Declaration of moratorium [ Section 14 ] - Insolvency Resolution And Liquidation For Corporate Persons - IBC

Declaration of moratorium Declaration of Moratorium [ Section 13(1)(a) ] The Adjudicating Authority, after admission of the application under section 7 or section 9 or section 10 , shall, by an order- (a) declare a moratorium for the purposes referred to in section 14 ; Moratorium [ Section 14 ] M o r a t o rium is a delay or suspension of an activity. In a legal context, it may refer to the temporary suspension of a law to allow a legal challenge to be carried out. Af t e r the commencement of corporate insolvency resolution process a calm period, known as moratorium period is declared, during which all suits and legal proceedings etc. against the Corporate Debtor are held in abeyance to allow the resolution professional to carry out his/her task smoothly and disallowing creditors and other stakeholders to take any individual actions against the corporate debtor and disrupt the process. Declaration of Moratorium Periods [ Section 14(1) ] Subject to provisions of sections 14(2) and section 14(3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely:- As per section 14(1)(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; Relevant Case Laws In Alchemist Asset Reconstruction Company Limited Vs. Hotel Gaudavan Private Limited - SC, Dated 20.10.2017 the Supreme Court affirmed that once a moratorium is imposed under the IBC, any proceeding initiated against the CD is non-est (does not exist) in law. In Canara Bank Vs. Deccan Chronicle Holdings Limited - Company Appeal (AT) (Insolvency), Dated 14.09.2017 the NCLAT held that the moratorium will not affect any proceedings initiated or pending before the Supreme Court under Article 32 of the Constitution of India or where an order is passed under Article 136. Further, it will not affect the powers of any High Court under Article 226 of the Constitution. In the Power Grid Corporation of India Limited Vs. Jyoti Structures Limited [246 (2018) DLT 485], the Delhi High Court held that the object of the IBC is to ensure that the CD receives relief during the standstill period, protecting its assets from being diminished, and alternatively using this period to strengthen its financial position. It also held that the term proceedings referred to in section 14 of the IBC does not mean all proceedings , but is restricted to debt recovery actions against the assets of the CD. It was also held that the use of the term against the CD in section 14(1)(a) of the IBC in comparison with by or against the CD used in section 33(5) demonstrates that the former has a more restrictive meaning and applicability than the latter. In SSMP Industries Ltd Vs. Perkan Food Processors Pvt. Ltd - HC, Dated 18.07.2019 the Delhi High Court delved into the issue of whether a counter claim raised against the CD in a suit filed by the CD would also be barred. The court held that under section 14(1)(a), strictly speaking, a counter claim would be covered by moratorium. However, the counter claim raised in the present case against the CD was considered integral to the recovery sought by the CD and was related to the same transaction. The Court observed that a blinkered approach cannot be followed and the Court cannot blindly stay the counter claim and refer the defendant to the NCLT/RP for filing its claims. The Court further observed that the NCLT/ RP cannot be burdened with the task of entertaining claims of the defendant which are undetermined. It held that the plaintiff s and the defendant s claim ought to be adjudicated comprehensively by the same forum. Once the counter claims are adjudicated and the amount to be paid/recovered is determined, at that stage, or in execution proceedings, depending upon the situation prevalent, section 14 could be triggered. In Mr. Ajay Kumar Bishnoi Vs. M/s Tap Engineering and Other MADRAS HC, Dated 09.01.2020 the CD underwent insolvency resolution while a complaint was pending under section 138 of the Negotiable Instruments Act, 1881. Further, during this time, a resolution plan for the CD was approved with a change in management and control. The MD of the erstwhile CD sought to quash the prosecution under section 138 in view of the approval of the resolution plan. The High Court confirmed that the moratorium under section 14 of the IBC prohibits proceedings, but such proceedings do not include prosecution. In the matter of Varrsana Ispat Limited Vs. Deputy Director, Directorate of Enforcement -NCLAT, Dated 02.05.2019 The RP had sought de-attachment of properties attached with the Directorate of Enforcement under the Prevention of Money Laundering Act, 2002, a considerable time prior to the initiation of CIRP. The NCLAT had held that section 14 of the IBC is not applicable to the criminal proceeding or any penal action taken pursuant to the criminal proceeding or any act having the essence of crime or crime proceedings. The Supreme Court also upheld the order passed by the NCLAT [ Varrsana Ispat Limited Vs. Deputy Director, Directorate of Enforcemen t, Civil Appeal No. 5546 of 2019]. While the bar under IBC is automatic, practically the IRPs/RPs may need to file an application before various forums where proceedings against the CD is continuing, bringing to their attention the commencement of CIRP and the moratorium declared by the AA under section 14 of the IBC, and requesting the