is completely different and as far as the Corporate Debtor is concerned there is a debt and there is a default. This is what is required to be seen as per law. NCLAT upheld the decision of the NCLT, reported at (2019) ibclaw.in 275 NCLAT.

3.3 Any amount received during the CIRP when the moratorium is in force, is the asset of the Corporate Debtor and RP has to deal with the same as per the provisions of the Code

NCLT in Mr. Sudip Bhattacharya RP of Reliance Naval & Engineering Ltd. Vs. UCO Bank (2021) ibclaw.in 50 NCLT held that as per Section 14 of IB Code and in line with the decision of the Hon’ble NCLAT in the matter of Indian Overseas Bank vs. Mr. Dinkar T. Venkatsubramaniam, Resolution Professional for Amtek Auto Limited, [2017] ibclaw.in 50 NCLAT, the amount received during the CIRP when the moratorium is in force, is the asset of the Corporate Debtor and RP has to deal with the same as per the provisions of the IB Code. The Respondent is not entitled to adjust the same when the moratorium is in force. If, he has any dues pending from the Corporate Debtor on the date of commencement of CIRP, it is open for him to file his claim before the RP. The instant IA is allowed with the above observations and accordingly disposed of. No order as to cost.

NCLAT in Indian Overseas Bank(Supra) held that after admission of an application under Section 7 of the IBC, once moratorium has been declared it is not open to any person including Financial Creditors & bank to recover any amount from the account of the Corporate Debtor, nor it can appropriate any amount towards its own dues.

3.4 Proceedings which are in the benefit of the corporate debtor or Suits are filed by Corporate Debtor

Hon’ble Delhi High Court in the matter of Power Grid Corporation Of India Ltd Vs. Jyoti Structures Ltd. [2017] ibclaw.in 12 HC held that in Jyoti Structures case for testing the applicability of Section 14 of Code one has to see the nature of proceedings and see if such proceedings are against the corporate debtor or is in its favour. In the light of the purpose or object behind the moratorium, Section 14 of the Code would not apply to the proceedings which are in the benefit of the corporate debtor. Stay of proceedings against an award in favour of the corporate debtor would rather be stalking the debtor’s effort to recover its money and hence would not fall in the embargo of Section 14(1)(a) of the Code.

Hon’ble Supreme Court in Malayan Banking Berhad Vs. Ushdev International Ltd. & Ors. (2020) ibclaw.in 35 SC held that the suit has been filed by the corporate debtor and Section 14(1)(a) is not applicable.

3.5 High Court ought not to have proceeded with the auction of the property of the Corporate Debtor, once the proceedings under the IBC had commenced, and an Order declaring moratorium was passed by the NCLT

The Supreme Court in the matter of Mr. Anand Rao Korada Resolution Professional Vs. M/s. Varsha Fabrics (P) Ltd. & Ors.[2019] ibclaw.in 04 SC set aside the impugned Interim Orders dated 14.08.2019 and 05.09.2019 passed by the Odisha High Court and held that in view of the provisions of the IBC, the High Court ought not to have proceeded with the auction of the property of the Corporate Debtor, once the proceedings under the IBC had commenced, and an Order declaring moratorium was passed by the NCLT. The High Court was not justified in passing the Orders for carrying out auction of the assets of the Corporate Debtor before the NCLT. If the assets of the Company(Corporate Debtor) are alienated during the pendency of the proceedings under the IBC, it will seriously jeopardise the interest of all the stakeholders. The sale or liquidation of the assets of Respondent No. 4 will now be governed by the provisions of the IBC.

3.6 Impact on proceedings under the Arbitration and Conciliation Act, 1996

Hon’ble Supreme Court in P. Mohanraj & Ors. Vs. M/S. Shah Brothers Ispat Pvt. Ltd. (2021) ibclaw.in 24 SC held that it is important to note that an award of an arbitration panel or an order of an authority is also included. This being the case, it would be incongruous to hold that the expression “the institution of suits or continuation of pending suits” must be read disjunctively as otherwise, the institution of arbitral proceedings and proceedings before authorities cannot be subsumed within the expression institution of “suits” which are proceedings in civil courts instituted by a plaint (see Section 26 of the Code of Civil Procedure, 1908).

