Subsequent Effect of Moratorium: Jeopardising the Rights of an Innocent Litigant

Subsequent Effect of Moratorium: Jeopardising the Rights of an Innocent Litigant.

[Vishal Hablani]

The author is a second-year student at West Bengal National University of Juridical Sciences, Kolkata. He may be reached at vishalhablani@nujs.edu.

On 11th December, 2017, the High Court of Delhi held that moratorium under the Insolvency and Bankruptcy Code, 2016 (“Code”) would not be applicable to proceedings beneficial to the concerned corporate debtor. However, in case the decree is passed against the corporate debtor, the enforceability of such decree would be covered by the moratorium commenced earlier under section 14(1)(a) of the Code. The write-up aims to critique the judgement passed in the matter of Power Grid Corporation of India Ltd. v. Jyoti Structures Ltd.

In the said case, a financial creditor filed an application under section 7 of the Code against the respondent company. However, when the application was filed, proceeding under section 34 of the Arbitration and Conciliation Act, 1996 for setting aside the arbitral award passed in favour of the respondent was already pending. The question before the High Court, therefore, was whether the proceeding under section 34 ought to be stayed by virtue of section 14(1)(a) of the Code. The respondent submitted that before suspending the proceedings, the nature thereof must be taken into consideration. If proceedings are in favour of the corporate debtor, granting a stay would defeat its efforts to recover money. Moreover, stay of such a nature would not fall in the embargo of section 14(1)(a).

The Court in the instant case had to decide whether the term “proceedings” used in the said section could be read in such a way so as to include “all legal proceedings”, or it should be read restrictively to cover only a specific type of legal proceeding viz., “debt recovery action” which may diminish debtor’s assets during the insolvency resolution period. It becomes pertinent here to discuss the relevant provision in the Code.

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  1. Moratorium – (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;

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The Court placed reliance on Canara Bank v. Deccan Chronicle Holdings Limited to hold that since the word “proceedings” under the provision is not preceded by the word “all”, the provisions of moratorium would not apply to all the proceedings against the corporate debtor. The object of the Code was interpreted and the view was taken that moratorium is implemented with the objective of protecting the assets of the corporate debtor from dissipation. If the proceedings are suspended, it would extend the non-executability of the award which would add to the woes of the debtor.

The Court opined that section 14 of the Code would be inapplicable to proceedings which are beneficial for the corporate debtor, as the conclusion of these proceedings would not have any impact over the assets during the insolvency resolution process. Reliance was placed on the report of the Bankruptcy Law Reforms Committee, and it was construed that the objective behind the moratorium is to protect the assets of the corporate debtor from additional stress. Interestingly, the judgment provided that if a counter claim is allowed against the corporate debtor, section 14(1)(a) would come into play and the decree then would not be executed against the corporate debtor.

The judgment passed by the Delhi High Court seems to be fallacious, for the Court failed to take into consideration the situation that, if the proceedings are continued and counter claim against the corporate debtor admitted, then, by the effect of this judgement, it would then become impossible for the innocent litigant to enforce the decree against the Corporate Debtor by the subsequent effect of the moratorium. This raises various questions which the Court failed to answer:

  1. Is it possible for the litigant then to enforce the decree subsequently against the firm, or an individual whose resolution plan has been accepted, after the moratorium ceases to have the effect, provided the case was still pending while the claims against the corporate debtor were being invited before the acceptance of such resolution plan?  
  2. What recourse would be available to this litigant, in case the Adjudicating Authority passes an order for liquidation of corporate debtor, provided the case was still pending while the claims against the corporate debtor were being invited before passing of such order? 

The Code provides for completion of resolution proceedings within 180 days, subject to extension for a period of 90 days. However, no statutory time limit has been prescribed for the adjudication of a suit pending before conventional courts. This gives rise to a critical question:

What if the resolution proceedings are completed against the corporate debtor and the suit against him is still pending before the Court? Would the suit be automatically terminated then?

In this scenario, rights of both the parties to the suit would be jeopardised, and the arbitral award would be rendered useless.

There might also be a situation where the court decides the suit in favour of the corporate debtor after the acceptance of resolution plan, or passes an order for liquidation of the corporate debtor. This also gives rise to certain critical questions:

  1. Would the firm or an individual whose resolution plan has been accepted have the locus standi for the enforcement of the arbitral award in question?
  2. If the Adjudicating Authority approves the liquidation of corporate debtor, can the liquidator then enforce the arbitral award against the party which has lost the suit?

The author hopes that the questions presented hereinabove would soon be answered by an appropriate forum so as to fill the vacuum.

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