“Decoding the Code”

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

 

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

 

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

Legal content of the provisions related to 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.

(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.

1[(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.

———

1. Substituted by the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, w.e.f. 06.06.2018.(see State Bank of India Vs. V. Ramakrishnan & Anr.-SC)  Prior to the substitution, sub-section (3) of section 14 as under:

“(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.”

 

Secure Creditor & Security Interest define under section 3 as under:

“(30) “secured creditor” means a creditor in favour of whom security interest is created;”

“(31) “security interest” means right, title or interest or a claim to property, created in favour of, or provided for a secured creditor by a transaction which secures payment or performance of an obligation and includes mortgage, charge, hypothecation, assignment and encumbrance or any other agreement or arrangement securing payment or performance of any obligation of any person:

          Provided that security interest shall not include a performance guarantee;”

 

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.

 

II. What is the term ‘Moratorium’ used under the Code[Sec. 14(1)]

The provisions of section 14(1)(a) 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.

Hon’ble Bombay High Court in the matter of  Tayal Cotton Pvt. Ltd. Vs. The State of Maharashtra & Othrs 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.

Hon’ble Delhi High Court in the matter of Power Grid Corporation Of India Ltd Vs. Jyoti Structures Ltd. held that 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.

NCLAT in the matter of GAIL (India) Limited Vs. Rajeev Manaadiar & Ors. held that from sub-section (31) of Section 3, it is clear that the ‘security interest’ do not include the ‘Performance Bank Guarantee’(PBG), therefore, we hold that the ‘security interest’ mentioned in clause (c) of Section 14(1) do not include the ‘Performance Bank Guarantee’. Thereby the ‘Performance Bank Guarantee’ given by the ‘Corporate Debtor’ in favour of the Appellant- ‘GAIL (India) Ltd.’ is not covered by Section 14. The Appellant- ‘GAIL (India) Ltd.’ is entitled to invoke its ‘Performance Bank Guarantee’ in full or in part.

 

III. Outside the purview of the Moratorium [Sec. 14(2) &(3)]

a. Essential Goods or Services covered by section 14(2):

Section 14(2) of the Code states that 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. Section 14(2) of the Code requires the continuation of supply of essential goods or services to the corporate debtor during the moratorium period. Section 30(2)(a) read with regulation 31(a) makes it clear that dues to suppliers for essential goods and services supplied during the moratorium period are a part of the IRP costs and are required to be paid back in priority to any other creditor as a part of the resolution plan.

As per regulation 32 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, essential supplies 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.

The Mumbai Bench of the NCLT in ICICI Bank v. Innoventive Industries(MA 157 in CP 01/I&BP/2016. Decision date- 23.08.2017), explained this position as follows “By reading this Regulation, it appears that electricity, water and telecommunication services and Information Technology service are to be considered as essential as long as these services are not a requirement to the output produced or supplied by the Corporate Debtor. Under this regulation, an illustration also been given saying that water is to be considered as essential service as long as it is used for drinking purpose and sanitization purpose but not for generating electricity. Whenever any illustration is given, it will be given to have an understanding about the provision of law. If supply of water for drinking and sanitization purpose is an essential service, the supply of electricity is also deemed to be limited for lighting purpose and other domestic purposes, which are in modern days considered as essential service. If the same electricity is used as input for manufacturing purpose making huge bill of lakhs of rupees to get output from that industry, then to our understanding, supply of electricity is used as input for manufacturing purpose to get output from the factory and it obviously to make profits. Essential service is a service for survival of human kind, but not for making business and earn profits without making payment to the services used. When company is using it for making profit, then the company owes to make payment to the services/goods utilized in manufacturing purpose.”

 

NCLT, Hyderabad Bench in the matter of Canara Bank v. Deccan Chronicle Holdings Limited (2017) held that “Section 14(2) Of the IBC Code, 2016 already exempted supply of essential goods and services to the Corporate Debtor and in addition the Learned Counsels for the Respondent submitted that goods/services viz. Water, Electricity, printing ink, Printing plates, Printing Blanket, Solvents etc. will also come under the purview Of exemption and thus prayed to exempt above good/services from moratorium. We are convinced with the prayer of the Respondent that the above goods and services would come under exemption under this Section. Hence, we clarify that goods/services viz. Water, Electricity, Printing ink, Printing plates, Printing Blanket, Solvents etc. will come under this Section and these essential goods or services to Corporate Debtor shall not be terminated or suspended and interrupted during the moratorium period.[(para 3(c)(v)] (emphasis provided)

 

b. Moratorium on proceedings against surety to corporate debtor-amendment under Section 14

Section 14 (3) set out that moratorium is not applicable against assets of guarantors to the debts of the corporate debtor. Some courts have taken the view that section 14 may be interpreted literally to mean that it only restricts actions against the assets of the corporate debtor, a few others have taken an interpretation that the stay applies on enforcement of guarantee as well, if a CIRP is going on against the corporate debtor.

