MORATORIUM UNDER THE INSOLVENCY AND BANKRUPTCY CODE RP Vats & Yashika Sarvaria VGC Law Firm The Insolvency and Bankruptcy Code (hereinafter I&B Code ) came into effect from 1 st December, 2016. It incorporates all the necessary measures needed to secure the interests of all types of creditors and provide for an effective resolution process. One such measure is the Moratorium period also referred to as calm period. Moratorium period is not defined under the I&B Code. In Words and Phrases, permanent edition, volume 27-A, page 210, the word moratorium has been defined as a term designating suspension of all or of certain legal remedies against debtors, sometimes authorised by law during financial distress. The Supreme Court in Shiv Kumar Tulsian and another v. Union of India and others; (1990) 68 Comp Cas 720, has observed that,...moratorium implies postponement of obligations of the debtor to pay his creditor.... As regards the Corporate Insolvency Resolution Process, the I&B Code provides for a moratorium period of 180 days, once an application is admitted by the Adjudicating Authority for corporates, the National Company Law Tribunal ( NCLT ). During this time, all pending actions against the corporate debtor are stayed and no new action may be initiated against it. The intention behind having a moratorium period can be inferred from the Banking Law Reforms Committee Report. The Banking Law Reforms Committee considered it essential to ensure the suspension of debt collection actions by the creditors, and provide time for the debtors and creditors to renegotiate their contract. This required a moratorium period. The motivation behind the moratorium is that it is value maximising for the entity to continue operations even as its viability is being assessed during the insolvency resolution process. The order for moratorium during the insolvency resolution process imposes a stay not just on debt recovery actions, but also on any claims or expected claims from old lawsuits, or on new lawsuits, for any manner of recovery from the entity. The moratorium is active for the period during which the insolvency resolution process is active. Section 14 of the I&B Code deals with moratorium and reads as under: 14. (l) Subject to provisions of subsections (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 or any judgement, decree or order in any court of law, tribunal, arbitration panel or other authority; (b) transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein; (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 lnterest Act,2002 (54 of 2002); (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... Therefore, during the insolvency resolution process, the Code takes precedence over debt recovery laws and security enforcement actions under Securitisation and Reconstruction of Financial Assets and Enforcement of Secured Interests Act, 2002 (hereinafter SARFAESI ). As such no new SARFAESI actions may be commenced and any existing ones would have to be suspended during the moratorium period. Although the intention behind having a moratorium is to provide for a calm period to the debtor and the creditors, it is also in effect a stringent measure in so far as it restrains the creditors from proceeding under the other laws to recover their dues. It was noted by the NCLT, Mumbai Bench in M/s Schweitzer Systemtek India Pvt. Ltd. v. Phoenix ARC Pvt. Ltd. (TCP No. 1059/I&BP/NCLT/MB/MAH/2017) that there are cases when moratorium is used by debtors to thwart or frustrate recovery proceedings initiated by lenders. As the Code is at an infancy stage, the scope and extent, the effect and impact of the moratorium on the rights of creditors has not yet been fully tested or seen and is yet to be analysed by the Courts. However, there have been a few instances wherein the courts have interpreted the scope and extent of moratorium. Some of the propositions on moratorium are discussed below: A. Whether Moratorium covers all the properties of the Corporate Debtor? In M/s Schweitzer Systemtek India Pvt. Ltd. v. Phoenix ARC Pvt. Ltd., (TCP No. 1059/I&BP/NCLT/MB/MAH/2017) the NCLT, Mumbai Bench (decided on July 3, 2017), while admitting the case under Section 10 of the Code observed that personal assets of the promoters which were pledged with the borrower and were not part of the corporate debt are outside the ambit of a moratorium. The NCLT held as under:
...The property not owned by the Corporate Debtor do not fall within the ambits of the moratorium. Even Section 10 is confined to the Books of the Accounts of the Corporate Debtor due to the reason that Section 10(3) has specified that the Corporate Applicant shall furnish its Books of Accounts......The outcome of this discussion is that the Moratorium shall prohibit the action against the properties reflected in the Balance Sheet of the Corporate Debtor. The moratorium has no application on the properties beyond the ownership of the Corporate Debtor......The SARFAESI Act may come within the ambits of Moratorium if an action is to foreclose or to recover or to create any interest in respect of the property belonged to or owed by the Corporate Debtor, otherwise not... This Order of NCLT was challenged in appeal before the NCLAT (Company Appeal (AT) (Insolvency) No. 129 of 2017) and was held to be in accordance with law and valid. A