[By Hamza Khan & Divyanshu Kumar]
The authors are students of NALSAR University of Law, Hyderabad.
Introduction
In the case of NUI Pulp v. Ms. Roxcel Trading GMBH, the National Company Law Tribunal (“NCLT”) exercised power under Rule 11 of the National Company Law Tribunal Rules, 2016 (“NCLT rules”) to prevent the Corporate Debtor from alienating or encumbering any disputed assets during the pre-admission phase of the Corporate Insolvency Resolution Proceeding (“CIRP”). This effectively established a temporary moratorium until the application of CIRP was either admitted or rejected by the Adjudicating Authority (“AA”). Although the National Company Law Appellate Tribunal (“NCLAT”) affirmed this ruling, the possibility of an interim moratorium during the pre-admission stage remains uncertain.
Through a comment on this landmark case, the authors aim to address two pertinent questions: firstly, whether an interim moratorium in the pre-admission phase is desirable, and secondly, whether the NCLT, under Rule 11 of the NCLT rules, possesses the authority to grant such a moratorium for a Corporate Debtor. In pursuit of answers to these questions, the authors will analyse the reasoning provided in NUI Pulp and look for judicial developments following this case. Subsequently, the authors would examine the reports by the Insolvency and Bankruptcy Board of India (“IBBI”) and recommendations by the Insolvency Law Committee (“ILC”) to determine the necessity of an interim moratorium during the pre-admission period. Finally, the authors will juxtapose Rule 11 of the NCLT with Section 151 of the Civil Procedure Code (“CPC”) to determine whether granting an interim moratorium is within the inherent powers of the NCLT.
Judicial Analysis of Interim Moratoriums in CIRP: NUI Pulp and its Developments
In NUI Pulp, the Operational Creditor substantiated its concern with sufficient evidence, demonstrating that the management of the Corporate Debtor intended to sell assets, pending admission of CIRP application, thereby causing wrongful losses to all creditors, including the Operational Creditor. The NCLAT noted that, given the significant threat, the NCLT was justified in issuing an ad-interim order before admitting the application under Rule 11 of the NCLT Rules.
Following this line of reasoning in F.M. Hammerle, the NCLT granted interim injunctions in the CIRP prior to the admission of the application. In Phoenix ARC Private Limited v. Precision Realty Developers Private Limited, the NCLT noted “To make out a case for grant of injunction and that too at the pre-admission stage, the Applicant is required to make out a strong prima facie case,” thus setting a threshold akin to three-pronged test of grant of interim injunction while rejecting the application for want of evidence.
However conversely, in Go Airways, the court noted the absence of provisions empowering the NCLT to grant injunctions at the interim stage. Thus, while there are rare instances of interim moratoriums being granted, these are exceptions rather than the norm and resemble injunctions more than moratoriums. This reflects a lack of clarity in the jurisprudence, requiring a deeper analysis.
Interim Moratorium: The Need of the Hour
According to the section 7(4) of Insolvency and Bankruptcy Code (“IBC”), the AA is required to admit an application within 14 days of its receipt, provided it fulfills the necessary criteria. However, in actuality, this process often takes longer due to various factors. A case in point is Asset Reconstruction Company Limited v. Nivaya Steel, where the application for admission into CIRP remained undecided for over a year.
The IBBI’s study revealed that at pre-admission stage of CIRP, due to the lack of imposition of moratorium, there is a high risk of deterioration of value of asset. The ILC report underscored that such prolonged delays could encourage asset siphoning by promoters and induce creditors to enforce debts. Following the UNCITRAL Guide to address this issue, countries like the UK and the US have incorporated the provision of an interim moratorium in their code. Referring to the same, the ILC recommended granting of discretion to the AA to balance the interests of stakeholders, recognizing potential harm to certain creditors by an automatic interim moratorium pending admission. The committee also recommended AA’s discretion to include the ability to modify or withdraw the moratorium order if unjustifiable harm to a creditor is proven.