relevant forums to pass an order staying proceedings. As per Section 14(1)(b) transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein; This is a bar against CD, however, the IRP/RP, while managing the CD as a going concern can sell the assets of the CD in the ordinary course of business or in accordance with regulation 29 of the CIRP Regulations (if not in the ordinary course). As per Section 14(1)(c) any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ; Relevant Case Law In Anand Rao Korada Vs. M/s Varsha Fabrics (P) Limited and Others - SC, Dated 18.11.2019 the RP filed an appeal before the Supreme Court challenging the order of the High Court for auction of assets on the ground that since CIRP had already commenced, the proceedings before the High Court ought to be stayed. The Supreme Court observed that in view of the provisions of the IBC, the High Court ought not to have proceeded with the auction of the property of the CD. It was further noted that if the assets of the Respondent No.4 Company are alienated during the pendency of the proceedings under the IBC, it will seriously jeopardize the interest of all stakeholders. Amira Pure Foods Pvt. Ltd. Vs. Canara Bank Ors. - HC , Dated. 20.05.2019 The Debts Recovery Appellate Tribunal should have recalled its order so that the IRP/RP could take over the assets of the CD in exercise of its mandate under the Code, during the period of moratorium. As per Section14(1)(d) the recovery of any property by an owner or less or where such property is occupied by or in the possession of the corporate debtor. Relevant case laws Rajendra K. Bhutta Vs. Maharashtra Housing and Area Development Authority and Another - SC Dated 19-02-2020+ ​​​Issue - Whether Section 14(1)(d) of the Code is applicable on the property occupied under a Joint Development Agreement. The Hon'ble Supreme Court answered the issue raised in the case in affirmative in favour of the corporate debtor and held that It is clear that Section 14(1)(d) of the Insolvency Bankruptcy Code, when it speaks about recovery of property occupied , does not refer to rights or interests created in property but only actual physical occupation of the property. Explanation .- notwithstanding anything contained in any other law for the time being in force, a license, permit, registration, quota, concession, clearances or a similar grant or right given by the Central Government, State Government, local authority, sectoral regulator or any other authority constituted under any other law for the time being in force, shall not be suspended or terminated on the grounds of insolvency, subject to the condition that there is no default in payment of current dues arising for the use or continuation of the license, permit, registration, quota, concession, clearances or a similar grant or right during the moratorium period; Supply of essential goods or services [ Section 14(2) ] The supply of essential goods or services to the corporate debtor as may be specified shall not be terminated or suspended or interrupted during moratorium period. The term Essential Goods is defined in regulation 32 of the CIRP Regulations as electricity, water, telecommunications services, and information technology services, to the extent that these are not a direct input to the output produced or supplied by the CD. An example has been given of a case where water supplied to a CD will be regarded as essential supplies for drinking and sanitation purposes, but not for the generation of hydro-electricity (because the latter would be a direct input to the CD s output). The status of Corporate Debtor to be maintained as Going Concern [ Section 14(2A) ] Where the interim resolution professional or resolution professional, as the case may be, considers the supply of goods or services critical to protect and preserve the value of the corporate debtor and manage the operations of such corporate debtor as a going concern, then the supply of such goods or services shall not be terminated, suspended or interrupted during the period of moratorium, except where such corporate debtor has not paid dues arising from such supply during the moratorium period or in such circumstances as may be specified. Relevant Case Laws In Dakshin Gujarat VIJ Company Ltd. Vs. M/s. ABG Shipyard Ltd. and Another - NCLAT, Dated 08.02.2018 the question that came before the NCLAT was whether the moratorium under section 14 of the IBC will cover the current charges payable by the CD for supply of such services as water and electricity. The NCLAT held that: There is no prohibition or bar imposed on the payment of current charges for essential services. Such payment is not covered by the order of the moratorium The law does not stipulate that essential goods, including water and electricity, should be supplied free of charge until the moratorium is ended. The amount paid for these services by the RP shall be part of the CIRP cost. The RP was directed to pay current charges for the supply of electricity during the moratorium. In Shyam Pradhan Another Vs. Ananda Chandra Swain [Company Appeal (AT) (Insolvency) No. 15 of 2020], the insurance company through its agent sought to terminate the insurance policy insuring the CD, on account of the CD entering CIRP. The AA, while protecting the insurance cover of the CD, held that the policy could not be terminated since it is essential for the very existence of the CD. The