In Alpha and Omega Diagnostics (India) Ltd. v. Asset Reconstruction Company of India, the personal properties of the promoters were given as security to the banks. The issue was whether properties that are not owned by the corporate debtor would come within the scope of moratorium under section 14 of the Code. The NCLAT held that section 14 only applies to assets of the corporate debtor and would not bar proceedings or actions against assets of third parties. A literal interpretation of section 14 was undertaken, and it was noted that the word “its” in section 14(1)(b) and (c) is used in relation to the corporate debtor only. A similar issue came up in Schweitzer Systemtek India Private Limited v. Phoenix ARC Private Limited, and following its previous decision, the NCLAT noted that moratorium in Section 14 has no application on the properties beyond the ownership of the corporate debtor.

The Allahabad High Court subsequently took a differing view in Sanjeev Shriya v. State Bank of India by applying moratorium to enforcement of guarantee against personal guarantor to the debt. The rationale being that if a CIRP is going on against the corporate debtor, then the debt owed by the corporate debtor is not final till the resolution plan is approved, and thus the liability of the surety would also be unclear. The Court took the view that until debt of the corporate debtor is crystallised, the guarantor’s liability may not be triggered. 

A contract of guarantee is between the creditor, the principal debtor and the surety, where under the creditor has a remedy in relation to his debt against both the principal debtor and the surety. The surety here may be a corporate or a natural person and the liability of such person goes as far the liability of the principal debtor. As per section 128 of the Indian Contract Act, 1872, the liability of the surety is co-extensive with that of the principal debtor and the creditor may go against either the principal debtor, or the surety, or both, in no particular sequence.

Sub-section 3 of the section 14 has been substituted by the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, w.e.f. 06.06.2018. That is a new clause has been inserted to carve outs surety in a contract of guarantee to a corporate debtor on recommendation by the Insolvency Laws Committee in the report published in March, 2018.

The Committee recommendations as under:

“5.10 The Committee further noted that a literal interpretation of Section 14 is prudent, and a broader interpretation may not be necessary in the above context. The assets of the surety are separate from those of the corporate debtor, and proceedings against the corporate debtor may not be seriously impacted by the actions against assets of third parties like sureties. Additionally, enforcement of guarantee may not have a significant impact on the debt of the corporate debtor as the right of the creditor against the principal debtor is merely shifted to the surety, to the extent of payment by the surety. Thus, contractual principles of guarantee require being respected even during a moratorium and an alternate interpretation may not have been the intention of the Code, as is clear from a plain reading of section 14.

5.11 Further, since many guarantees for loans of corporates are given by its promoters in the form of personal guarantees, if there is a stay on actions against their assets during a CIRP, such promoters (who are also corporate applicants) may file frivolous applications to merely take advantage of the stay and guard their assets. In the judgments analysed in this relation, many have been filed by the corporate applicant under section 10 of the Code and this may corroborate the above apprehension of abuse of the moratorium provision. The Committee concluded that section 14 does not intend to bar actions against assets of guarantors to the debts of the corporate debtor and recommended that an explanation to clarify this may be inserted in section 14 of the Code. The scope of the moratorium may be restricted to the assets of the corporate debtor only.

The supreme Court in the matter of State Bank of India Vs. V. Ramakrishnan & Anr. held that Section 14(3) of the Code (introduced vide 2018 amendment) which states that provisions of moratorium shall not apply to a surety in a contract of guarantee for corporate debtor, is retrospective.

