Moratorium Under IBC

By-Saijeet Mohanty

INTRODUCTION

The Insolvency and Bankruptcy Code, 2016[1] was introduced to improve the relationship between creditors and debtors, and it was promulgated to consolidate laws related to bankruptcy at the time. In order to reduce the burden of increasing non-performing assets, different types of reforms are needed. Therefore, the Bankruptcy Law Reform Commission (BLRC) was established in 2014 to recommend the Indian Bankruptcy code to replace the current law and apply it to non-financial companies and individuals.

One of the important features of the Code is the concept of "Moratorium". The term "Moratorium" has been interpreted by judicial authorities on different levels. The word "Moratorium" is not defined anywhere in the code. According to the dictionary, this means a legal authorization for the debtor to delay the payment. The suspension under the Code means that for a certain period, no judicial proceedings shall be initiated or conducted against company debtors to recover, enforce security interests, sell or transfer assets, or terminate important contracts.

In harmony with Section 13(1)(a) of the Insolvency and Bankruptcy Code, 2016[2], the arbitrating agency must enforce the moratorium of the matters mentioned in Section 14. Section 14 of the Insolvency and Bankruptcy Code, 2016[3]talks about the moratorium and its impact on any procedure. The moratorium order has attracted much attention because it suspended multiple parallel proceedings against the company along with the bankruptcy proceedings.


OBJECTIVE OF MORATORIUM

When a debtor of a company enters the Corporate Insolvency Resolution Process (CIRP), after confirming the petition against the organization, a moratorium will be announced, that is, all pending cases against the bankrupt organization before any court shall be suspended. The purpose of this code is to hold the assets of the company's debtors together during the CIRP period and facilitate the orderly completion of the above process and ensure that the company can continue to operate. It also ensures that company directors are prohibited from taking available funds when the suspension is announced. If the established deadline is not indicated, the CIRP process will be blocked, thus invalidating the objective of the code.

The Hon’ble Supreme Court, referring to the report of the Insolvency Law Committee of February 2020, reiterated the objective of the suspension, that is, "to form a plan to protect the debtors of the company from monetary attacks during the suspension, from so that the company debtors can have a respite as operations continue, to eventually recover.” In other words, the stay order offers a defense for the company's debtors by hindering various parallel proceedings and allows the debtors of the company to maximize the value of the company without further liens.

In addition, the legislative intent behind the introduction of the suspension clause is to prohibit government authorities from terminating or suspending various concessions, such as licenses, permits, quotas, and concessions, because these concessions are the basis for any company’s operations and realize any continuous operation to the greatest value of the company.


Scope of Section 14 of the IBC and Proceedings under Section 138 of Negotiable Instruments Act, 1881

The provisions of Section 14 of the Code are very extensive and seem to completely hinder the initiation or continuation of litigation or any legal proceedings against the debtor of the company, as the adjudicating authority announced a moratorium.

In the Landmark case of P Mohanraj & Ors. V/s M/s. Shah Brothers Ispat Pvt Ltd.[4],

  • The defendant Shah Brothers Ispat Pvt Ltd., provided steel products worth 24.20 crores to M/s Diamond Engineering Private Limited (DEPL) from 2015 to 2016. Mr P Mohanraj, the plaintiff, is the director of DEPL.

  • The plaintiff issued 51 checks, all of which were returned due to “insufficient funds”. Therefore, on March 31, 2017, the defendant then issued a notice of claim under Article 141, Article 138 of the NI Act of 1881, requiring the company and its directors to pay within 15 days. The plaintiff again issued two more checks in April 2017 which were also returned due to “insufficient funds”. The defendant sent a second notice of claim to the plaintiff. As the plaintiff failed to make any payments, the defendant then filed two criminal cases on May 17 and June 21, 2017, before the Additional Chief Metropolitan Magistrate (ACMM), Mumbai. On February 12, 2018, both parties received subpoenas.

