Moratorium under the Insolvency and Bankruptcy Code, 2016 – Scope and Recent Developments

I. Introduction

The Black’s Law Dictionary explains the term “Moratorium” as the delay the performing of an obligation or taking of an action legally authorized or simply agreed to be temporary. In other words of Oxford Dictionary, it may also be understood as “A legal authorization given to debtors to postpone payment”. The Insolvency and Bankruptcy Code, 2016 introduces the concept of moratorium during the insolvency proceeding under Section 14.

The objectives of the Insolvency and Bankruptcy Code, 2016 is to provide laws regarding resolution of insolvency of corporate persons, partnership firms and individuals in a timely and speedy manner. It also aims to provide realization of value of assets of such persons in its maximum capacity so as to promote entrepreneurship, ensured credit and secure the interests of all stakeholders.

II. Moratorium under Section 14 of Insolvency and Bankruptcy Code, 2016

The basic objective of the moratorium is laid down under Section 14 of the Insolvency and Bankruptcy Code, 2016 which is to prohibit the creditors to institute any suits and to continue any pending proceedings against the corporate debtor. This includes execution of judgement, decree or order by any authority like court of law, tribunal, or arbitration panel. It also imposes a prohibition on the corporate debtor from transferring, restricting, blocking, alienating, or disposing off any of its assets, beneficial interests or legal rights therein. A moratorium may also be declared to prevent the corporate debtor to take any action to foreclose, recover or enforce any security interest in respect of its property. Such action to foreclose, recover or enforce the security interest also covers under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002. The recovery of any property by an owner or lessor, which is in the possession of or occupied by the corporate debtor is also prohibited by Section 14 of the Insolvency and Bankruptcy Code.

In the recent amendment to Sub-section (1) of Section 14, an explanation in the form of a non-obstante clause [1] has been added to secure the rights of a licensee or similar grantee during the moratorium period. The explanation provides that a license, permit, registration, quota, concession, clearance or any other similar grant, which is given by the Central Government, State Government, local authority, sectoral regulator or any other authority cannot be suspended or terminated as a consequence of insolvency. The underlying condition for the same is that there should not be any default in payment of current dues arising out of the use of such license or similar grant.

III. Purpose of Moratorium

The intent of Apex Court to declare the moratorium during the insolvency resolution proceeding was defined in the case of Innovative Industries Ltd. V. ICICI Bank Ltd.[2], which is to provide a breathing spell to corporate debtors during which he can reorganize his business”.

A limited standstill period is essential so that genuine businesses can explore the option of restructuring. The purpose of moratorium under Section 14 of Insolvency and Bankruptcy Code, 2016 is to ensure uniformity and order during the resolution process. Besides maximizing the value of assets, the imposition of a prohibition on the unauthorized disposition of the debtor’s assets and suspension of enforcement of rights and remedies of the creditors against the debtors for a prescribe period of time preserves and protects the assets of corporate debtors. The code provides for fair and speedy mechanism for the completion of the insolvency resolution procedure. It ensures a stand still procedure during which the creditors cannot resort to any personal enforcement actions against the corporate debtor. This ensures that all the assets of the corporate debtor are kept together and the conduct of tribunals is not obstructed as the tribunals do not have to deal with the complexities of multiple creditor actions in Debt Recovery Tribunals.

IV. Commencement and Period of Moratorium under Insolvency and Bankruptcy Code, 2016

When any corporate debtor commits a default in the payment of its debt, a financial creditor, an operational creditor or the corporate debtor itself may file an application to initiate corporate insolvency resolution process (CIRP) against such corporate debtor before the Adjudicating Authority i.e., National Company Law Tribunal. After the receipt of the application, the Adjudicating Authority may admit the application within fourteen days if it is complete and no disciplinary action is pending against the proposed resolution professional. However, the Adjudicating Authority may reject the application if it is incomplete, after giving a notice to the applicant to rectify the defects in the application. Such defects must be rectified within seven days from the date of receipt of that notice. The moratorium for the purpose of Section 14 commences as declared by the Adjudicating Authority after the admission of the application.

Section 12 of the Insolvency and Bankruptcy Code, 2016 provides the time limit for the completion of insolvency resolution process. According to this section, from the date of application to start the corporate insolvency resolution process, it must complete within one hundred and eighty days. However, after passing a resolution at a committee of creditors by a vote of 66% of the voting shares, the resolution professional may file an application to the Adjudicating Authority to extend the period of the insolvency resolution proceeding beyond one hundred and eighty days. If the Adjudicating Authority is satisfied that the subject matter of the case is such that the resolution process cannot be completed within the period of one hundred and eighty days in furtherance of application filed by the resolution professional, the Adjudicating Authority may extend the duration of such process by such period as it thinks fit, but not beyond ninety days. Therefore, the order of moratorium applies till the corporate insolvency resolution process completes. However, the moratorium ceases to have effect if the Adjudicating Authority approves the resolution plan under sub-section (1) of Section 31 or passes an order of liquidation of corporate debtor under Section 33 at any time during the insolvency resolution process.