 

c. Other matters:

The moratorium period is not applicable on following matters:

  1. No criminal proceeding is covered under Section 14 of the Code.(Bombay HC)
  2. Proceeding under Section 138 of the Negotiable Instrument Act, 1881.(NCLAT)
  3. Any suit or case pending before the Hon’ble Supreme Court under Article 32 or where an order is passed under Article 136 or the power of the High Court under Article 226.(NCLAT)
  4. The arbitration that has been instituted after the aforesaid moratorium is non est in law.(SC)
  5. Moratorium would not apply to the proceedings which are in the benefit of the corporate debtor(Delhi HC)
  6. The personal and individual assets of a Director is not the subject matter of the CIRP and the moratorium only extends to the assets of the Corporate Debtor.(NCLAT)
  7. Moratorium is not applicable on proceeding under ‘Prevention of Money Laundering Act, 2002’ or provisions therein relates to ‘proceeds of crime’.(NCLAT)
  8. Performance Bank Guarantee given by the Corporate Debtor  is not covered by Section 14.(NCLAT)

 

IV. Commencement & effective period of the Moratorium [Sec. 14(4)]

The moratorium comes into effects on the insolvency commencement date. The insolvency commencement date defines under section 5 (12) means the date of admission of an application for initiating CIRP by the Adjudicating Authority under sections 7,  Section 9 or section 10, as the case may be and where the interim resolution professional is not appointed in the order admitting application under section 7, 9 or section 10, the insolvency commencement date shall be the date on which such interim resolution professional is appointed by the Adjudicating Authority.

Section 14(4) sets out the time limit for which the moratorium can be in effect, i.e until the completion of the CIRP or on the approval of a resolution plan by the adjudicating authority or on a resolution of the committee of creditors to liquidate the corporate debtor, whichever is earlier.

As per section 12 of the Code, the CIRP shall be completed within a period of 180 days from the date of admission of the application to initiate such process, and the period can only be extended by 90 days, subject to an application being made to the adjudicating authority after a resolution is passed at a meeting of the committee of creditors by a vote of seventy-five percent of the voting share.

 

 

V. Judicial pronouncements on the Moratorium

 

1. Supreme Court’s pronouncements

a. Effect of Section 14(1)(a) is that the arbitration that has been instituted after the aforesaid moratorium is non est in law- Alchemist Asset Reconstrution Company Ltd. Vs. M/S. Hotel Gaudavan Pvt. Ltd. & Ors.- Supreme Court

An arbitration proceeding has been purported to be started after the imposition of the said moratorium and appeals under Section 37 of the Arbitration Act are being entertained. Therefore, we set aside the order of the District Judge dated 06.07.2017 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.

 

b. Section 14(3) of the Code (introduced vide 2018 amendment) which states that provisions of moratorium shall not apply to a surety in a contract of guarantee for corporate debtor, is retrospective -State Bank of India Vs. V. Ramakrishnan & Anr.- Supreme Court

Ground of the Appeal: Whether Section 14 of the Insolvency and Bankruptcy Code, 2016, which provides for a moratorium for the limited period mentioned in the Code, on admission of an insolvency petition, would apply to a personal guarantor of a corporate debtor.

Factual Backdrop: V. Ramakrishnan(Respondent No. 1) is the Managing Director of the corporate debtor(Respondent No.2) and also the personal guarantor in respect of credit facilities that had been availed from the State Bank of India(Appellant). The Guarantee Agreement entered into between the the State Bank of India and the V. Ramakrishnan. As the corporate debtor did not pay its debts in time, the account of corporate debtor was classified as a non-performing assets matters stood thus, an application was filed by Respondent No.2, the corporate debtor, under Section 10 of the Code on 20.05.2017 to initiate the corporate insolvency resolution process against itself. On 19.06.2017, this petition filed under Section 10 was admitted, followed by the moratorium that is imposed statutorily by Section 14 of the Code.

While the said proceedings were pending, an interim application was filed by Respondent No.1 as personal guarantor to the corporate debtor, in which Respondent No.1 took up the plea that Section 14 of the Code would apply to the personal guarantor as well, as a result of which proceedings against the personal guarantor and his property would have to be stayed.

