Corporate Debtor, Moratorium under Insolvency and Bankruptcy Code?
Corporate Debtor, MORATORIUM UNDER IBC
What is Moratorium?
Since the implementation of the Insolvency and Bankruptcy Code, 2016, the word ‘moratorium’ has been construed by the judiciary on different levels. The word ‘Moratorium’ has not been defined anywhere in the code. According to the Oxford Dictionary, it means a legal authorization to debtors to postpone payment.
The moratorium under the code implies a period wherein no judicial proceedings for recovery, enforcement of security interest, sale or transfer of assets, or termination of essential contracts can be initiated or proceeded against the Corporate Debtor. Under section 13(1)(a) of the Code, the adjudicating authority is required to enforce a moratorium for matters mentioned in section 14.The Adjudicating Authority (NCLT or NCLAT), whilst taking up a petition against the Corporate Debtor is required to declare the moratorium period as described under Section 14 of the Code.
When a corporate debtor goes into Corporate Insolvency Resolution Process [hereinafter alluded to as “CIRP”], after the confirmation of the petition filed against the organization, a moratorium is announced whereby all the pending cases against the insolvent organization before any court have stayed.
When Moratorium Commence?
It comes into effect immediately after the application of provisions under Section 7,9 or 10, as admitted by the Adjudicating Authority. Insolvency Commencement Date is a date on which the moratorium is applied, and insolvency application is submitted.
What is Objective of a Moratorium under IBC?
Its main purpose is to keep the corporate debtor’s assets together during the CIRP and facilitate orderly completion of the process mentioned and to ensure that the company may continue as a going concern. It also ensures a bar upon the directors of the company, who can’t take any available money at the time of declaration of the moratorium. If the said period isn’t declared, the CIRP process will be thwarted which in turn will render the objective of the code null.
Section 14 – Moratorium
(1)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.
Section 14 (1) (a) Judicial Interpretations: Moratorium
- In Anand Rao Korada Resolution vs M/S Varsha Fabrics (P) Ltd., NCLT-Supreme Court held that the High Court ought not to have proceeded with the auction of the property of the Corporate Debtor, once there is an institution of proceedings under IBC. An order reporting moratorium was passed. Provisions regarding a moratorium cannot possibly apply to cash deposits made in the court.
- In India Infoline Finance Ltd. Vs. The State of West Bengal & Ors., it was held that any action of police must be based on the investigation, and it can’t take additional steps in the matter unless and until the CIRP ends, in a resolution or otherwise.
- The arbitration proceedings cannot go on, once the moratorium is imposed under S.14(1)(a). This was discussed in Alchemist Asset Reconstruction … vs M/S. Hotel Gaudavan Pvt. Ltd.
- Personal/Individual Assets of a director is not the subject matter of CIRP, and the moratorium only extends to the assets of the Corporate Debtor. Held in Suresh Chand Garg Vs. Aditya Birla Finance Ltd.
- The NCLAT in Canara Bank v. Deccan Chronicle Holdings Limited carved out an exception holding that the moratorium will not affect any proceedings initiated or pending before the Supreme Court under Article 32 of the Constitution of India or where an order is passed under Article 136 of the Constitution of India. It also concluded that the moratorium will not affect the powers of any High Court under Article 226 of the Constitution of India.
- Clause (c) of the section mentions the term ‘security interest’, it doesn’t include the Performance Bank Guarantee.
Section 14(2): Continuance of Critical Supplies
It 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 the moratorium period. As per Regulation 32 of Insolvency & Bankruptcy (CIRP) Regulations, 2016.
Essential supplies mentioned in Section14(2) shall mean:
- Telecommunication Service
- Information Technology Services
NCLT Bench of Hyderabad, in Canara Bank v. Deccan Chronicle Holdings Limited, held that with the above-mentioned essential supplies, printing ink, printing plates, printing blankets, solvents, etc. will also come under the purview of exemption from the moratorium. It shall not be terminated or suspended during the period.
Section 14(3): Retrospective Effect
After the amendment through an ordinance, the assets of corporate guarantors or personal guarantors of the corporate debtor will not get the protection of stay provisions under section 14.
NCLAT, New Delhi in Alpha and Omega Diagnostics (India)Ltd. V Asset Reconstruction Company of India held that the personal properties of the promoters were given to the bank as security. It held that the said section only applies to assets of the corporate debtor and would not bar proceedings or actions against assets of third parties.
Through the 2018 Amendment, it was held that the moratorium provisions will not apply to a surety in a contract of guarantee for the corporate debtor, is retrospective.
Section 14(4): Commencement & Effective Period
This section sets out the limit for which the moratorium can be in effect, that is until the completion of the CIRP or on the approval of a resolution plan under Section 31 by the adjudicating authority or on a resolution of the committee of creditors to liquidate the corporate debtor under Section 33, whichever is earlier.
According to Section 12, the CIRP shall be completed within 180 days from the date of admission of the application, 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 75% of the voting share.
Section 74: Punishment for Contravention
Under this Section, officials of the corporate debtor who knowingly or wilfully violate the moratorium provisions can be imprisoned for a min. of three years, which may extend up to five years. Min. fine is of one lakh and max. is up to five lakhs, or with both.
If any creditor violates then the imprisonment is the same as above. The min. imprisonment is one year, and max. is up to five years whereas the min. the fine is one lakh and max. fine which can be imposed is up to one crore, or with both.
Where any corporate debtor or an officer or a creditor on whom the approved resolution plan is binding under Section 31, knowingly or wilfully contravenes any of its terms or abets, the min punishment is of one year which may extend up to five years, whereas the min. the fine is one lakh which may extend up to one crore, or with both.
In conclusion, it can be stated that IBC is silent on the aspect of the definition of moratorium and what proceedings will fall under the ambit of Section 14 of the IBC would still require judicial assessment. Nonetheless, the language of Section 14 of IBC is wide and the intention of the legislature is also to provide complete calm period. However, the Appellate Authority has carved out an exception to the moratorium in the matter of Deccan Chronicle7 and has held that the moratorium even in favor of the Corporate Debtor is also not absolute and it will not affect the proceedings before the Hon’ble High Court and Hon’ble Supreme Court under Article 32, 136 and 226/227 of the Constitution of India. Therefore, the issue whether the proceedings under Section 138 of NI Act will also be covered under the umbrella of moratorium and to what extent would still necessitate judicial examination and only time will set the issue at rest.
Author: Mohit Mathur
Editor: Adv. Aditya Bhatt & Adv. Chandni Joshi