NCLAT, in the appeal, also upheld the view of the AA as during the CIRP, the CD is to continue as a going concern, and directed the appellant to continue with the insurance policy. The NCLAT also directed the IRP to pay the insurer any amount owing as an installment during the CIRP. In Gujarat Urja Vikas Nigam Ltd. Vs. Amit Gupta - NCLAT, Dated 15.10.2019 the NCLAT upheld the order of the AA, setting aside the termination of the Power Purchase Agreement of the CD by the authority on the sole ground of initiation of CIRP of the CD. The AA held that in light of section 238 of the IBC, any terms of the PPA in direct contravention of the IBC could not be enforced. The NCLAT upheld the decision of the AA while acknowledging that the subsistence of the agreement was imperative to ensure that the CD was kept as a going concern. Prohibited Act [ Section 14(3) ] The provisions of section 14(1) shall not apply to - (a) such transactions, agreements or other arrangements as may be notified by the Central Government in consultation with any financial sector regulator or any other authority; As per notification No. S.O. 2660 (E) - Dated: 14-6-2023 - IBC the corporate debtor has entered into any of the following transactions, arrangements or agreements, namely: - (i) the Production Sharing Contracts, Revenue Sharing Contracts, Exploration Licenses and Mining Leases made under the Oilfields (Regulation and Development) Act, 1948 and rules made thereunder; and (ii) any transactions, arrangements or agreements, including Joint Operating Agreement, connected or ancillary to the transactions, arrangements or agreements referred to in clause (i). As per notification No. S.O. 4321(E) Dated 03.10.2023-IBC to transactions, arrangements or agreements, under the Convention and the Protocol, relating to aircraft, aircraft engines, airframes and helicopters. (b) a surety in a contract of guarantee to a corporate debtor. Relevant Cased Laws In State Bank of India Vs. Ramkrishnan - SC, Dated 14.08.2018 T he SC held that section 14 did not apply to the personal guarantor of the CD but only to the CD. The court held that in a contract of guarantee, the liability of surety and that of principal debtor is coextensive and hence, the creditor can proceed against assets of either the principal debtor or the surety, or both, in no particular order. The court also took into consideration the Insolvency and Bankruptcy (Amendment) Ordinance, 2018 which amended the provision of section 14 and held the same to be retrospective (clarificatory in nature). Bharat Aluminium Co. Ltd. Vs. M/S J.P. Engineers Pvt. Ltd., Andhra Bank (Now Merged With Union Bank) - NCLAT 26-02-2021 Issue - Whether bank guarantee can be invoked during moratorium period? The Appellate Tribunal held that the AA has failed to consider the amended provision under section 14(3)(b) of the Code which clarifies that the moratorium does not apply to sureties in guarantee contracts and hence, the bank guarantee in question can be invocated/encashed even during the moratorium period under section 14 of the IBC against the Corporate Debtor. Effect of the order of Moratorium [ Section 14(4) ] The order of moratorium shall have effect from the date of such order till the completion of the corporate insolvency resolution process. No t e s : T h e provision of section 14(1) of the Code is not applicable on a surety in a contract of guarantee to a corporate debtor. Thus, recovery proceedings, insolvency resolution process or bankruptcy proceedings against surety (guarantor) can be initiated even if moratorium is granted to corporate debtor. I t is clarified that notwithstanding anything contained in any other law for the time being in force, a licence, permit, registration, quota, concession, clearance or a similar grant or right given by the Central Government, State Government, local authority, sectoral regulator or any other authority constituted under any other law for the time being in force, shall not be suspended or terminated on the grounds of insolvency, subject to the condition that there is no default in payment of current dues arising for the use or continuation of the license or a similar grant or right during moratorium period. When Moratorium period shall cease to have effect [ Proviso of Section 14(4) ] Provided that where at any time during the corporate insolvency resolution process period, if the Adjudicating Authority approves the resolution plan u/s 31(1) or passes an order for liquidation of corporate debtor under section 33, the moratorium shall cease to have effect from the date of such approval or liquidation order, as the case may be. E x a mp l e : A f t e r commencement of Corporate Insolvency Resolution, NCLT declared Moratorium against the corporate debtor. Within a month of declaration, corporate debtor disposed of his property. In the given instance, as per section 14 of the Code, any transaction/disposal/ of any assets of Corporate Debtor during the moratorium period which is 180 days from date of commencement of corporate insolvency resolution, is prohibited. So here the act of disposal of the corporate debtor, is not valid. Ho w e v e r , as per Regulation 29 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, the Resolution Professional may sell unencumbered asset(s) of the corporate debtor, other than in the ordinary course of business, not exceeding 10% of the total claims admitted.