Brief of SC decision:

Sections 96 and 101, when contrasted with Section 14, would show that Section 14 cannot possibly apply to a personal guarantor. When an application is filed under Part III, an interim-moratorium or a moratorium is applicable in respect of any debt due.
First and foremost, this is a separate moratorium, applicable separately in the case of personal guarantors against whom insolvency resolution processes may be initiated under Part III.
Secondly, the protection of the moratorium under these Sections is far greater than that of Section 14in that pending legal proceedings in respect of the debt and not the debtor are stayed. The difference in language between Sections 14 and 101 is for a reason. Section 14 refers only to debts due by corporate debtors, who are limited liability companies, and it is clear that in the vast majority of cases, personal guarantees are given by Directors who are in management of the companies. The object of the Code is not to allow such guarantors to escape from an independent and coextensive liability to pay off the entire outstanding debt, which is why Section 14 is not applied to them. However, insofar as firms and individuals are concerned, guarantees are given in respect of individual debts by persons who have unlimited liability to pay them. And such guarantors may be complete strangers to the debtor – often it could be a personal friend. It is for this reason that the moratorium mentioned in Section 101 would cover such persons, as such moratorium is in relation to the debt and not the debtor. We may hasten to add that it is open to us to mark the difference in language between Sections 14 and 96 and 101, even though Sections 96 and 101 have not yet been brought into force.

 

 

2. High Courts’ Pronouncements

a. Moratorium would not apply to the proceedings which are in the benefit of the corporate debtor-Power Grid Corporation Of India Ltd Vs. Jyoti Structures Ltd.-Delhi High Court

Question before the High Court

The question has arisen is if the present proceedings under Section 34 of the Act, need to be stayed, per Section 14 (1)(a) of the Code? i.e. The respondent‟s case is if the proceedings are stayed, the respondent would be unable to execute the award given in its favour for an extended period till the moratorium exists and be unable to recover its dues thereby further impeding its financial condition. Hence, the issue is if the word „proceedings‟ used in Section 14 (1) (a) of the Code be read to mean „all legal proceedings‟ or be read restrictively to mean a particular type of legal proceedings viz., „debt recovery action‟ which may have an effect of dissipating or diminishing the debtor‟s assets during the period of its insolvency resolution.

High Court’s ruling

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, like the one before this court in as much these proceedings are not a „debt recovery action‟ and its conclusion would not endanger, diminish, dissipate or impact the assets of the corporate debtor in any manner whatsoever and hence shall be in sync with the purpose of moratorium which includes keeping the corporate debtor‟s assets together during the insolvency resolution process and facilitating orderly completion of the process envisaged during the insolvency resolution process and ensuring the company may continue as a going concern. If such proceedings is against the corporate debtor or is in its favour. 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.

 

b. Moratorium in the matter Mrs. Jai Rajkumar Vs. Stanbic Bank Ghana Limited-High Court of Madras

RP can act on behalf of corporate debtor against any one. When such an action on behalf of Corporate Debtor runs into the interest of the financial creditor, it necessarily is an issue which has to be looked into, dealt with and decided by NCLT by applying the IB Code. In this regard Section 63 of IB Code kicks in. In other words, the question as to whether RP should file a suit assailing the foreign decree has to be examined and answered by NCLT as it is against the financial creditors in the instant case. Once NCLT comes to the conclusion that such a suit has to be filed by RP, the scenario shifts to this Commercial Division without being hit by Section 63 (as rightly held by NCLAT). It is clarified that NCLT will not have to decide about actions of RP in cases where the suit is not against the financial or operational creditor..

Before parting with this case, this Commercial Division deems it appropriate to notice that proceedings under IB Code are time bound in the light of Arcelormittal India Pvt. Ltd., Vs. Sathish Kumar Gupta and Ors. reported in 2018 SCC OnLine SC 1733. If ultimately RP assails the UK Judgment, as that will be in the Commercial Division, there will be no difficulty in such suit being fast-tracked by applying the amended CPC procedure as amended by ‘The Commercial Courts Act, 2015’ (‘said Act’ for brevity) particularly by Section 16 of the said Act. In the light of the narrative, discussion and deliberation supra, this suit is held to be not maintainable, but reserving the rights of corporate debtor (second defendant) to approach NCLT under Section 60(5) of IB Code and further reserving the right of Resolution Professional to file a suit on the same ground with regard to the same issue if the NCLT permits the Resolution Professional to do so.

c. Moratorium prohibiting institution of a proceeding as provided for in Sec. 14 of IBC doesn’t apply to a criminal proceeding-Tayal Cotton Pvt. Ltd. Vs. The State of Maharashtra & Othrs-Bombay High Court

Ground of the case
Whether moratorium prohibiting institution of a proceeding as provided for in Section 14 of the Insolvency and Bankruptcy Code, 2016 applies even to a criminal proceeding?

