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Moratorium under IBC: Its effect on parallel proceedings
The moratorium under the Insolvency and Bankruptcy Code, 2016 (IBC) means a period wherein no judicial proceedings for recovery, enforcement of security interest, sale or transfer of assets, or termination of essential contracts can be instituted or continued against the Corporate Debtor. Section 14 of the Insolvency and Bankruptcy Code, 2016 talks about the moratorium and its effect on any proceeding. It has been put on a very high pedestal as it suspends several parallel proceedings which are filed against the company under insolvency proceedings.
Section 14(1)(a) of IBC provides that when an order declaring moratorium is passed, the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgement, decree or order in any court of law, tribunal, the arbitration panel will be prohibited. The moratorium provides the ‘calm period’ which is to ensure that the already economically distressed corporate debtor maximizes realization of the assets and ensures a prolific resolution without being stressed on the disbursal of the assets in parallel proceedings if taken place.
The article would further elaborate on the proceedings suspended during the moratorium period and give an in-depth understanding with the help of case laws and discusses the intersection of laws that involve moratorium and any other dispute.
The Hon’ble Delhi High Court in the matter of Power Grid Corporation of India Limited v. Jyoti Structures Limited, REED 2017 Del 12676, held that for testing the applicability of section 14 of Code one has to see the nature of proceedings and see if such proceedings are against the corporate debtor or are in its favour. In light of the purpose or object behind the moratorium, section 14 of the Code would not apply to the proceedings that benefit the corporate debtor.
The Hon’ble Supreme Court referring to the Report of Insolvency Law Committee of February 2020 iterated the objective of the moratorium which is to “form a scheme which shields the corporate debtor from pecuniary attacks against it in the moratorium period so that the corporate debtor gets breathing space to continue as a going concern to ultimately rehabilitate itself,” i.e the moratorium provides a defence to the corporate debtor by creating a bar on several parallel proceedings and allows the corporate debtor to maximize the value of the company without further encumbrances. Further, the legislative intent behind introducing the provision of the moratorium was to bar termination or suspension of several grants such as licenses, permits, quotas, concessions by the Government authorities as these grants are fundamental to the operation of any company and to realize the maximum value of any company as a going concern.
To have a general understanding of what a moratorium is and its role in insolvency proceedings, we have to further understand those circumstances when the moratorium will not take effect and the effect of the moratorium on parallel proceedings is present. The provision is very clear and is out rightly in favour of the corporate debtors and the issue of whether the moratorium will suspend or stay all the proceedings against the corporate debtor could be understood with help of case laws.
Jurisdiction of Writ Courts
In the earlier act, exemptions were granted to cases pending before High Courts or Supreme Court, but no such exemption has been provided for under the IBC. The issue was discussed in Canara Bank v. Deccan Chronicle Holdings Limited, REED 2017 NCLAT Del 09510. The creditor submitted that the adjudicating authority cannot exclude any court from the purview of the moratorium to recover the amount or execution of any judgment or decree, including the proceeding, if any, pending before the High Courts the Supreme Court of India against a corporate debtor. The NCLAT acknowledged that clause (a) of section 14(1) specifically does not exclude any Court, including the High Courts or even the Apex Court. However, there are certain constitutional provisions which must be considered and there is no provision to file any money suit or suit for recovery before the Supreme Court except under Article 131 of the Constitution; some High Courts have original jurisdiction to entertain the suits, which may include money suit or suit for recovery of money. However, the writ jurisdiction conferred on the Supreme Court and the High Court under Article 32 and Article 226 of the Constitution of India, being a constitutional power, cannot be curtailed by any provision of an Act or court. Therefore, the moratorium will not affect any suit or case pending under Article 32 or 226. However, so far as the suit, if filed before any High Court under original jurisdiction which is a money suit or suit for recovery, against the corporate debtor such suit will be covered by the bar imposed under section 33(5) of the code.
The arbitral proceedings are also hit by section 14(1)(a) which bars the execution of any order, judgment or decree. However, a peculiar question came to be addressed by the Hon’ble Delhi High Court in Power Grid Corporation of India Limited v. Jyoti Structures Limited, REED 2017 Del 12676, while considering a Petition filed by Power Grid Corporation of India under Section 34 of the Arbitration and Conciliation Act, 1996 for staying a money decree awarded in favour of Jyoti Structures Ltd. During the pendency of the section 34 petition, the Corporate Insolvency Resolution Process was initiated against Jyoti Structures by a financial creditor. The Hon’ble Delhi High Court adopted a purposive interpretation to observe that the objective of the IBC was dual – by way of the standstill period in Moratorium, a Corporate Debtor could protect its assets from further dissipation and strengthen its financial position. In such a background, it was held that staying the execution of an arbitral award that would add to the financial corpus of the Corporate Debtor would run counter to the IBC. Hence, it held that ‘proceedings’ as employed in section 14(1)(a) did not encompass ‘all’ proceedings and that section 14 of the IBC would not apply to those proceedings which are to the benefit of the Corporate Debtor.