In the matter of Alchemist Asset Reconstrution Company Ltd. Vs. M/S. Hotel Gaudavan Pvt. Ltd. & Ors. [2017] ibclaw.in 09 SC, Hon’ble Supreme Court held that after moratorium under Sec. 14 come into effect, arbitration proceedings cannot start or continue against the Corporate Debtor and further state that the effect of Section 14(1)(a) is that the arbitration that has been instituted after the aforesaid moratorium is non est in law.

Hon’ble Delhi High Court in the matter of Power Grid Corporation Of India Ltd Vs. Jyoti Structures Ltd. [2017] ibclaw.in 12 HC held that stay of proceedings against an award in favour of the corporate debtor would rather be stalking the debtor’s effort to recover its money and hence would not fall in the embargo of Section 14(1)(a) of the Code. The High Court held that:

(a) moratorium under section 14(1)(a) is intended to prohibit debt recovery actions against the assets of corporate debtor;
(b) continuation of proceedings under sec. 34 of the Arbitration Act which do not result in endangering, diminishing, dissipating or adversely impacting the assets of corporate debtor are not prohibited under section 14(1)(a) of the code;
(c) the Arbitration Act draws a distinction between proceedings under section 34 (i.e. objections to the award) and under section 36(i.e. the enforceability and execution of the award). The proceedings under section 34 are a step prior to the execution of an award. Only after determination of objections under section 34, the party may move a step forward to execute such award and in case the objections are settled against the corporate debtor, its enforceability against the corporate debtor then certainly shall be covered by moratorium of section 14(1)(a).

a. An arbitral order passed post admission of CIRP against the Corporate Debtor is in violation of objective of the Code and is in contravention of moratorium under Section 14 of the Code:

NCLT in Mr. Atul Rajwadkar Vs. HDFC Bank Limited & Ors. (2021) ibclaw.in 55 NCLT that the arbitral order passed on 23 of January, 2020, post admission of CIRP against the Corporate Debtor on 17.09.2019, is in violation of objective of the Code and is in contravention of moratorium under Section 14 of the Code. The arbitral award dated 23.01.2020 is hereby set aside.

NCLAT in Ranjit Das & Ors. Vs. MSX Mall Pvt. Ltd. (2019) ibclaw.in 272 NCLAT held that the arbitration proceedings, if so pending may continue but the award, if any, passed by the Arbitral Tribunal against the Corporate Debtor be not given effect during the period of Moratorium.

b. Sale of Hypothecated Trucks pursuance to the Arbitral Award during the Moratorium under Section 14 of IBC

In Tata Motors Finance Ltd. Vs. Jadoun International Pvt. Ltd. & Anr. (2019) ibclaw.in 401 NCLAT, there was Hypothecation Agreement between the Corporate Debtor and the Appellant. CIRP had started on 25.01.2019 and the Appellant in pursuance to the Arbitral Award, proceeded to repossess two trucks belonging to the Corporate Debtor and sold one on 15.03.2019 and another on 8th April, 2019. The Appellant claims that the Appellant did not have knowledge of the moratorium. The Resolution Professional (RP) before the Adjudicating Authority (NCLT, Jaipur Bench) calling upon the Appellant to deposit the money and the Appellant filed IA 258 of 2019 that the Appellant was being restrained from filing claim with the RP who is insisting for first deposit of the value of the trucks already sold.

