Non-monetary decrees under moratorium – An unresolved story?
Rahul Taneja and Ishaan Saluja
(The Authors are 4th year students at Hidayatullah National Law University, Raipur)
Introduction
The Insolvency and Bankruptcy Code 2016 (IBC) was enacted with the aim of providing a speedy resolution to the corporate debtor (CD) and creditors of a company. The Corporate Insolvency Resolution Process (CIRP) envisaged under the code is accompanied by the imposition of a moratorium period. The object of the moratorium is to ensure minimal depletion of the CD’s assets during CIRP so that it can be kept running as a going concern thus ensuring maximum value for all the stakeholders of the company.
During this period, there is a bar on all legal action related to the recovery of money from the CD. However, this bar is seen to be misused by the CD many times due to the lack of clarity on what is encompassed by the moratorium. The convergence between non-monetary decrees and the moratorium under Section 14 was one such area that suffered from a judicial void until it was cleared recently by the Madras High Court in V.R. Swetha Naidu v. The Secretary to Government.
The judgment dealt with two aspects under IBC, namely, the time-bound resolution of debts during CIRP and the impact of the moratorium process on non-monetary decrees. This article will largely deal with the latter to highlight the practical issues that may arise with the interpretation going forward and to suggest a possible solution for the same.
Background
A two-judge bench of the Madras High Court took it upon itself to answer whether the moratorium under Section 14 of IBC applies to non-monetary obligations such as decrees for specific performance against the Corporate Debtor. The petition was referred to the Madras High Court by a final year law student under Article 226 of the Constitution, the purpose behind the same was to gather some semblance of clarity because of the lack of precedents on the aforementioned subject matter. The court clarified at the beginning that the court will judge the effect of moratorium on the execution of contracts that have the effect of alienating the assets of the CD.
Judgment
The Court ruled that the execution of decrees of specific performance that have been obtained before the initiation of CIRP would not be hit by the moratorium imposed under Section 14 of the IBC. The Madras High Court relied upon the findings of the Apex Court in P. Mohanraj and others v. Shah Brothers Ispat Private Limited (2021) ibclaw.in 24 SC and laid down that the scope of Section 14 is confined to monetary obligations.
Further, the court said that execution of non-money decrees won’t be barred by the moratorium because of two primary reasons –
- As per Essar Steel India Limited v. Satish Kumar Gupta and others (2019) ibclaw.in 07 SC, the intent of IBC is to ensure the non-depletion of assets of the CD during the moratorium period. However, the said intent is not said to be defeated if non-money decrees are allowed to be executed during the moratorium as even the CD would be a gainer in the said transaction and the moratorium does not prevent transactions in which CD is at profit.
- The scope of the moratorium is restricted to persons who are categorized as ‘creditors’ of the CD under Section 3(10) of IBC. Further, non-monetary decree holders cannot be categorized under the ambit of the same so as to extend the scope of the moratorium to them.
Analysis
The judgment laid down by the Madras High Court comes at a time of much-needed clarity on the subject matter. The judicial void around the same had resulted in the corporate debtors repeatedly invoking the moratorium to avoid fulfilling their contractual obligations without repercussions under the relevant law. Further, the court has also carefully prevented the expansion of the definition of Operational Creditor so as to prevent random creditors from using IBC as a debt recovery mechanism and has prevented opening Pandora’s box of problems in doing so. However, the High Court has missed certain crucial points that should have been carefully scrutinized during the course of laying down the judgment. These hindrances, although may seem small, act as a major barrier to realizing the true intentions of the enactment of the code. Some of them have been identified and illustrated herein below –
Ignores lucid precedents
The Court seems to have ignored the classification of the decree-holder under the waterfall mechanism envisaged by Section 53 of IBC made by the Tripura High Court in Sri Subhankar Bhowmik v. Union of India and Anr (2022) ibclaw.in 75 HC. The aforementioned judgment classifies decree holders as ‘creditors’ who have an admitted claim against the CD. The Tripura high court laid down that the rights of a decree-holder remain inchoate with the principle of IBC, this is essentially because the express mandate of Section 14 puts a bar on the execution of the decree awarded to the holder. The Madras High Court creates an unnecessary classification among the decree holder (money and non-money decree holders) which is unfounded in IBC, unlike the Tripura High Court which took the view that there is no separate class under the common category of decree holders. In light of the same, the Madras High Court’s creation of such distinction where there are none falls foul of the intent of the statute.
Possibility of Sham Transactions
Entering into sham transactions is a common method adopted by the CD to defeat the purpose of the moratorium and to avoid the liabilities due to the creditor. Suppose, for instance, A gets the information that an application has been filed by B for initiation of CIRP against him. In order to avoid the payment of debts due to B, A enters into an agreement of specific performance for selling some assets to C (his acquaintance) for abysmally low rates. This transaction has been entered solely so that A may avoid his liabilities during the course of the Resolution process and the assets may still remain in his indirect possession throughout. Allowing such decrees to be executed during the moratorium may cause great losses to B who may not be in a position to recover his debts under IBC. Conversely, C may be a bonafide buyer who bought the property under the misapprehension that there are no encumbrances on the same. In the latter situation, both C and B may be in a losing position due to the initiation of the resolution process. C might have problems in getting his decree executed and B may lose the opportunity to recover his debts.
Ignores previous interpretations of Section 14
The Madras High Court referred to the judgment of the Apex Court in P Mohanraj (supra) in multiple instances throughout the judgment. It is pertinent to note that the Apex Court undertook a thorough analysis of various provisions of the IBC and came to the conclusion that the ambit of Section 14 is wider than the other provisions and that the former is not a ‘subject-specific’ provision. Further, the scope of the moratorium will not be judged from the nature of the transaction but from that of the parties. In the same vein, the ratio that the scope of Section 14 will not cover any forms of non-monetary obligations seems prima facie problematic and may cause hardships to multiple stakeholders.
Contradictory to legislative intent
Maximization of assets of a corporate debtor is a cardinal principle of the IBC, and the same has been held by the Apex Court in a slew of cases, such as Essar Steel India Limited vs. Satish Kumar Gupta and Ors. (supra) and Maharashtra Seamless Limited vs. Padmanabhan Venkatesh and Anr. [2020] ibclaw.in 03 SC Further, the Code envisages boundless possibilities of resolution, to restrict the resolution of the firm and to minimize the value of its assets falls foul of the bedrock upon which the entire code has been built.
Conclusion
While the judgment of the Madras High Court was much waited for clearing the air around the novice jurisprudence on the subject. However, it sets out more problems that it seeks to solve, the judgment from Madras High Court has ignored previous detailed precedents by overlooking the practical problems that may arise from the same, the primary one being the possibility of sham transactions to avoid liability. The Supreme Court should immediately step in to resolve this conundrum and reconcile the conflicting judgments of the two courts and lay down the law that shall ubiquitously apply throughout the country. The authors are of the opinion that the Tripura High Court’s judgment should be given precedence over the judgment of the Madras High Court as the former lays down the correct law after analyzing the problem in detail and is more aligned with the intent of IBC. Alternatively, a middle way may be taken by impleading the CoC as a necessary party to the execution proceedings and scrutinizing allegations of fraudulent transactions and other problems that may arise on a fact-to-fact basis rather than passing a blanket allowance on all non-monetary decrees awarded before the initiation of the resolution process.
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