Although assessment proceedings are considered to be outside the purview of the moratorium, proceedings for recovery of tax would fall within the ambit of the moratorium. This distinction may seem to be unfair, however, in the proceedings under the income tax act, sales tax, excise etc., the proceedings for the determination of the rights and liabilities of the companies and the other persons may have to be determined initially by authorities which have been specially created under the specific statute, and when it comes to recovery of dues, the winding up court should come into the picture. The reason is that the legislature intended that the assets of the company in liquidation should be dealt with in one place by the NCLT who would be in the best position to distribute the funds of the companies equitably. In the case of, Tika Ram and Sons (Private) Ltd. v. Commissioner of Income-Tax, 1964 51 ITR 403 All, where Allahabad High Court made the following observations that “Income-tax proceedings are certainly not such proceedings which the High Court under Section 446 could entertain and make the assessment itself nor could it transfer any such assessment pending before the Income-tax Officer to its own record. For these reasons would hold that assessment proceedings do not fall within the scope of “other legal proceedings” and do not automatically come to a stop the moment the company goes into liquidation. The company in liquidation is still an assessee, and income-tax proceedings up to the stage of assessment do not fall within the scope of the words “other legal proceedings” as used in Section 446 of the Companies Act, 1956.”
The next aspect that could be of question is if initiation of Corporate Insolvency Resolution Process (CIRP) takes place against a subsidiary of a Corporate Debtor under CIRP will that be hit by section 14(1)(a) moratorium or not?
The relevant case to cite here is the Axis Bank Limited v. Alok Infrastructure Limited, REED 2018 NCLT Mum 10544, the contention was that initiation of CIRP against a subsidiary of a holding company that is under CIRP amounts to enforcement action or coercive action as contemplated under section 14(1)(a) of the Code and hence the petition deserves to be rejected. The NCLT held that section 14(1)(a) of the Code speaks about moratorium for prohibiting institution of suits or continuation of pending suits against the Corporate Debtor including the execution of any judgment, etc. It does not speak about the initiation of CIRP against the subsidiary of the Corporate Debtor. Initiation of CIRP against a subsidiary of a Corporate Debtor (under CIRP) will not be hit by Section 14(1)(a) moratorium by any stretch of the imagination. It also held that in the eyes of law a subsidiary company is a distinct entity just like how a holding company is a distinct legal entity. Because of this the contention of the Corporate Debtor herein is far-fetching and cannot be accepted. Further, the present proceeding is completely different and as far as the Corporate Debtor is concerned there is a debt and there is a default. This is what is required to be seen as per law. The decision was later upheld by NCLAT.
Another important aspect to be discussed in this regard is section 138 of the Negotiable Instruments Act, 1881 wherein the directors or officers in default, as the case may be, are generally held personally liable, as against the civil liability of the company. The company and its directors cannot shirk their criminal liability merely on the ground that the company was already wound up and the liquidator had taken charge of the affairs of the company. This brings us to a question on the issue of the applicability of the Moratorium to the proceedings under section 138 of the Negotiable Instruments Act (NI Act). There has been no judicial pronouncement on the issue of whether the moratorium will also cover the proceedings pending against the Corporate Debtor under section 138 of the NI Act. The moratorium will apply to all the proceedings where the primary liability is that of the Corporate Debtor.
In the latest landmark judgment P. Mohanraj and Others v. Shah Brothers Ispat Private Limited, REED 2021 SC 03526, appeal to the Supreme Court, the Apex Court in a three-judge bench ruling, held that where an order of moratorium is passed by the Adjudicating Authority in an insolvency petition, in such cases parallel proceedings under section 138 of the Negotiable Instrument Act, 1881 shall be suspended. The Supreme Court of India emphasized the legislative intent of the moratorium behind such a decision and stated that it is now a settled position that the parallel proceedings under Section 138 of the NI Act shall not be allowed to continue. In an explanation of Chapter XVII of the Negotiable Instruments Act, 1881, the apex court held that it is clear that a quasi-criminal proceeding that is contained in Chapter XVII of the Negotiable Instruments Act would, given the object and context of section 14 of the IBC, amount to a “proceeding” within the meaning of section 14(1)(a), the moratorium, therefore, attaching to such proceeding”. Thus, the Supreme Court deferred from the NCLAT’s reasoning and interpretation of Section 138 of NI Act, 1881 in Shah Brother's judgement and settled the conflicting position on the effect of the moratorium on section 138 of NI Act, 1881 proceedings.
To conclude, it is understood that the intent behind the inclusion of the moratorium under IBC was to allow the corporate debtor to formulate the best suitable resolution plan as the provisions of IBC and to realize the maximum value of the company’s assets as mentioned. On seeing a few case laws, and the reasoning of the courts during the parallel proceedings, it’s understood that there is still some sort of ambiguity present which needs to be addressed as the definition of what moratorium and what proceedings will fall under the ambit of section 14 requires to be looked upon. There is no doubt that the provision is wide and comparatively more supreme but a few issues are still to be examined with time.