By the Impugned Order, the Adjudicating Authority has directed the Appellant to deposit Rs.25,10,000/- and then participate. The learned Counsel for the Appellant is submitting that the Appellant did not have knowledge of the initiation of CIRP process and so the fault cannot be found with the Appellant. The Counsel submits that if the Appellant had the trucks, the Appellant would have given possession of the same but the same have already been sold and if the Appellant is required to deposit the value of the trucks sold, the Appellant would have no assurance of getting back its money. NCLAT rejected the appeal and held that once Section 7 Application was admitted, from commencement date, moratorium got activated and any action of the present nature violating moratorium could not be upheld. However, if the Appellant deposits money with the RP within 15 days from today, the Appellant may be allowed by the RP to lodged its claim, against Corporate Debtor.

c. The Adjudicating Authority has no jurisdiction to set aside the order passed by the Indian Council of Arbitration 

In Sobodh Kumar Agrawal Vs. EIH Ltd [2019] ibclaw.in 154 NCLAT it is held that he Appeal is squarely covered by the decision of this Appellate Tribunal in K.S. Oils Ltd. vs. The State Trade Corporation of India Ltd. & Anr. [2018] ibclaw.in 07 NCLAT, NCLAT held that in the facts and circumstances, the order dated 3rd August, 2018 passed in Jharkhand Bijli Vitran Nigam Ltd.’ is not applicable to a Corporate Debtor not being the claimant and the claim petition of the Respondent cannot proceed during the period of Moratorium. In K.S. Oils Ltd.(supra) it was held that the arbitral proceeding pending between Corporate Debtor and Financial Creditor before the Indian Council of Arbitration cannot proceed during the moratorium period.

d. Once the Resolution Plan is approved, thereafter the Arbitral Proceeding may continue

In C. Satyanarayana Vs. Sri Vasudevan, R.P. & Anr. (2019) ibclaw.in 314 NCLAT it was submitted that the Arbitral Tribunal may be allowed to pass the award but it will not be executed during the moratorium period. The Resolution plan has already been approved by the CoC and Resolution Professional has placed the same before the Adjudicating Authority for approval under Section 31. NCALT held that instead of passing any specific order about the award, we direct the Adjudicating Authority to pass appropriate order under Section 31 in accordance with law on an early date. If the plan is approved, thereafter the Arbitral Proceeding may continue.

e. The handing over or showing any document to any party will not amount to violation of order of Moratorium

In Mr. V. Nagarajan RP of M/s. Cethar Ltd. Vs. M/s. Meenakshi Energy Ltd. [2018] ibclaw.in 125 NCLAT Counsel for Applicant/RP raised an issue in the Application that has been filed by the Respondent before the Arbitral Tribunal for production of the certificates on completion of the project. The Arbitral Tribunal has given direction to the Applicant to produce the certificates in relation to the completion of the project in a sealed cover. It has been submitted by the Counsel for the Applicant that the Applicant is under the CIRP and any application cannot be filed before any Court in the light of the provisions of section 14 read with 60 of the IBC, 2016, because the Applicant (Corporate Debtor) will not be able to exercise the ‘right of unpaid vendor lien’. NCLAT held that the handing over or showing any document to any party will not amount to violation of order of Moratorium.

3.7 Impact on proceedings under the Negotiable Instruments Act, 1881

a. Whether the institution or continuation of a proceeding under Section 138/141 of the Negotiable Instruments Act can be said to be covered by the moratorium provision, namely, Section 14 of the IBC: Hon’ble Supreme Court in P. Mohanraj & Ors. Vs. M/S. Shah Brothers Ispat Pvt. Ltd. (2021) ibclaw.in 24 SC held that given our analysis of Chapter XVII of the Negotiable Instruments Act together with the amendments made thereto and the case law cited hereinabove, it is clear that a quasi-criminal proceeding that is contained in Chapter XVII of the Negotiable Instruments Act would, given the object and context of Section 14 of the IBC, amount to a “proceeding” within the meaning of Section 14(1)(a), the moratorium therefore attaching to such proceeding.(p53). 