V. Application of Section 14 to Other Legal Proceedings

The language of Section 14 of the Insolvency and Bankruptcy Code, 2016 makes it clear that during any corporate insolvency resolution process, initiation of any suit or continuation of any pending legal proceeding against the corporate debtor is prohibited. However, such prohibition has been a topic of discussion in the tribunals as well as the courts regarding the application of moratorium on proceedings such as criminal proceedings under Section 138 of Negotiable Instruments Act or under the writ jurisdiction of High Courts and the Supreme Court.

Writ Jurisdiction of High Courts and The Supreme Court

After much discussion, it has been established that although the language of Section 14 of the code indicated a prohibition on the initiation and continuation of legal proceedings, it does not put an embargo on initiation and continuation of proceedings under Article 32 and 226 of the Constitution of India. Such exemption in case of writ jurisdictions of High Courts and the Supreme Court is not mentioned in the Insolvency and Bankruptcy Code, 2016.

This issue has been discussed in Canara Bank v. Deccan Chronicle Holdings Limited [3]. In this case the appellant submitted that the adjudicating authority should include the High Courts or the Supreme Court in the purview of moratorium for the purpose of recovery of amount or execution of any judgement, order or decree pending against a corporate debtor.

The National Company Law Appellate Tribunal (NCLAT) in its finding laid down that even though Sub-section (1) of Section 14 does not specifically exclude the writ jurisdiction of High Court or the Supreme Court, yet the constitutional provisions must be considered.

A suit for recovery of debt can be file only under Article 131 of the Constitution of India. Under the provision, a suit can be filed before the Hon’ble Supreme Court when there a dispute between the Government of India and one or more States. In addition, some High Courts also have original jurisdiction to entertain the suits related to recovery of money. The NCLAT disposed of the matter clarifying that the moratorium under Section 14 of Insolvency and Bankruptcy Code, 2016 does not affect any suit or case pending before the Hon’ble Supreme Court under Article 32, nor when order is passed under Article 136 of the Constitution. In addition, the power of the High Courts under Article 226 of the Constitution can also not be affected by the period of moratorium.

However, suit for the recovery of money before the High Court under its original jurisdiction against the corporate debtor cannot proceed if filed after the declaration of moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016.

Section 138 of Negotiable Instruments Act, 1881

The issue whether the order of moratorium covers a criminal proceeding under Section 138 of the Negotiable Instruments Act, 1881 or not was decided by the Hon’ble National Company Law Appellate Tribunal (NCLAT) in the case of Shah Brothers Ispat Pvt. Ltd v. P. Mohanraj & Ors.[4]. The Appellate Authority in this case decided that the criminal proceeding under Section 138 of the Negotiable Instruments Act will not fall under the purview of Section 14 of the Insolvency and Bankruptcy Code, 2016. The reasoning given by NCLAT for such finding was that the proceeding under Section 138 of Negotiable Instruments Act was penal in nature, which empowers the Court of competent jurisdiction to pass an order of imprisonment or imposition of fine or both. Such order fall not fall under the category of proceeding, order or decree of money claim as established under Section 14 of Insolvency and Bankruptcy Code, 2016. The NCLAT held that the order of imprisonment cannot be construed as an order of recovery of debt from the corporate debtors, nor can be the imposition of fine. Therefore, no criminal proceedings fall under the purview of Section 14 of Insolvency and Bankruptcy Code, 2016.

However, in the case of M/s Meters and Instruments Pvt. Ltd v. Kanchan Mehta[5], the Hon’ble Supreme Court held that the offence under Section 138 of Negotiable Instruments Act is primarily civil in nature, the burden of proof of which falls on the accused in terms of Section 139 of the Negotiable Instruments Act. It was also laid down that the standard of such proof under such case is “preponderance of possibilities” rather than “proof beyond reasonable doubt”. Similarly, in the case of Kaushalya Devi Massand v. Roopkishore Khore[6], the Supreme Court held that the gravity of offence under Negotiable Instruments Act cannot be equated with that of the provisions of Indian Penal Code.

The underlying object of Section 138 of the Negotiable Instruments Act is to ensure that an obligation of payment on the part of the drawer through a cheque has been fulfilled. A dishonor cheque gives rise to a non-cognizable offence thus, creating a faith in negotiable instruments. On the other hand, the purpose of moratorium under Insolvency and Bankruptcy Code, 2016 is to keep the assets of the corporate debtor together during the insolvency resolution proceeding. In my opinion, it is justifiable that the umbrella of moratorium is not wide enough to cover a criminal proceeding under the Negotiable Instruments Act as the punishment under the same is imprisonment or fine or both.