 Facts

The petitioner company instituted a complaint under Section 138 of the Negotiable Instruments Act (hereinafter referred as N.I.Act for short) bearing SCC No.3197/2016 against the respondent no.2 company and the respondents 3 to 7 who are its Managing Director and Directors, in respect of a cheque for an amount of Rs.15,58,612/­ issued by respondents 2 to 7 towards discharge of a civil liability. The learned Magistrate issued process under Section 204 of the Code of Criminal Procedure. Being aggrieved, the respondents 2 to 7 challenged the order of issuance of process by preferring Criminal Revision No.147/2016. In the meanwhile, the respondents 2 to 7 initiated insolvency proceeding in Case No.CP/(IB No.20/BB/2017). In view of such proceeding, the respondents 2 to 7 submitted application (Exh.20) in the Criminal Revision and requested to keep the revision in abeyance/stayed till further order was passed in the insolvency proceeding.

The petitioner opposed that application by its Say (Exh.23) inter alia on the ground that in view of the Division Bench judgment of this Court in Indorama Synthetics India Limited Nagpur V/s State of Maharashtra and others; 2016 (4) Mh.L.J.249 while considering a similar provision contained in Sub Section 1 of Section 446 of the Companies Act it has interpreted the words ‘Suit or other proceeding’ contained in that Section as not to include a criminal complaint filed under Section 138 of the N.I.Act. The learned Additional Sessions Judge after hearing the arguments allowed the application Exh.20 filed by the respondents 2 to 7 and directed the revision to be kept in abeyance till further order was passed in the insolvency proceeding. Being aggrieved by the order, the petitioner has filed this Writ Petition under Articles 226 and 227 of the Constitution of India.

High Court Ruling

As can be seen from Clause (a) of Sub Section 1 of Section 14 of the Code, once the adjudicating authority declares moratorium for prohibiting institution of suits or continuation of pending suits or proceeding against the corporate debtor including execution of any judgment, decree or order in any Court of law, Arbitration Tribunal or other authority. As is the principle of interpretation of Statutes, these words would take colour from words preceding thereto. These words will have to be interpreted ejusdem generis with the words ‘suits’ used earlier thereto. So interpreted, the 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 this 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.

The criminal revision should not have been directed to be kept in abeyance by resorting to Section 14 of the Code. For that matter even the National Company Law Tribunal in its order in a proceeding under Section 10 could not have and has not specifically directed any prohibition against the continuation of a criminal proceeding. 

 

 

3. NCLAT’s pronouncements

a. 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-Mrs. Madhurima Mridul & Anr. Vs. Raj Infrastructures Development (India) Pvt. Ltd. & Ors.-NCLAT

 

b. It was then contended that during the period of Moratorium cases pending against the CD has not been stopped by the RP but such submission cannot be accepted as in terms of Sec. 14, all the proceedings pending before all court against the CD automatically comes to halt and cannot be decided- Haravtar Singh Arora Vs. Punjab National Bank & Ors.-NCLAT

 

c. Corporate debtor or Resolution Professional are not liable to pay dues of period prior passing of order of moratorium- NCLAT in case of Innoventive Industries Ltd. Vs. Maharashtra State Electricity Distribution Company Ltd.-NCLAT

 

d. Personal and individual assets of a Director is not the subject matter of the corporate insolvency resolution process and the moratorium only extends to the assets of the Corporate Debtor-Suresh Chand Garg Vs. Aditya Birla Finance Ltd.- NCLAT

 

e. Moratorium u/s 14 of IBC is not applicable on proceeding under ‘Prevention of Money Laundering Act, 2002’ or provisions therein relates to ‘proceeds of crime’-Varrsana Ispat Limited Vs. Deputy Director Directorate of Enforcement- NCLAT

The Directorate of Enforcement of Central Government attached some of the properties of ‘Varrsana Ispat Limited’- (‘Corporate Debtor’). The ‘Resolution Professional’ filed application before the Adjudicating Authority for releasing the attachment of certain assets of the ‘Corporate Debtor’ by Deputy Director of Enforcement.

Section 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. The object of the ‘Prevention of Money Laundering Act, 2002’ is to prevent the money laundering and to provide confiscation of property derived from, or involved in, money-laundering and for matters connected therewith or incidental thereto.
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’, Section 14 of the ‘I&B Code’ is not applicable to such proceeding.