The Court held that it can thus be seen that regard being had to the object sought to be achieved by the IBC in imposing this moratorium, a quasi-criminal proceeding which would result in the assets of the corporate debtor being depleted as a result of having to pay compensation which can amount to twice the amount of the cheque that has bounced would directly impact the CIRP in the same manner as the institution, continuation, or execution of a decree in such suit in a civil court for the amount of debt or other liability. Judged from the point of view of this objective, it is impossible to discern any difference between the impact of a suit and a Section 138 proceeding, insofar as the corporate debtor is concerned, on its getting the necessary breathing space to get back on its feet during the CIRP. Given this fact, it is difficult to accept that noscitur a sociis or ejusdem generis should be used to cut down the width of the expression “proceedings” so as to make such proceedings analogous to civil suits.(p24)

3.8 Impact of Moratorium on Criminal Proceedings and Prevention of Money Laundering Act, 2002

Sec. 14 is not applicable to the criminal proceeding or any penal action taken pursuant to the criminal proceeding or any act having essence of crime or crime proceeds:

Hon’ble Bombay High Court in the matter of Tayal Cotton Pvt. Ltd. Vs. The State of Maharashtra & Othrs [2018] ibclaw.in 13 HC interpreted the clause (a) of Section 14 (1) that word ‘proceedings’ used therein and even the words ‘order’ and ‘in Court of law’ will have to be interpreted as a proceeding arising in the nature of a suit and orders passed in such proceedings and suits. Apart from the fact that the Legislature has not conspicuously used the words ‘criminal’ as an adjective to the word ‘proceedings’ and as an adjective to the noun Court of law, it must be assumed that the Legislature in its wisdom has consciously omitted to use such adjectives since it must have intended to prohibit only the suits and execution of the judgments and decrees or a proceeding of the like nature. Therefore, applying the principle of interpretation, one cannot put any other interpretation on this provision contained in Section 14 of the Code except that it only prohibits a suit or a proceeding of a like nature and does not include any criminal proceeding.

In the matter of Varrsana Ispat Limited Vs. Deputy Director Directorate of Enforcement [2019] ibclaw.in 67 NCLAT, NCLAT held that the Prevention of Money Laundering Act, 2002 relates to proceeds of crime and the offence relates to money-laundering resulting confiscation of property derived from, or involved in, money laundering and for matters connected therewith or incidental thereto. Thus, as the Prevention of Money Laundering Act, 2002 or provisions therein relates to proceeds of crime, the Section 14 of the Code is not applicable to such proceeding.

In Rotomac Global Private Limited Vs. Deputy Director Directorate of Enforcement [2019] ibclaw.in 114 NCLAT it is also held that Section 14 is not applicable to the PML Act, 2002.

NCLT in Sterling SEZ and Infrastructure Limited Vs. Deputy Director Directorate of Enforcement, PMLA (2019) ibclaw.in 15 NCLT held that the attachment order issued by Directorate of Enforcement and as confirmed Adjudicating Authority under PMLA Court is a nullity and nonest in law in view of Sections 14(1)(a), 63 and 238 of IBC and the Resolution Professional can proceed to take charge of the properties and deal with them under IBC as if there is no attachment order.

3.9 Impact on Existing Contracts/ termination of the contracts

a. Statutory right of a financial institution to proceed under the SARFAESI Act, 2002 remains suspended for a limited period but the existing contracts between the surety, principal debtor and the creditor remains unaffected

Hon’ble Calcutta High Court in Gouri Shankar Jain Vs. Punjab National Bank & Anr. [2019] ibclaw.in 01 HC held that An application under Section 7 of the Code of 2016 once admitted under Section 7(5) thereof has two terminal points for the corporate debtor. The Code of 2016 does not contemplate withdrawal of an application under Section 7 once it is admitted under Section 7(5). The terminal points are, firstly, the approval of a Resolution Plan and secondly, the initiation of liquidation proceeding on a Resolution Plan not being approved. When a financial creditor applies under Section 7 of the Code of 2016 it is exercising a statutory right. The exercise of such statutory right does not depend upon the contractual obligations of the parties bound by the respective contracts between the creditor, principal debtor and the surety. Such contracts cannot be said to have rescinded, novated, frustrated, modified, altered or affected in any manner, on an application under Section 7 of the Code of 2016 being filed. After its admission under Section 7(5) of the Code of 2016, when an order under Section 14 is passed, then also only the statutory right of a financial institution to proceed under the SARFAESI Act, 2002 remains suspended for a limited period. The existing contracts between the surety, principal debtor and the creditor remains unaffected.