Section 34 of Arbitration and Conciliation Act, 1996

Another point of consideration regarding the interpretation of “proceedings” under section 14 of Insolvency and Bankruptcy Code, 2016 is if the proceeding under Section 34 of the Arbitration Act which lays down provision regarding application to set aside an arbitral award will be stayed or not.

In the case of Power Grid Corporation of India Ltd v. Jyoti Structures Ltd. The Delhi High Court while determining the scope of Section 14 under the Insolvency and Bankruptcy Code, 2016, held that the “proceeding” under Section 14(1)(a) of the code does not include all proceedings but only those the nature of which is of debt recovery action against the assets of the corporate debtor. The moratorium period covers only those proceedings the conclusion of which could endanger, diminish or dissipate the assets of the corporate debtor in any manner. Thus, while answering the question, Delhi High Court held that the main purpose of moratorium is to keep the assets of the debtor together and to facilitate orderly completion of the insolvency process. Therefore, while the purpose of moratorium is deliberately inclined in the favor of the corporate debtor, any stay of proceedings against an award under Section 34 of the Arbitration Act, which is in favor of the corporate debtor would rather be negating the debtor’s effort to recover its money and hence, would not fall under the prohibition as mentioned in Section 14(1)(a) of the Code.

VI. Exclusions under Section 14 of the Insolvency and Bankruptcy Code, 2016

After much deliberate discussion, the tribunals have clarified the code to include, the proceeding or actions that are outside the purview of moratorium under Sub-section (1). Sub-section (2) of Section 14 of the Code clearly and explicitly states that the supply of essential goods and services[7] as may be specified shall not be terminated or suspended or interrupted to the corporate debtor during the moratorium period.

A recent amendment by the ordinance called Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 Sub-section (2A) was inserted to section 14 of the Code. Sub-section (2A) states that when the interim resolution professional or resolution professional considers that the supply of goods or services is important to protect and preserve the value of the corporate debtor and manage his operations, then the supply of essential goods and services shall not be suspended, terminated or interrupted during the moratorium period. However, such supply of essential goods and services is subject to the condition the dues arising out of the supply should be duly paid during the moratorium period.

Furthermore, Sub-clause (3) of Section 14 sets out that in a contract of guarantee to the corporate debtor, the moratorium is not applicable to the surety. In addition, the moratorium also does not apply to such transactions or agreements as notified by the Central Government in consultation with any financial sector regulator or any other authority.

VII. Conclusion

Section 14 of the Insolvency and Bankruptcy Code, 2016 creates a limited standstill period. This provides an opportunity to genuine businesses to explore the option of restructuring. This also encourages the creditors to participate in the insolvency process besides upholding fundamental objectives and policy of insolvency law. The purpose is to prevent the creditors to initiate multiple proceedings through individual enforcement, which frustrates the very object of the code. However, this prohibition on the initiation of the proceedings is only limited to such proceedings which are of the nature of money claims or recovery of debts or which diminish or endanger the assets of the corporate debtor. Any other proceedings, which do not impose any endangerment on the assets of the corporate debtor, for example under Section 138 of the Negotiable Instruments Act can be initiated as these are not covered under the purview of moratorium under Section 14 of the Code. Even though the code imposes restrictions on the creditor to create their claim, but at the same time, it also provides a wide enough window to create a primary liability on the debtor.

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VIII. References:

[1] A non-obstante clause empowers a legislation or a provision containing such clause with overriding effects of any other legal provisions under the same law or any other law which are in contrary to such legislation or provision.

[2] Innovative Industries Ltd. V. ICICI Bank Ltd. (2001) 1 SCC 407

[3] Canara Bank v. Deccan Chronicle Holdings Limited: Company Appeal (AT) (Insolvency), 2017. No. 147

[4] Shah Brothers Ispat Pvt. Ltd v. P. Mohanraj & Ors: Company Appeal (AT) (Insolvency), 2018. No. 306

[5] M/s Meters and Instruments Pvt. Ltd v. Kanchan Mehta (2018) 1 SCC 560

[6] Kaushalya Devi Massand v. Roopkishore Khore (2011) 4 SCC 539

[7] Regulation 32 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulation, 2016 envisages what construes as “essential goods and services”, i.e.:

1. Electricity

2. Water

3. Telecommunication services, and

4. Information technology services, to the extent that these are not a direct input to the output produced or supplied by the corporate debtor.

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Footnotes

1. Author is a student at DES Law College, Pune University, India.