  • On March 21, the defendant filed a lawsuit under Section 8 of the IBC. On June 6, an order was issued under Section 9 of the IBC to acknowledge the bankruptcy application. The moratorium has been implemented under Section 14 of the IBC. As a result, proceedings were suspended for two criminal cases submitted to ACMM, Mumbai.

  • NCLAT (National Company Law Appellate Tribunal) revoked the order on the moratorium of the appeal, claiming that section 138 of the Negotiable Instruments Act, 1881[5] is a criminal statute that cannot be regarded as a "process" under section 14 of the IBC.

  • The High Court decided that the criminal provisions of Section 138 of the Negotiable Instruments Act, 1881 aren’t "procedures" within the gist of Section 14 of the IBC. Therefore, although Section 14 of IBC provides a moratorium, the case of dishonor of cheques can be handled simultaneously.

  • The court must decide whether judicial procedures commenced under Section 138 of the Negotiable Instruments Act are covered by the IBC's moratorium clause.

  • The Hon'ble Supreme Court concluded in the ruling that:

  • Section 138 of NI Act in case of check bounce are quasi-criminal proceedings and are dismissed under the terms of Section 14 of the IBC.

  • Cheque dishonour cases filed under Section 138 of the NI Act against entities subject to the IBC's Section 14(1)(a) moratorium shall not be commenced or continued.

  • The moratorium imposed by Section 14 of the IBC only applies to the company's debtor. Individuals, such as directors of the company's debtors, can be sued in check bounce situations.

  • Justice Nariman aforementioned[6]: “The legal obstacles of Section 14 of the IBC can forestall the continuing process from or being initiated against the debtors of the corporate. Therefore, throughout the moratorium period, the method might not continue because of Section 138/141 or because of legal prohibitions against the debtors of the corporate, said procedures will be initiated or continued for the persons (directors/persons who manage or control debtors of the company) are mentioned in Section 141(1) and 141(2) of the Negotiable Instruments Act.” The Supreme Court decision reiterated the long-standing opinion that the Lawsuits under the NI Law are not strictly criminal in nature. In several cases, the Supreme Court ruled that the proceedings under section 138 of the NI Law were civil in nature and the primary objective was compensation, such as for Kaushalya Devi Massand vs Roopkishore Khore[7].

The suit brought under section 138 of the NI Act is not entirely a criminal offense in nature, because the imprisonment and fines are only to force the accused debtor to return the money owed to the complainant. Permitting all forms of civil litigation to continue to take action under Section 138 of the NI Act violates the purpose of the settlement procedure. In addition, the resolution procedures and resolution plans involve the rights of all creditors, because according to Section 31 of IBC, once the resolution plan is accepted, it will be binding on all creditors. Allowing the payer’s claim to undergo an independent recovery process, the entire settlement process will be threatened.


SITUATIONS WHERE MORATORIUM DOES NOT APPLY

The two exceptions to Section 14(1) are contained in Section 14(2) and (3). Section 14(3) has been replaced by the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, as of June 6, 2018. In other words, according to the recommendations in the report issued by the Insolvency Law Committee in March 2018, a new clause was inserted to exclude surety in the contract of guarantee for company debtors. Additionally, Section 14(a) of the Sub-Section (3) has been Replaced by the Insolvency and Bankruptcy Code (Amendment) Act, 2020, w.e.f. 28-12-2019.

The broad understanding that the moratorium will not penetrate all areas of the company’s debtor’s life has been resolved many times. So, some situations where the prohibition of section 14 does not apply are:

Writ Jurisdiction remains unchanged: In Canara Bank vs. Deccan Chronicle Holdings Ltd.[8], it has been determined that the suspension will not affect the exercise of the Hon’ble Apex Court under Article 32 of the Constitution or by Hon’ble High Court under Articles 226 of the Indian Constitution. Nonetheless, the Hon`ble NCLAT specifically noted that the claim for money or the claim for recovery brought by the Hon`ble High Court against the debtor of the company in the original Hon`ble jurisdiction will still be affected by the court order under Section 14.