b. Whether the adjudication of the counter claim would be liable to be stayed in view of Section 14 of the Code

If continuation of the counter claim would not adversely impact the assets of the corporate debtor, Section 14 could not be triggered: Hon’ble Delhi High Court in the matter of SSMP Industries Ltd Vs. Perkan Food Processors Pvt. Ltd [2019] ibclaw.in 07 HC held that till the defence is adjudicated, there is no threat to the assets of the corporate debtor and the continuation of the counter claim would not adversely impact the assets of the corporate debtor. Once the counter claims are adjudicated and the amount to be paid/recovered is determined, at that stage, or in execution proceedings, depending upon the situation prevalent, Section 14 could be triggered. At this stage, due to the reasons set out above, the counter claim does not deserve to be stayed under Section 14 of the Code.

c. Absence of any agreement with the State Government in respect to any property, RP on behalf of the Corporate Debtor cannot claim that the property is under occupation or in possession of the Corporate Debtor

In the matter of Monnet Ispat & Energy Ltd. Vs. Government of India, Ministry of Coal [2018] ibclaw.in 116 NCLAT, after initiation of the CIRP, the Government of India, Ministry of Coal(GoI), issued notice for termination of Coal Mines Development and Production Agreement between Monnet Ispat & Energy Ltd.(Corporate debtor) and GoI. The Resolution Professional of Monnet Ispat & Energy Ltd. challenged this letter of termination on the ground that it is against the provisions of Section 14 of the Code where under moratorium has been declared by the NCLT. NCLAT has held that the vesting of the Coal Mines is not complete in absence of any agreement with the State Government in respect to the mines in question, therefore, the Resolution Professional on behalf of the Corporate Debtor cannot claim that pursuant to lease the mines are under occupation or in possession of the Corporate Debtor.

d. The existing contracts between the surety, principal debtor and the creditor remains unaffected during the moratorium under Section 14

Hon’ble High Court of Calcutta in Gouri Shankar Jain Vs. Punjab National Bank & Anr. [2019] ibclaw.in 01 HC held that when a financial creditor applies under Section 7 of the Code of 2016 it is exercising a statutory right. The exercise of such statutory right does not depend upon the contractual obligations of the parties bound by the respective contracts between the creditor, principal debtor and the surety. Such contracts cannot be said to have rescinded, novated, frustrated, modified, altered or affected in any manner, on an application under Section 7 of the Code of 2016 being filed. After its admission under Section 7(5) of the Code of 2016, when an order under Section 14 is passed, then also only the statutory right of a financial institution to proceed under the SARFAESI Act, 2002 remains suspended for a limited period. The existing contracts between the surety, principal debtor and the creditor remains unaffected.

Hon’ble Supreme Court in Tata Consultancy Services Ltd. Vs. Vishal Ghisulal Jain, RP, SK Wheels Pvt. Ltd. (2021) ibclaw.in 167 SC the residuary jurisdiction of the NCLT cannot be invoked if the termination of a contract is based on grounds unrelated to the insolvency of the Corporate Debtor. The NCLT does not have any residuary jurisdiction to entertain the present contractual dispute which has arisen dehors the insolvency of the Corporate Debtor. In the absence of jurisdiction over the dispute, the NCLT could not have imposed an ad-interim stay on the termination notice. The NCLAT has incorrectly upheld the interim order of the NCLT. Further, it held that even if the contractual dispute arises in relation to the insolvency, a party can be restrained from terminating the contract only if it is central to the success of the CIRP. Crucially, the termination of the contract should result in the corporate death of the Corporate Debtor.

