The Insolvency and Bankruptcy Code, 2016 (‘
the Code’) has become one of the most dynamic and fast-changing legislations. Not only has the Government been modifying it from time to time, but the Judiciary is also playing a very active role in ironing out creases and resolving controversies. The Code provides for the insolvency resolution process of corporate debtors. The Code gets triggered when a corporate debtor commits a default in payment of a debt, which could be financial or operational. The initiation (or starting) of the corporate insolvency resolution process under the Code may be done by a financial creditor (in respect of default of financial debt) or an operational creditor (in respect of default of an operational debt) or by the corporate itself (in respect of any default).
One of the important facets of this resolution process is a moratorium on legal proceedings against the corporate debtor contained u/s 14 of the Code. This provision has seen a great deal of judicial development in recent times. Let us analyse this crucial section in greater detail.
MORATORIUM
Once the insolvency resolution petition against the corporate debtor is admitted by the National Company Law Tribunal (NCLT), and after the corporate insolvency resolution process commences, the NCLT declares a moratorium prohibiting institution or continuation of any suits against the debtor; execution of any judgment of a Court / authority; any transfer of assets by the debtor; and recovery of any property against the debtor. The moratorium continues till the resolution process is completed. Thus, total protection is offered to the debtor against any suits / proceedings. In Alchemist Asset Reconstruction Company Ltd. vs. Hotel Gaudavan (P.) Ltd. [2018] 145 SCL 428 (SC), it was held that even arbitration proceedings are stayed during this period.
An extract of the relevant provisions is given below:
‘Moratorium.
14. (1) Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the 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;
(b) transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein;
(c) any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002);
(d) the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.
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(2) The supply of essential goods or services3 to the corporate debtor as may be specified shall not be terminated or suspended or interrupted during the moratorium period.
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(3) The provisions of sub-section (1) shall not apply to:—
(a) such transactions, agreements or other arrangements as may be notified by the Central Government in consultation with any financial sector regulator or any other authority.
(b) a surety in a contract of guarantee to a corporate debtor.’
(4) The order of moratorium shall have effect from the date of such order till the completion of the corporate insolvency resolution process:
Provided that where at any time during the corporate insolvency resolution process period, if the Adjudicating Authority approves the resolution plan under sub-section (1) of section 31 or passes an order for liquidation of the corporate debtor under section 33, the moratorium shall cease to have effect from the date of such approval or liquidation order, as the case may be.”
The Supreme Court in P. Mohanraj vs. Shah Brothers Ispat P Ltd. [2021] 125 taxmann.com 39 (SC) has explained that the object of a moratorium provision such as s.14 of the Code was to see that there was no depletion of a corporate debtor’s assets during the insolvency resolution process so that it could be kept running as a going concern during this time, thus maximising value for all stakeholders. The idea was that it facilitated the continued operation of the business of the corporate debtor to allow it breathing space to organise its affairs so that new management may ultimately take over and bring the corporate debtor out of financial sickness, thus benefitting all stakeholders, which would include workmen of the corporate debtor. The Apex Court further explained that while s.14(1)(a) referred to monetary liabilities of the corporate debtor, s.14(1)(b) referred to the corporate debtor’s assets. Together, these two clauses formed a scheme that shielded the corporate debtor from pecuniary attacks against it in the moratorium period so that the corporate debtor got breathing space to continue as a going concern in order to rehabilitate itself ultimately. Relying on this explanation, the Supreme Court did not allow cheque bouncing proceedings to continue against the corporate debtor u/s 138 of the Negotiable Instruments Act, 1881. It held that a quasi-criminal proceeding that is contained in Chapter XVII of the Negotiable Instruments Act would, given the object and context of s.14 of IBC, amount to a ‘proceeding’ within the meaning of s.14(1)(a) of the Code. Hence, the moratorium would attach to such a proceeding.
In the case of Sandeep Khaitan vs. JSVM Plywood Industries Ltd. [2021] 166 SCL 494 (SC) the Apex Court dealt with an issue of whether the High Court has inherent powers under s.482 of the Criminal Procedure Code, 1973 to make such orders against the corporate debtor to give effect to any order under that Code, or to prevent abuse of the process of any Court or otherwise to secure the ends of justice? The Court held that the power under s.482 of the CrPC may not be available to the Court to allow the breach of a statutory provision. The words ‘to secure the ends of justice’ in s.482 cannot mean to overlook the undermining of a Statute, i.e., the provisions of s.14 of the Code.
Similarly, in Anand Rao Korada v Varsha Fabrics P Ltd. [2019] 111 taxmann.com 474 (SC), in order to recover labour dues, the High Court ordered the auction of the assets of the corporate debtor after issuance of the moratorium. The Supreme Court set aside this Order and held that if the assets of the company were alienated during the pendency of the proceedings under the IBC, it would seriously jeopardise the interest of all the stakeholders. The sale or liquidation of assets had to be in accordance with the IBC only.