The introduction of an interim moratorium is critically essential in India, where there is a shortage of judicial manpower to promptly address CIRP admission. This measure would effectively prevent individual creditors from taking action against the Corporate Debtor, thereby safeguarding its chances of revival. It would also deter the Corporate Debtor’s management from siphoning off its assets. Thus, following the ILC report, the IBC should be amended to incorporate provision for interim moratorium in part II of the IBC as well, and NUI Pulp is a welcome step in recognizing the need for interim moratoriums and seeking to preserve the value of the Corporate Debtor by taking such step. The need for introducing such a measure has been previously discussed and highlighted, yet there is no subsequent development regarding the same.
The scope of inherent powers of NCLT
While acknowledging that in certain circumstances, grant of an interim moratorium could preserve the value of the Corporate Debtor and thus become crucial for achieving the very objective of the IBC, it is our opinion that the NCLT does not have the power to do so under Rule 11 of NCLT Rules, and the same is untenable in law.
This has been orally remarked by the NCLT in the subsequent case of Go Airways Interlocutory Application (“IA”) praying for interim moratorium. The NCLT stated, “there is no provision in IBC which grants the NCLT the power to impose interim moratorium”.
An in-depth analysis of the inherent powers given to the NCLT under Rule 11 would clearly substantiate the position taken in Go Airways.
Rule 11, which is under contention deals with the inherent powers of the NCLT to make orders in the interests of justice. This is identical to Section 151 CPC which grants similar powers to the civil court to meet the ends of justice and prevent abuse of process.
Considering that the Rule 11 is of recent origins and has narrow application, no jurisprudence has developed around it by the constitutional courts, therefore, we look at the established jurisprudence around Section 151 CPC to see whether grant of an interim moratorium could be a remedy within the inherent powers of the Tribunal.
Firstly, it is trite law that inherent powers may be used only where a situation arises that was not foreseeable to the legislature, and hence, the statute is silent on the situation (Indian Bank vs. M/s Satyam Fibres). With interim moratorium for a Corporate Debtor, this does not appear to be the case. A bare perusal of the Committee Reports and IBC Section 96 would show that the legislature, chose deliberately not to include a provision for interim moratorium under Chapter II of the IBC, while including it under Chapter III. As highlighted previously on the blog, this deliberate distinction made by the legislature signifies their intent to not extend the provision of interim moratorium to corporate entities. This became abundantly clear after provision for interim moratorium (as an extension of Section 14) was introduced exclusively for Financial Service Providers, through the FSP Rules, 2019. Therefore, using inherent powers to grant a remedy that has been deliberately omitted by the legislature is contradictory to the nature of inherent powers.
Secondly, the inherent powers are only procedural in their operation, and cannot create substantive remedies or rights to the parties (Ramji Gupta & Anr. vs Gopi Krishan Agrawal). Granting interim moratorium has wide-ranging impact on the functioning of the company and the discretion that the management has over it. It bars the rights of creditors to initiate suits or start recovery. Hence, granting of an interim moratorium is by no stretch of imagination within the inherent powers that were framed only to allow for procedural remedies.
Lastly, the Companies Act, and the IBC that deliberately omitted the interim moratorium for Corporate Debtor are legislations passed by the Parliament, while the Rules that grant inherent powers to the NCLT are a sub-ordinate legislation framed by the Central Govt. It goes without saying that a sub-ordinate legislation cannot be ultra vires the parent legislation (Naresh Chandra Agrawal v. ICAI). Hence, the Rules cannot be interpreted so as to confer upon the NCLT a power, which has been denied by the Acts.
Conclusion
The NIU Pulp case by awarding interim moratorium under Rule 11 of NCLT Rules has made a development in the right direction, but through wrong means. While it is essential to have a provision for interim moratorium for Corporate Debtor considering the delay that is common in admitting the application, and the foreseeable possibility of abuse and divergence of funds by the management, such interim moratorium cannot be granted under Rule 11, and requires a legislative amendment which empowers the NCLT to pass orders of interim moratorium.
A legislative amendment should be carried out which follows the recommendations of the IBBI report and grants the NCLT discretion to grant interim moratorium. Such amendment would also lay down the criteria that must be assessed before granting the interim moratorium, and the procedure for the same. Without such streamlining, if the NCLT continues to grant interim moratorium in certain cases, while denying that it has powers to do so in other cases, it would lead to uncertainty and unpredictability, further hampering the smooth revitalization of an insolvent entity.