3.10 Impact on property(ies)/Lease/Rent

a. Whether the order of Moratorium will be applicable to the lease hold property of a land-lord in which the Corporate Debtor is a tenant, particularly after decree of eviction passed in favour of the land lord against the Corporate Debtor

In M/s. Navbharat Castings LLP. Vs. M/s. Moser Baer India Ltd. & Anr. (2018) ibclaw.in 148 NCLAT, the appellant has challenged the order dated 8th May, 2018 whereby and whereunder the application preferred by the appellant (landlord) for direction to the Corporate Debtor through the Resolution Professional to vacate the premises belonging to the decree holder has been rejected in view of the order of moratorium passed. NCLAT held that in view of sub-clause (1) of clause (d) of Section 14 of the Code, the recovery of property by the owner occupied by the Corporate Debtor is not permissible during the period of moratorium.

b. Whether the land handed over in pursuant to joint development agreement can be treated as an asset of the Corporate Debtor under Section 14(1)(d)?

Hon’ble Supreme Court in Rajendra K. Bhutta Vs. Maharashtra Housing and Area Development Authority and another [2020] ibclaw.in 27 SC while referring to Ude Bhan and Others v. Kapoor Chand and Others, AIR 1967 P&H 53 (FB), The Member, Board of Revenue v. Arthur Paul Benthall [1955] 2 SCR 842 and other judgments, reaffirmed the Latin maxim ‘Reddendo Singula Singulis’ and held that the property which is ‘occupied by’ the Corporate Debtor under the joint development agreement will become the property over which actual possession of the Corporate Debtor is there. Thus, it will come under the ambit of Section 14(1)(d) the Code which talks about the actual possession of the assets of the Corporate Debtor rather than its interest over it, thereby setting aside the order of the NCLAT. It was further concluded that in case of clash between the MDHA Act and the Code, the latter shall prevail due to overriding provision of the IBC over other laws given under Section 238 of the Code.

c. Whether the amount of rent due to the Land Lord (Operational Creditor) has prejudicially affected on account of the moratorium imposed under Section 14(1)(d)

NCLAT in JAS Telecom Pvt. Ltd. Vs. Eolane Electronics Bangalore Pvt. Ltd. (2018) ibclaw.in 133 NCLAT held that from the regulation 31 of CIRP Regulations, 2016, it is clear that the amounts due to the person whose rights are prejudicially affected on account of the moratorium imposed under Section 14(1)(d), such amount to be included in the insolvency resolution process costs. So far as Appellant is concerned, the rent has not been paid by the Corporate Debtor since 1st January, 2017 that is much prior to order of moratorium. Learned counsel for the Resolution Professional (Respondent) rightly pointed out that the rent amount due to the Appellant was not prejudicially affected on account of the moratorium imposed under Section 14(1)(d). In act it has not been paid since prior to the order of moratorium i.e. since 1st January, 2017. The order of moratorium was passed subsequently on 31st August, 2017, therefore, the Appellant cannot claim that its right has been affected prejudicially on account of moratorium imposed by the Adjudicating Authority.

Learned counsel appearing on behalf of the Respondent submits that the liquidation process has already been started therefore the claim of the appellant may be considered in terms of provision of I&B Code, 2016. In view of such development, the Appellant may take advantage of Section 53 of the I&B Code, which relates to distribution of assets. Therefore, as and when the proceeds from sale of the assets shall be distributed the Adjudicating Authority is required to pass order in terms of priority as mentioned in Section 53 of I&B Code. The appeal stands disposed of with aforesaid observations.

d. Whether a property(ies) which is/are not ‘owned’ by a Corporate Debtor shall come within the ambits of the Moratorium?