Arbitration Procedure: The Hon’ble High Court of Delhi held in Power Grid Corporation of India Ltd v. Jyoti Structures Ltd.[9] that the suspension of the litigation against the judgment in favor of the debtors of the company would prefer to follow the efforts of the debtor to recover their funds, so they would not fall in the embargo of Section 14(1)(a). The High Court held that:

  • The suspension under Section 14(1)(a) is intended to prohibit debt recovery actions against the assets of the company's debtors;

  • Continuing the litigation under Section 34 of the Arbitration Act does not give rise to acts that endanger, reduce, dissipate or negatively affect the assets of the company's debtors are not prohibited by Section 14(1)(a) of the Code;

  • The Arbitration Law distinguishes Procedures under Section 34 and Section 36. The procedure provided for in Section 34 is a step before the enforcement of the award. Only after the objection is determined under Section 34, the parties can further enforce the above ruling. If the objection is resolved against the debtor of the company, its enforceability to the debtor of the company will be suspended from the implementation of Section 14(1)(a).

In summary, the term "procedures" used in Section 14(1)(a) of the IBC does not incorporate "all" procedures. The guiding principle seems to be that if the result of the matter harms the interests of the company's debtors, and the company's debtors are still not liable, then Article 14(1) does not prohibit such procedures. In other words, if the final result of the procedure will never result in the liability of the debtor of the company, the injunction in Article 14(1) will not affect such procedures.


CONCLUSION

In conclusion, it can be said that the IBC is silent on the definition of the moratorium, and which procedures will fall within the scope of article 14 of the IBC still require judicial evaluation. However, the language of Section 14 of IBC is very broad and the legislature is intended to provide a period of complete calm. However, the appellate authority made an exception to the Moratorium in Canara Bank vs. Deccan Chronicle Holdings Ltd. and found that even if the Moratorium was beneficial to the debtors of the company, it was not absolute and would not affect the proceedings of the Hon`ble High Court and Hon’ble Supreme Court according to Articles 226 and 32 of the Constitution of India. Therefore, if the procedures under Section 138 of the NI Act will also be covered by the suspension of protection and to what extent they will still require a judicial review, only time can solve this problem.

The purpose of including a moratorium under the IBC and the insubstantial provisions under Section 238 of the IBC is to provide respite for troubled corporate debtors and to prevent the debtor's resources and assets from being further depleted. The moratorium also allows corporate debtors to formulate the most suitable solutions as per IBC regulations to achieve the maximum value of the company’s assets. Taking into account the same reasoning, the court maintained the supremacy of the moratorium under the IBC in several parallel proceedings. There are few loopholes and outstanding disputes that the court needs to resolve, but compared with various other legislations, the current position puts the suspension clause in a higher position.


[1] Insolvency and Bankruptcy Code, 2016, No. 31, Acts of Parliament, 1949 (India). [2] Insolvency and Bankruptcy Code, 2016, § 13(1)(a), No. 31, Acts of Parliament, 1949 (India). [3] Insolvency and Bankruptcy Code, 2016, § 14, No. 31, Acts of Parliament, 1949 (India) [4] P Mohanraj & Ors. V/s M/s. Shah Brothers Ispat Pvt Ltd., 2018 SCC Online NCLAT 415 [5] Negotiable Instruments Act, 1881, § 138, No. 26, Acts of Parliament, 1949 (India) [6] Ajay Shukla, Cheque Bounce cases under NI Act, are covered under moratorium u/s 14 of IBC, centric (07/082021, 5:15pm), https://www.centrik.in/ . [7] Kaushalya Devi Massand vs Roopkishore Khore, 2011 (4) SCC 593 [8] Canara Bank vs. Deccan Chronicle Holdings Ltd, 2017 SCC Online NCLAT 255 [9] Power Grid Corporation of India Ltd v. Jyoti Structures Ltd., (2018) 246 DLT 485


Author: Saijeet Mohanty

Course: BBA-LLB, 2nd year,

College: Xavier Institute of Management University

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