similar question was posed before the NCLAT in Alpha & Omega Diagnostics (India) Ltd. v Asset Reconstruction Company of India Ltd. & Ors., Company Appeal (AT) (Insol.) No. 116 of 2017, wherein the NCLAT held as under: we are not inclined to accept such submissions as Appellant-Corporate Applicant has sought for "its" own insolvency resolution process that will include only the assets of the Corporate Debtor and not any assets, movable or immovable of a third party, like any director or other. In so far as 'guarantor' is concerned, we are not expressing any opinion, as they come within the meaning of 'Corporate Debtor individually', as distinct from principal debtor who has taken a loan... These decisions have sought to protect creditors from unscrupulous borrowers who file frivolous applications to avoid debt repayment and misuse the moratorium period to keep their personal properties outside the ambit of the recovery proceedings. B. Whether Moratorium is also applicable to the Guarantors? The issue whether action can be taken against guarantors during moratorium period was considered by the High Court of Allahabad in Sanjeev Shriya v. State Bank of India; C. No. 30285 of 2017. The Court in its order dated 6 th September, 2017 held that a moratorium issued under Section 14 of the Code stays all the proceedings initiated against personal guarantors. This finding was based on the premise that the liability of the Company only crystallizes once the NCLT approves the resolution plan under Section 31(1) of the Code or passes an order for liquidation of the Corporate Debtor under Section 33 of the Code. The Court held that until the liability of the company is crystallised, the guarantors cannot be held liable and as such the recovery proceedings against the guarantors before the DRT should be stayed, as it cannot allow the creditor
to pursue two remedies on the same cause of action. A perusal of the above decisions indicates that there are conflicting views making the position unclear as of now. While decisions in Schweitzer and Alpha put the personal properties of the Corporate Debtor outside the purview of moratorium; the decision in Sanjeev Shriya on the other hand imposes a moratorium in relation to enforcement of personal guarantees given by the guarantors. The position is therefore yet to be definite and clear. C. Whether sale initiated under SARFAESI is hit by moratorium under the Code? In Company Petition No. 1043 I&BP NCLT MB/MAHI2OI7, the NCLT Mumbai had dismissed an application seeking to effectuate the sale of immovable property of a company facing moratorium under the Code. Since only 25% of the price had been paid, the sale was not held to be confirmed and the NCLT dismissed the application. The Bench held that: It is true it is an established legal proposition that normally once sale is confirmed and made absolute then issuing of sale certificate has been connoted as administrative in nature. But as long as full payment has not been made and the same has not been confirmed by the secured creditor, it can t be considered that the sale is complete. As long as sale is not complete, and made absolute, no interest can be construed as transferred to the purchaser as is the case herein. D. Whether Moratorium is applicable to all the Courts? Section 14 (a) of the Code prohibits 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, during the moratorium period. The NCLAT in Canara Bank v. Deccan Chronicle Holdings Limited; Company Appeal (AT) (Insolvency) No. 147 of 2017, decided on 14.9.2017, excluded the applicability of moratorium to proceedings before the Supreme Court and High Court under Articles 32 and 226 of the Constitution respectively. The NCLAT in its order held as under:...we make it clear that moratorium will not affect any suit or case pending before the Hon ble Supreme Court under Article 32 of the Constitution of India or where an order is passed under Article 136 of Constitution of India. Moratorium will also not affect the power of the High Court under Article 226 of Constitution of India... However, so far as 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 cannot proceed after
declaration of moratorium, under Section 14 of the I&B Code. E. What is the position on moratorium in relation to arbitration proceedings? In Alchemist Asset Reconstruction Company Limited v. M/s Hotel Gaudavan Private Limited; (Civil Appeal No. 16929 of 2017), while the moratorium was in force, the arbitration clause was invoked by one of the parties. The Supreme Court in its order dated 23 rd October, 2017 held that: The effect of Section 14(1)(a) is that the arbitration that has been instituted after the aforesaid moratorium is non est in law. COMMENTS In order to have an effective resolution, it is most essential to have a moratorium or calm period, so that a feasible resolution plan can be reached. However, as the I&B Code is a young legislation, the scope and extent of moratorium is not yet definite and clear. It is thus inevitable that there are certain debtors who would misuse the moratorium period to avoid debt repayment. It is only with the passing of time and with judicial pronouncements and proactive actions on the part of the Insolvency and Bankruptcy Board of India (IBBI) that misuse of moratorium period by certain debtors would be countered.