NCLT in M/s. Schweitzer Systemtek India Private Limited Vs. Phoenix ARC Private Limited [2017] ibclaw.in 13 NCLT held that the Moratorium has no application on the properties beyond the ownership of the Corporate Debtor. As a result, the Order of the Hon’ble Court directing the Court Commissioner to take over the possession shall not fall within the clutches of Moratorium. Even otherwise, the provisions of the SARFAESI Act may be having different criteria for enforcement of recovery of outstanding Debt, which is not the subject matter of this Bench. Before I Part with it is necessary to clarify my humble view that The SARFAESI Act may come within the ambits of Moratorium if an action is to foreclose or to recover or to create any interest in respect of the property belonged to or owned Debtor, otherwise not.

e. The property not owned by the Corporate Debtor do not fall within the ambit of the Moratorium

In Alpha & Omega Diagnostics (India) Ltd. Vs. Asset Reconstruction Company of India Ltd. & Ors [2017] ibclaw.in 23 NCLAT, wherein Alpha & Omega Diagnostics (India) Ltd. filed an application under Section 10 of the Code for initiation of CIRP in so far it relates to Corporate Debtor with the Adjudicating Authority. The Adjudicating Authority by impugned order dated 10th July, 2017 admitted the application subject and to some qualifications. On the question is that whether a property(ies) which is/are not ‘owned’ by a Corporate Debtor shall come within the ambits of the Moratorium?, the NCLT held that “its” denotes the property owned by the Corporate Debtor. The property not owned by the Corporate Debtor do not fall within the ambits of the Moratorium. Even Section 10 is confined to the Book of the Accounts of the Corporate Debtor, due to the reason that Section 10(3) has specified that the Corporate Applicant shall furnish “its” Books of Accounts. This Bench has no legislative authority to expand the meaning of the term, “its” even under the umbrella of ‘Ejusdem generis’. The outcome of this discussion is that the Moratorium shall prohibit the action against the properties reflected in the Balance Sheet of the Corporate Debtor. The Moratorium has no application on the properties beyond the ownership of the Corporate Debtor. For the sake of completeness, it is worth to refer that the provisions of The SARFAESI Act may be having different criteria for enforcement of recovery of outstanding debt, which is not the subject matter of this Bench. Before I past with it is necessary to clarify my humble view that the SARFAESI Act may come within the ambits of Moratorium if an action is to foreclose or to recover or to create any interest in respect of the property belonged to or owned by a Corporate Debtor, otherwise not. The impugned order dated 10th July, 2017 was under challenged before NCLAT.

NCLAT declined to interfere with the NCLT order and held that on careful reading of the provisions has come to the definite conclusion that on commencement of the insolvency process the “Moratorium” shall be declared for prohibiting any action to recover or enforce any security interest created by the ‘Corporate Debtor’ in respect of “its” property, no ground is made out to interfere with the said order.

3.11 Impact on other Laws

a. A moratorium under the IBC will apply to the order of the Income-Tax Appellate Tribunal

Hon’ble Supreme Court in Pr. Commissioner of Income Tax Vs. Monnet Ispat and Energy Ltd. [2018] ibclaw.in 30 SC upheld a Delhi High Court ruling that had held that a moratorium under the IBC will apply to the order of the Income-Tax Appellate Tribunal. The court relied on the Dena Bank vs Bhikhabhai Prabhudas Parekh and Co & Ors (2000) 5 SCC 694 and its progeny, making it clear that income-tax dues, being in the nature of Crown debts, do not take precedence even over secured creditors, who are private persons.

b. How are dues under GST for pre-CIRP period be dealt?

CBEC has clarified that in accordance with the provisions of the IBC and various legal pronouncements on the issue, no coercive action can be taken against the corporate debtor with respect to the dues for period prior to insolvency commencement date. The dues of the period prior to the commencement of CIRP will be treated as ‘operational debt’ and claims may be filed by the proper officer before the NCLT in accordance with the provisions of the IBC. The tax officers shall seek the details of supplies made / received and total tax dues pending from the corporate debtor to file the claim before the NCLT. Moreover,