[By Aditya Vaid & Anvita Sharma]
The authors are students of Jindal Global Law School.
Introduction
In a significant ruling in the case of Ansal Crown Heights Flat Buyers Association (Regd.) v. Ansal Crown Infrabuild Private Limited and Others (“the case”), the Supreme Court of India recently delineated that the implementation of a moratorium as stipulated in Section 14 of the Insolvency and Bankruptcy Code (“IBC”) does not hinder the enforcement of a decree against directors or officers of entitles undergoing Corporate Insolvency Resolution Process (“CIRP”) under the IBC.
A complaint was filed by the Homebuyers Association (“Appellant Association”) against the developers of the project, Ansal Crown Infrabuild Pvt Ltd. (“Developer Company”) before the National Consumer Disputes Redressal Commission (“NCDRC’). Subsequently, a petition under Section 9 of the IBC was filed before the National Company Law Tribunal (“NCLT”) seeking the initiation of CIRP against the Developer Company. Thereby, the NCLT commenced CIRP proceedings against the Developer Company and implemented a moratorium as per section 14 of the IBC. Thereafter, the Appellant Association filed an executive application before the NCDRC seeking the implementation of an order against the CD, i.e., the Developer Company and the Directors and Officers of the Company. The NCDRC refused to execute the said order due to the moratorium enforced under section 14 of the IBC. This order of the NCDRC was challenged before the SC, to which the Apex Court opined that the moratorium under the IBC is only available to the CD and not to the promoters, directors or other officers of the company.
Through this post, the author contends that the moratorium as outlined in section 14 of the IBC which prohibits the initiation of new proceedings or the continuation of existing ones, only applies to the Corporate Debtor (“CD”) and does not offer protection to the promoters of a financially distressed company. The author contends that the provision outlined in section 14, which constitutes the essence of IBC, should be interpreted expansively to ensure that the intended purpose and objective of the provision, as well as the code as a whole, are fully realized.
Legal Evolution: Analysing Past Precedents
In Anjali Rathi and others vs Today Homes and Infrastructure Pvt. Ltd and Ors, the agreement entered into by the parties was not duly complied with by the developer company. Consequently, the creditors raised a claim against the promoters and directors which was allowed by the SC as the moratorium imposed by the NCLT did not extend to the promoters and directors and was only limited to the CD. Through this judgment, the SC clarified that a party through a separate petition may choose to move against the promoters/directors or other officers of the CD, even though a moratorium was imposed under section 14 of the IBC. The Apex Court placed reliance on a judgement passed by a three-judge Bench of the SC in the case of P. Mohanraj V. Shah Bros. Ispat (P) Ltd. Through the aforementioned ruling, the SC laid down the precedent regarding legal actions under sections 138 and 139 of the Negotiable Instruments Act, 1881. The same delineated that such actions would be covered under the ambit of the moratorium provision outlined in section 14 of the IBC. However, the ruling emphasized that the moratorium applied solely to the CD and not to its management, Therefore, any ongoing proceedings against the management could proceed, and new proceedings could be initiated against them.
The decision of the SC in the present case allows the creditors of the CD to initiate proceedings against the management of the company, thus going against the underlying objective of section 14(1) of the IBC. The authors suggest that exempting key managerial roles such as promoters and directors from the moratorium not only endangers the creditors’ interests but also compromises the operations of the CD’s company. The primary reason behind the same is that promoters or directors of a company handle all major decisions relating to the functioning of a company, and further litigation rounds could result in the loss of assets or properties, essentially rendering the objective of CIRP futile and making the moratorium under section 14 irrelevant.
Analysing the Provisions under the IBC
The provisions under section 13 (1) (a) of the IBC enable the Adjudicating Authority (‘AA’) to enact and enforce a moratorium on the CD. The moratorium period would be effective from the date of admission until the completition of the CIRP. Section 14(1) of the IBC prohibits the imposition of a moratorium on specific actions, including the recovery of property by an owner or lessor, as long as the CD possesses the said property. The primary objective of these provisions is to prevent Directors of a corporate entity from withdrawing or accessing available funds. Furthermore, the IBC safeguards the assets and properties of the CD and guarantees the prompt conclusion of insolvency resolution proceedings by preserving the continuity of the corporate entity.
At first, it may seem like the legislature’s main goal was to restrict the extent of the moratorium delineated in section 14(1) of the IBC, which would be advantageous to the CD, its assets, and creditors. The underlying objective of section 14, which imposes a moratorium on the CD, is primarily to prevent the depletion of the CD’s assets during the CIRP. Simultaneously, it aims to keep the company operational as a going concern throughout the CIRP as doing so optimises the value for all stakeholders involved.
However, the continuation of this approach may have some gross defects that might work to the detriment of the interests of the CD. First, the underlying purpose of CIRP is to help the CD recover from financial difficulties and subsequently resume normal proceedings. Further proceedings against the CD may exacerbate their financial situation due to increased litigation expenses. Second, if the courts are faced with the conundrum of whether a proceeding benefits or harms the CD, then it may result in the judiciary making a decision based on a preliminary understanding of the case, which could ultimately prove to be detrimental to the involved parties.
Recommendations and Conclusions
The ruling of the SC in the present case aligns with the above-mentioned judgment. The author suggests that the present ruling of the SC requires reconsideration as failing to offer protection to the promoters and directors of the CD renders the objective of CIRP and moratorium moot.
The interpretation adopted by the SC is unquestionably in parallel with the goal of protection of the CD outlined in the IBC. However, the decision of SC may be counter-productive as it may lead to further grounds for litigation against the CD which may consequently result in the deglutition of assets holding the creditor’s interests. The author suggests that factors such as timely adjudication of the proceedings ought to be given due consideration to not diminish or harm the assets or properties of the CD. A hands-on or balanced approach that adheres to judicial standards and rules would go a long way in shielding the CD and the related parties.