The Insolvency and Bankruptcy Code, 2016 (“IBC”/ “Code”) was enacted with the objective of providing a unified framework for the resolution of financial distress of not only corporate debtors (“CDs”), but also individuals, including those who stand as personal guarantors (“PGs”) for the debts of CDs.
Part III of the Code read with the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019, lay down a structured framework for the Personal Guarantor Insolvency Resolution Process (“PGIRP”), which broadly entails the appointment of a resolution professional (“RP”), collation and verification of the claims of creditors, preparation of a repayment plan by the PG, deliberation on the repayment plan by the committee of creditors (“CoC”), and the placement of the plan before the Adjudicating Authority/ National Company Law Tribunal (“NCLT”) for its approval.
To facilitate this process and to shield the PG from parallel recovery proceedings during the pendency of the PGIRP, the Code provides for a moratorium under Section 101, i.e., a period during which no fresh legal action in respect of any debt can be initiated against the PG, and any pending action remains stayed.
The structure of this moratorium, however, differs materially from that available to CDs under Section 14 of the Code. Whereas the moratorium under Section 14 subsists for the entire duration of the corporate insolvency resolution process (“CIRP”), the moratorium under Section 101 terminates upon the earlier of:
(a) the expiry of 180 days from the date of the PG’s admission into insolvency, or
(b) the date on which the NCLT passes an order under Section 114 of the Code on the repayment plan, whether approving or rejecting it.
In a scenario where the repayment plan has not been approved by the NCLT within the said 180-day period, the moratorium would automatically lapse, even though the PGIRP may continue. This may give rise to an anomalous situation where creditors may begin initiating/ resuming individual recovery proceedings the moment the moratorium expires. Such a situation exposes both the PG and the ongoing PGIRP to fragmented recovery proceedings.
This piece aims to examine Section 101 of the Code in light of recent judicial interpretations, analyse the consequences which flow from the expiry of the moratorium prior to the conclusion of the PGIRP, and explore potential reforms to address the inadequacies in the existing framework.
The question of whether the moratorium under Section 101 of the Code may be extended beyond the statutory ceiling of 180 days was considered by the National Company Law Appellate Tribunal (“NCLAT”), Principal Bench, New Delhi, in the matter of Anil Kumar vs. Mukund Choudhary. In this matter, the RP contended that the absence of a moratorium during the pendency of the PGIRP would render the entire process futile, as the creditors would be at liberty to pursue individual recovery actions and enforce security interests the moment the moratorium ceases. The NCLAT, however, held that the language of Section 101 of IBC was clear and unambiguous and that neither the NCLT nor the NCLAT had the jurisdiction to extend the moratorium beyond the statutory ceiling.
It is important to note that while the moratorium itself cannot be extended, the timeline for completion of the PGIRP may be extended in appropriate cases, as held by the NCLAT in Purusottam Behera vs. SBI. The NCLAT observed that although Regulation 19 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Regulations, 2019 (“PG Regulations”) requires the repayment plan, as approved by the CoC, to be filed before the NCLT within 120 days from the commencement of the PGIRP, neither the Code nor the PG Regulations prescribe any outer limit for completion of the process, unlike the CIRP framework which prescribes a maximum period of 330 days [IBC, § 12, No. 31, Acts of Parliament, 2016]. Accordingly, the NCLAT held that Regulation 19 is directory rather than mandatory in nature and that the time for submission of the repayment plan, and consequently the overall duration of the PGIRP, may be extended.
Such an interpretation gives rise to an inconsistency within the IBC framework. Section 106 of the Code read with Regulation 19 of the PG Regulations (which prescribes the timeline for submission of the repayment plan), and Section 101 (which prescribes the duration of the moratorium), all employ the word “shall”, indicating their mandatory nature, yet they have been accorded differential treatment.
When the constitutionality of Section 101 was challenged before the Supreme Court in Mukund Choudhary vs. Union of India, the apex court dismissed the challenge while observing that moratorium serves distinct purposes in the corporate and individual insolvency contexts: while in the former it is intended to facilitate rehabilitation and revival of the CD, in the latter it serves a different purpose - which the Court did not elaborate upon. The SC, however, took note of the appellant’s submission that the expiry of the moratorium prior to conclusion of the PGIRP creates a risk where one of the creditors may “seek to take a march over the others” and that this would run contrary to the entire object of the insolvency framework, and accordingly issued notice in the connected civil appeal. This indicates that the apex court itself considers the concern raised by the appellant to be one that warrants closer scrutiny.
While the aforesaid decisions dealt with the issue largely at a theoretical level, the practical implications thereof came to be examined in a recent judgment of the Delhi High Court in Vistra ITCL (India) Ltd. vs. Pranav Ansal. In the said matter, a decree-holder/ creditor had filed an execution petition seeking attachment and sale of certain properties of the judgment-debtor, who was also a PG undergoing PGIRP. The PG had already submitted a repayment plan, which included the said properties, and the said plan was at the stage of consideration by the CoC. The PG contended that allowing such enforcement by an individual creditor would prejudice other creditors and disturb the principle of pari passu treatment amongst them. It was further argued that granting the relief sought could result in an inconsistency between the decision of the NCLT and the executing court.
The Delhi HC, however, held that Section 101 of the Code must be interpreted strictly, and that the moratorium automatically comes to an end upon occurrence of either of the contingencies prescribed under the provision. Accordingly, the High Court allowed the execution petition and ordered the attachment and sale of the said properties.
Now, the common thread which runs through the aforementioned line of judgments is the strict interpretation of Section 101 as it stands. The courts have, in unison, refused to read into the said provision any room for extension of the moratorium. The problem, however, is that such a position may produce consequences which run contrary to the objectives of the IBC itself, and it is to those consequences that this piece now turns.
About the authors: Palash Taing is a Partner and Shobhna Vijay is an Associate at TLH, Advocates & Solicitors.
Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.
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