The Widening Ambit of Moratorium Under the IBC

[By Gayathri Balasubramanian]

The author is a student at the Christ (Deemed to be) University, Bangalore.

Introduction:

The concept of the moratorium is one of the Insolvency and Bankruptcy Code’s (the Code) most fundamental aspects. It is provided for under section 14 of the Code and is considered as a crucial concept that effectively brings to halt any simultaneous proceedings brought against the corporate debtor during the corporate insolvency resolution process. This is done in order to prevent any further legal and financial hurdles to the distressed corporate debtor and to ensure its survival during the insolvency proceedings. Since the enactment of the Insolvency and Bankruptcy Code in 2016, the courts have expanded the scope of the provision by bringing different types of legal proceedings under the ambit of the provision. Several such notable judgments and the implications on the scope of the provision will be dealt with in this article to analyse whether they have a positive or negative impact on the corporate insolvency resolution process.

Judicial interpretation of the scope of Section 14:

Section 14 can be understood as a vast shield that protects the corporate debtor during the Corporate Insolvency Resolution Process from further legal and financial hurdles. It’s because of this broad ambit of the provision that the Courts have time and again decided on the ambit of the provision to ensure that moratorium does not unduly favour the corporate debtor. In the landmark judgment of P. Mohanraj V. Shah Bros. Ispat (P) Ltd., the court addressed a crucial legal conundrum i.e., whether the declaration of the moratorium would extend to the institution of criminal proceedings against the corporate debtor under section 138 of the Negotiable Instruments Act, 1881. The court began with addressing the issue by laying out the nature of the broad scope of the provision. Given that the terms provided under the provisions are to be interpreted in a broad manner, it was held that the term “proceedings” under section 14 would indeed include a section 138 proceeding under the Negotiable Instruments Act, 1881. It further added that drawing a technical difference between a civil suit and a section 138 proceeding would prove futile since the impact of both on the corporate debtor during the resolution process remain the same. It however pointed out that this protection would not extend to the personal liability of natural persons who are liable under the Negotiable Instruments Act, 1881. Although the judgment would be a step in the right direction, in the event the persons-in-charge or directors of the corporate debtor are directed to deposit money in the form of interim compensation, it would give rise to a new legal conundrum and result in more legal battles.

The court followed the aforementioned ratio in Shah’s case in the case of Anjali Rathi V. Today Homes & Infrastructure Private Limited, where it reiterated that moratorium under section 14 does not extend to promoters of the corporate debtor. This principle of extending the protection to the corporate debtor yet at the same time not absolving the personal liability of natural persons lies at the core of the rule of separate corporate personality, and balances the interests of the corporate debtor as well as the party seeking relief under the Negotiable Instruments Act, 1881. Based on the same principle, the court in Alpha and Omega Diagnostics (India)Ltd. V Asset Reconstruction Company of India held that the personal property of the promoters given as bank security would not fall within the purview of section 14, thus drawing a clear line between the corporate debtor and its promoters. The same was reiterated in the case of Schweitzer Systemtek India Pvt. Ltd v. Phoenix ARC Pvt. Ltd. & Ors., where the applicability of section 14 was not extended to the property of the personal guarantor.

On the contrary, the court gave a different ruling in State Bank of India v. V Ramakrishnan and Veesons Energy Limited, where it held that the moratorium under section 14 would not just apply for the corporate debtor, but also on the personal guarantor. The court based this rule on the reasoning that the personal guarantor being involved in the resolution process and bound by the order of the court, would also be included under the ambit of section 14. This judgment re-created the ambiguity regarding the liability of the personal guarantor. However, on appeal, the Supreme Court set aside the NCLAT order and reiterated the principle of co-extensiveness of the liability of the personal guarantor and the corporate debtor.

These minor inconsistencies are rather inevitable, given the extensively broad scope of section 14; Although, a bare reading and a strict interpretation of the provision would clearly indicate that the moratorium applies only in the context of any proceedings of the corporate debtor and no other body/person. Perhaps, these judicial interpretations were required given that the Code was in its nascent stage and still is, constantly evolving and such judicial reiterations give more clarity to the stakeholders

Moratorium vis-à-vis Writ Jurisdiction and Arbitral Proceedings:

In Canara Bank vs. Deccan Chronicle Holdings Limited, it was laid down that the power of the Hon’ble Supreme Court under Articles 32 and 136 of the Constitution of India, as well as the power of the Hon’ble High Courts under Articles 226 and 227 of the Constitution of India, shall be unaffected by the moratorium. Rightly so, this decision emphasised the supremacy of constitutional provision over the Code. However, it was laid down by the Hon’ble NCLAT that a suit for recovery filed against a corporate debtor before the the High Courts having original jurisdiction would be barred by section 14.

As regards arbitral proceedings, it is fairly settled that arbitral proceedings, including a petition under section 34 of the Arbitration and Conciliation Act, 1996 would be hit by section 14. Even a section 37 petition is barred upon declaration of the moratorium, as was laid down in the case of Alchemist Asset Reconstruction Co. Ltd. V. Hotel Gaudavan P. Ltd.Interestingly, a peculiar question on this matter was raised in the case of Power Grid Corporation of India vs. Jyoti Structures Ltd. The question before the court was whether a petition under section 34 seeking stay upon a money decree ordered in favour of the corporate debtor alongside insolvency proceedings was to be entertained or not. The Delhi High Court adopted the method of purposive interpretation to highlight the core object of moratorium under the Code, which is to prevent any further decadence of the property of the corporate debtor and ensure its financial viability. That being the case, barring a petition where the money decree is awarded in favour of the corporate debtor would be counterproductive and go against the spirit of the Code. The court rightly refrained from imposing a blanket restrain on “all” proceedings upon initiation of insolvency proceedings and took into consideration the potential outcome of the proceedings in question and its effect upon the corporate debtor. However, in the event the section 34 petition in question was to be ruled against the corporate debtor, the Delhi High Court’s reasoning could be questioned since it would defeat the whole purpose of section 14.

Regardless, the principle laid down in this decision was applied in the case of SSMP Industries Ltd. vs. Perkan Food Processors Pvt. Ltd., where the court declined the prayer for a stay on the adjudication of a counterclaim filed by the respondent against the corporate debtor. The court applied the similar rule of purposive interpretation and held that there was no threat to the property of the corporate debtor until the completion of the adjudication of counter claim and thus a ban under section 14 would not serve the purpose.

Conclusion:

The judgments explored in the initial part of this paper give rise to the inference that a strict interpretation of section 14 is required, which essentially widens the scope of the provision by barring any kind of proceedings during the moratorium. However, the judgments mentioned in the latter part suggest an alternative approach, which is to apply the rule of purposive interpretation and precisely decide on a case-to-case basis. The author suggests that either of the approaches could be applied in cases as they deem fit, provided the thumb rule of the moratorium is kept intact i.e., the end result of the proceedings in question ought not to result in creating a liability for the corporate debtor, and the procedure ought not to hinder the assets of the corporate debtor or its financial stability any further. This goes back to the main object and purpose of the Code itself. Therefore, the legal conundrum revolving around the scope of moratorium under section 14, albeit largely resolved, has to be addressed keeping in mind these basic rules in future.

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