In so far as penalty is concerned, offence of money-laundering is punishable with rigorous imprisonment which is not less than three years and has nothing to do with the ‘Corporate Debtor’. It will be applicable to the individual which may include the Ex-Directors and Shareholders of the ‘Corporate Debtor’ and they cannot be given protection from the ‘Prevention of Money Laundering Act, 2002’ and such individual cannot take any advantage of Section 14 of the ‘I&B Code’. This apart, we find that the attachments were made by the Deputy Director of Directorate of Enforcement much prior to initiation of the ‘Corporate Insolvency Resolution Process’, therefore, the ‘Resolution Professional’ cannot derive any advantage out of Section 14.
As the ‘Prevention of Money Laundering Act, 2002’ relates to different fields of penal action of ‘proceeds of crime’, it invokes simultaneously with the ‘I&B Code’, having no overriding effect of one Act over the other including the ‘I&B Code’.

 

f. Till the period of Moratorium continues, the SEBI cannot recover any amount nor can sell the assets of the Corporate Debtor during the Moratorium period-Mr. Bohar Singh Dhillon Vs. Mr. Rohit Sehgal (Interim Resolution Professional) & Ors. -NCLAT

NCLAT that the till the period of ‘Moratorium’ continues, the ‘Securities and Exchange Board of India’ cannot recover any amount nor can sell the assets of the ‘Corporate Debtor’ during the ‘Moratorium’ period.

Though NCLAT have held that the application under Section 7 is maintainable while step has been taken by the ‘Securities and Exchange Board of India’ the ‘Resolution Professional’ is required to act in terms of Section 17(2) (e) of the ‘I&B Code’ for complying with the requirements under the ‘Securities and Exchange Board of India Act’ and Regulations framed thereunder as well as the guidelines issued by the Regulatory Authority. It is also made clear that the ‘Securities and Exchange Board of India’ is however entitled to take action against individual including the former Directors and Shareholders of the ‘Corporate Debtor’.

 

g. It was then contended that during the period of Moratorium cases pending against the CD has not been stopped by the RP but such submission cannot be accepted as in terms of Sec. 14, all the proceedings pending before all court against the CD automatically comes to halt and cannot be decided- Haravtar Singh Arora Vs. Punjab National Bank & Ors.-NCLAT

 

h. RP on behalf of the Corporate Debtor(CD) cannot claim that pursuant to lease the mines are under occupation or in possession of the CD u/s 14(1)(b)-Monnet Ispat & Energy Ltd. Vs. Government of India, Ministry of Coal-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 ‘I&B Code’ whereunder ‘Moratorium’ has been declared by the Adjudicating Authority (National Company Law Tribunal), Mumbai Bench, Mumbai.
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, NCLAT has held that 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’.

i. Proceeding u/s 138 of NI act shall be undertaken even during the period of moratorium-Shah Brothers Ispat Pvt. Ltd. Vs. P. Mohanraj & Ors.-NCLAT

As 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 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. Infact no criminal proceeding is covered under Section 14 of I&B Code.

 

j. Moratorium will not affect any suit or case pending before the Hon’ble Supreme Court under Article 32 or where an order is passed under Article 136 or the power of the High Court under Article 226-Canara Bank Vs. Deccan Chronicle Holdings Limited-NCLAT

Moratorium will not affect any suit or case pending before the Hon’ble Supreme Court under Article 32 of the Constitution of India or where an order is passed under Article 136 of Constitution of India. ‘Moratorium’ will also not affect the power of the High Court under Article 226 of Constitution of India. However, so far as suit, if filed before any High Court under original jurisdiction which is a money suit or suit for recovery, against the ‘corporate debtor’ such suit cannot proceed after declaration of ‘moratorium, under Section 14 of the I&B Code.

h. Performance Bank Guarantee(PBG) given by the Corporate Debtor is not covered under Moratorium-GAIL (India) Limited Vs. Rajeev Manaadiar & Ors.- NCLAT

From sub-section (31) of Section 3, it is clear that the ‘security interest’ do not include the ‘Performance Bank Guarantee’(PBG), therefore, we hold that the ‘security interest’ mentioned in clause (c) of Section 14(1) do not include the ‘Performance Bank Guarantee’. Thereby the ‘Performance Bank Guarantee’ given by the ‘Corporate Debtor’ in favour of the Appellant- ‘GAIL (India) Ltd.’ is not covered by Section 14. The Appellant- ‘GAIL (India) Ltd.’ is entitled to invoke its ‘Performance Bank Guarantee’ in full or in part.

 

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