RECOVERY OF PROPERTY
In Rajendra K Bhutta vs. MHADA [2020] 160 SCL 95 (SC), a society redevelopment project was blessed by the Maharashtra Housing and Area Development Authority (MHADA). The developer went into insolvency, MHADA wanted to take over possession of the land given to the developer for demolition and redevelopment. The Supreme Court disallowed this owing to the moratorium u/s. 14(1)(d). It held that under s.14(1)(d) what was referred to was the ‘recovery of any property’ of the corporate debtor. It was clear that when recovery of property was to be made by an owner under s.14(1)(d), such recovery would be of property that was ‘occupied by’ a corporate debtor. The expression ‘occupied by’ would mean or be synonymous with being in actual physical possession of or being actually used by, in contra-distinction to the expression ‘possession’, which would connote possession being either constructive or actual and which, in turn, would include legally being in possession, though factually not being in physical possession. Since it was clear that the Joint Development Agreement had granted a license to the developer (i.e., the corporate debtor) to enter upon the property, with a view to do all the things that were mentioned in it, it is obvious that after such entry, the property would be ‘occupied by’ the developer. Section 14(1)(d) of the Code, when it speaks about recovery of property ‘occupied’ refers to actual physical occupation of the property. Hence, MHADA’s plea for repossession of the land was turned down.
NATURAL PERSONS NOT PROTECTED
In the above referred decision of P.Mohanraj (supra), the Supreme Court also held that it is clear that the moratorium provision contained in s.14 of the IBC would apply only to the corporate debtor, the natural persons, i.e., its Directors in charge of its affairs continued to be statutorily liable under the Negotiable Instruments Act. Accordingly, criminal proceedings could continue unabated against the Managing Director / Other Directors who have drawn the bounced cheque.
Similarly, in Anjali Rathi vs. Today Homes & Infrastructure Pvt. Ltd. [2021] 130 taxmann.com 253 (SC), the Supreme Court allowed proceedings to be carried out against the promoters of a corporate debtor which was a developer for failing to honour the terms of settlement entered into with home buyers.
PERSONAL GUARANTOR NOT SHIELDED
Another novel issue arose in SBI vs. V. Ramakrishnan [2018] 96 taxmann.com 271 (SC) of whether the moratorium extended to the personal guarantor of a corporate debtor also? The Court held that the moratorium under s.14 cannot possibly apply to a personal guarantor. This decision has since been given the shape of law by inserting sub-section (3) in s.14 which expressly provides that the moratorium under s.14 will not apply to a surety in a contract of guarantee to a corporate debtor.
WILFUL DEFAULTER PROCEEDINGS CONTINUE
An interesting question arose before the Calcutta High Court in the case of Gouri Prasad Goenka vs. State Bank of India, LSI-473-HC-2021(CAL). Here the corporate debtor had gone into insolvency resolution. However, the question was whether wilful defaulter proceedings could be initiated against the promoter, in view of the moratorium imposed u/s 14? The Court held that whole-time directors and promoters who were in charge of the affairs of the defaulting company during the relevant period, when the default was committed, could not be said to be absolved of their act of wilful default committed prior to final approval and acceptance of a resolution plan. The moratorium in no way prevented this. The wilful defaulter declaration proceeding were to disseminate credit information for cautioning banks and financial institutions so as to ensure that further bank finance was not made available to them and not for recovery of debts or assets of the corporate debtor, which could hamper the corporate resolution process.
PMLA ATTACHMENT OF ASSETS
In Directorate of Enforcement vs. Manoj Kumar Agarwal [2021] 126 taxmann.com 210 (NCL-AT), the National Company Law Appellate Tribunal was determining whether an attachment order passed by the Enforcement Directorate under the Prevention of Money Laundering Act, 2002 before the start of the resolution process of the corporate debtor could survive in view of s.14?
The NCL-AT held that the aim and object of the PMLA for attaching the property alleged to be involved in money laundering was to avoid concealment, transfer or dealing in any manner which may result in frustrating any proceedings relating to the confiscation of such proceeds of crime under PMLA. Thus, Provisional Attachment Order was issued for a period not exceeding 180 days from the date of Order. Now if s.14(1)(b) of IBC relating to the moratorium was seen, the NCLT was required to pass an order declaring a moratorium, inter alia prohibiting ‘transferring, encumbering, alienating or disposing of by the Corporate Debtor any of its assets or any legal right or beneficial interest therein? thus the moment an insolvency was initiated, the property of the corporate debtor was protected by such a moratorium. Thus, both the provisions sought to protect the property of corporate debtor from transfer etc. till further actions take place. It further held s.14 would be attracted in all such cases. Once the moratorium was ordered, even if the Enforcement Directorate moved the Adjudicating Authority under PMLA, further action before the Adjudicating Authority under PMLA must be said to have been prohibited. Section 14 of IBC will hit the institution and continuation of proceedings before Adjudicating Authority under PMLA.
CONCLUSION
The provisions relating to the moratorium are very important to protect the assets and going concern of the corporate debtor. However, Courts are quick to ensure that while it is a shield for the debtor it cannot be used as a shield by its promoters / directors.
