Scope of Moratorium under Section 14 and 33 (5) of the Insolvency and Bankruptcy Code, 2016

The approach to moratorium (either under Section 14 or 33 (5) of IBC), should be a practical one and not for mere academic purpose.
MCO Legals -  Amit Meharia & Paramita Banerjee
MCO Legals - Amit Meharia & Paramita Banerjee

Introduction

The Insolvency and Bankruptcy Code, 2016 (“IBC”) empowers a financial or operational creditor or the corporate debtor (“CD”) itself to make an application for initiation of corporate insolvency resolution process (“CIRP”) before the Adjudicating Authority, i.e., National Company Law Tribunal. Once the application is admitted by the Tribunal, CIRP starts, and a moratorium is imposed on CD under Section 14 of IBC and similarly, under Section 33 (5) of IBC, after an order of liquidation has been passed. This article seeks to delve into the scope of moratorium under IBC, in the CIRP as well the liquidation process.

Moratorium – Meaning?

Literally, a moratorium means temporary stay or suspension of activities. During CIRP, a moratorium subsists on the activities of CD. In effect, any action by or against CD stands suspended. The resolution professional takes charge of the business of CD and only the activities related to or required for the insolvency process are undertaken.

Under section 14 of IBC, a moratorium means prohibition of following actions against CD:

  • Institution of suits, continuation of pending suits, execution of judgments

  • Transferring/disposing off assets

  • Recovery or enforcement of security interest or any action under the SARFAESI Act, 2002

  • Recovery of property in possession.

Proviso to Section 14 (4) of IBC clarifies that the moratorium shall cease to have effect after the completion of CIRP, i.e., from date of approval of resolution plan or order of liquidation. The purpose of moratorium is to create a calm period for reorganization of business without being disturbed by litigations. [Swiss Ribbons Private Limited vs. Union of India]

However, during the period of liquidation, CD may initiate legal proceedings through the liquidator and/or can continue with litigations, with the prior approval of the Tribunal.

The correlation of moratorium between Section 14 and 33 (5), IBC was interpreted in Elecon Engineering Company Limited vs. Energo Engineering Projects where Delhi High Court observed that a moratorium under Section 14 applies to CIRP whereas Section 33 applies to a liquidation process and hence they are entirely distinct in application. It was held that by express language of IBC, a moratorium prohibits continuation of pending suits as well, whereas Section 33 (5), IBC is only a bar on institution of new suits during the liquidation process. This line of reasoning was also followed by the NCLT, Ahmedabad Bench in Bhavarlal Mangilal Jain vs. Metal Link Alloys Ltd.

Contrary to the above, the Report of the Insolvency Law Committee (February, 2020) sets out a different view. The Committee stated that the legislative intent was to provide for a bar on initiation as well as continuation of suits or other proceedings but the term “continuation” was omitted as “inadvertent error”. The Committee pointed that the provisions of liquidation under the Companies Act, 2013 also bar continuation of proceedings during liquidation. Hence, general idea on legal proceedings being initiated or continued by or against the CD during CIRP or liquidation process  by reason of a subsisting moratorium is still unclear but may be accepted on the express order of the Tribunal. 

Arbitration invoked during CIRP

Alchemist Asset Reconstruction Company Ltd. vs. Hotel Gaudayan Pvt. Ltd., held that arbitration proceedings initiated after implementation of CIRP is non est in law. (Also, New Delhi Municipal Council vs. Minosha India Limited). However, Courts have created certain exceptions where arbitration may be allowed to continue, if, it was filed before the order of moratorium or invoked during moratorium in cases where the claims are in the benefit of CD. (Power Grid Corporation of India Ltd. vs. Jyoti Structures Ltd.)

Further, it has also been held in Jharkhand Bijli Vitran Nigam Limited vs. IVRCL Ltd., and SSMP Industries Ltd. vs. Perkan Food Processors Pvt. Ltd., that there is no bar in passing of award during moratorium but if the award contemplates recovery of assets or amount from the CD then the same would be barred by reason of the moratorium. (Also, K.S. Oils Ltd. vs. State Trade Corporation of India Ltd., P. Mohanraj vs. Shah Brothers Ispat Pvt. Ltd., settled the legal position by holding that Section 34 proceedings for setting aside of an arbitral award cannot continue during moratorium since it may result in confirmation of debts against CD.)

Section 33 (5), IBC and moratorium – the relationship

The statutory position is that there is no bar on continuation of pending proceedings during the process of liquidation. However, a new proceeding by CD in liquidation may only be instituted through the liquidator with the permission of the Tribunal. This clarity has however been shrouded by the recommendation of the Insolvency Law Committee to amend Section 33(5) to the effect that the bar during liquidation should also apply to continuation of pending legal proceedings.

In ABG Shipyard vs. Central Board of Indirect Taxes and Customs, the Supreme Court held that once a moratorium either under Section 14 or under Section 33 (5) of IBC has been imposed on CD, no recovery proceedings can be initiated under the Customs Act, 1961. However, the above decision also made observations on the basis of the statutory literature that continuation of pending proceedings has not been curtailed under Section 33 (5) of IBC.

Conclusion

In view of the aforesaid, the key takeaway is that the approach to moratorium (either under Section 14 or 33 (5) of IBC), should be a practical one and not for mere academic purpose. A Liquidator comes into the picture when it is decided that CD is beyond revival. Even if, a Liquidator pursues a litigation, the same, in addition to being time and cost consuming, is always subjected to the stages in a litigation, i.e., appeals and interim applications. A Liquidator's role is not to contest litigation but to maximize value of the assets of the CD in shortest period of time. It is beyond question whether the legislative intent of IBC could ever have been to create a situation where Liquidator shall litigate, rather than maximizing the value of assets and the same is reflected in the Report of Insolvency Law Committee. Further, the Companies Act, 2013 also did not permit the Liquidator to continue with litigations during moratorium. Therefore, Committee of Creditors should deal with moratorium under Section 33 (5) of IBC in a practical/commercial manner and not as in the approach as stated in the Power Grid Judgement referred above.

It is striking to note that, on the flip side of the coin, a party who continues with a litigation during moratorium under Section 33 (5), IBC may have a Decree/Award against him or in his favour, however:

a. He will not be able to challenge the Decree/Award against CD, either under Code of Civil Procedure, 1908 (“CPC”) or Arbitration and Conciliation Act, 1996 (“Arbitration Act”), as applicable.  

b. He will not be able to Execute the Decree/Award against CD, either under CPC or Arbitration Act, as applicable.

c. However, he may have to deposit security, when facing an execution proceeding.

In light of complicated situations that may arise due to possible inconsistencies, a pragmatic view is mandated. This, all the more makes one conclude that there is no rationale or logic to have a separate ambit of the concept of moratorium under Sections 14 and 33 (5) of IBC.

Amit Meharia is a Managing Partner and Paramita Banerjee is a Senior Associate at MCO Legals.

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