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Moratorium under Insolvency and Bankruptcy Code, 2016

Writer – Mayank Gupta-1  Moratorium as per the Oxford dictionary means “A Legal authorization to debtors to postpone payment”.  1875, originally a legal term for ‘authorization to a debtor to postpone payment’, from neuter of Late Latin moratorius ‘tending to delay’, from Latin morari ‘to delay’, from mora ‘pause, delay’. General sense of ‘a postponement, deliberate temporary suspension’ is first recorded in 19322.  “moratorium implies postponement of the obligation of the debtor to pay his creditor”3 Section 14 of Insolvency and Bankruptcy Code provides for Moratorium from insolvency commencement date on inter alia. Although Moratorium is not defined under IBC, for which ILR report have duly suggested to add eloquent definition to avoid future ambiguity.4

As per IBC, a petition for Insolvency against the Corporate Debtor can be triggered by Financial Creditor, Operational Creditor, or by Corporate Debtor itself in cases where the default amount is more than Rs. 1 lakh. Once a petition under the IBC is admitted against the Corporate Debtor, a moratorium under Section 14 of IBC follows in favor of Corporate Debtor. The moratorium under IBC kicks in on the Insolvency Commencement date and is in force till the Corporate Insolvency Resolution Process (‘CIRP’) period and during such period no judicial proceedings for recovery, enforcement of security interest, sale or transfer of assets, or termination of essential contracts can take place against the Corporate Debtor. Section 14 of IBC read as follows: – 14. (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; (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 Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; (d) the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor. The language of Section 14 is clear and the moratorium in favor of the Corporate Debtor is also absolute.

1- 3rd-year LL.B(Hons.) Student at City Academy Law College, Lucknow 2- https//www.etymoline.com/word/moratorium 3- Shiv Kumar Tulsian and another v. Union of India and others;(1990) 68 Comp Cas 720 4 -Report of the insolvency law committee, [March 2018]. Page 92: To insert an explanation to section 14(1) to clarify that the moratorium shall not be applicable to a surety in a contract of guarantee to a corporate debtor.

Objective of Moramortium The notes on clauses for section 14, read as follows: “the purposes of the moratorium include keeping the corporate debtor’s assets together during the insolvency resolution process and facilitating orderly completion of the processes envisaged during the insolvency resolution process and ensuring that the company may continue as a going concern while the creditors take a view on the resolution of default” and “the moratorium on initiation and continuation of legal proceedings, including debt enforcement action ensures a stand-still period during which creditors cannot resort to individual enforcement action which may frustrate the object of the corporate insolvency resolution process.” The intent of the legislature behind such moratorium which is to grant a calm period for insolvency resolution where a Debtor can negotiate in the assessment of viability without any fear of recovery enforcement mechanisms adopted by the Creditors5. Scope of Moratorium Constitutional powers immune of Moratorium 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 the Constitution of India… However, so far as a 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 the declaration of ‘moratorium’, under Section 14 of the I&B Code.”  Section 14(1)(a) does not exclude any Court, including the Hon’ble High Courts or Hon’ble Supreme Court of India.  There is no provision to file any money suit or suit for recovery before the Hon’ble Supreme Court except under Article 131 of the Constitution of India where a dispute between Government of India and one or more States or between the Government of India and any State or States on one side and one or two or more States is filed. Some High Courts have original jurisdiction to entertain the suits, which may include a money suit or suit for recovery of money.  The Hon’ble Supreme Court has the power under Article 32 of the Constitution of India and Hon’ble High Court under Article 226 of the Constitution of India which cannot be curtailed by any provision of an Act or a Court.

5-Kunal Godhwani, Moratorium Under Insolvency And Bankruptcy Code, 2016 Impact On Pending Proceeding, 8 November 2017, www.mondaq.com/india/x/644310/insolvency+Bankruptcy/Moratorium+Under+Insolvency+And+Bankruptcy+Co

Article 226 In Whirlpool Corporation vs. Registrar of Trade Marks, Mumbai & ors6 Hon’ble Supreme Court has observed that the power to issue prerogative writs under Article 226 of the Constitution of India is plenary in nature and is not limited by any other provision of the Constitution of India. Under Article 226 of the Constitution of India, the High Court, having regard to the facts of the case, has the discretion to entertain or not to entertain a writ petition. But the High Court has imposed upon itself certain restrictions, one of which is that if an effective and efficacious remedy is available, the High Court would not normally exercise its jurisdiction.

Applicability of Moratorium to personal guarantors A contract of guarantee is defined under Section 126 of the Indian Contract Act, 1872, as a contract to perform the promise or discharge the liability of a third person in case of his default. The person who gives the guarantee is called the ‘surety’; the person in respect of whose default the guarantee is given is called the ‘principal debtor’, and the person to whom the guarantee is given is called the ‘creditor’. Section 128 of the Indian Contract Act, 1872 provides that the liability of the surety is co-extensive with that of the principal debtor unless provided otherwise by the contract. Thus, it has been established beyond doubt that the creditor has the discretion to proceed against either the principal debtor or the guarantor as he deems fit. In the case of Sanjeev Shriya v. State Bank of India7, The directors of the company (corporate debtor) were guarantors against the loan taken by the company from the State Bank of India. After the declaration of the company as ‘sick’ by the Board for Industrial & Financial Reconstruction, SBI approached the Debt Recovery Tribunal (‘DRT’) for the recovery of the due amount. Following this, the company approached the National Company Law Tribunal (‘NCLT’) under section 10 of the Code for the initiation of the corporate insolvency resolution process. The NCLT admitted its application and declared moratorium against the Company. Consequently, the directors approached the DRT for the stay of recovery proceedings. This order was, therefore, challenged by the petitioners in the High Court on the ground of a lack of jurisdiction of the DRT. The honorable Allahabad Court after hearing the contentions of both sides ruled out that the DRT by its order granted a stay on proceedings against the corporate debtor but not against the guarantors (petitioners). The honorable Allahabad Court found the entire petition before DRT to be completely without jurisdiction, (…..once the proceeding has already been commenced under IBC, 2016 and Moratorium under Section 14 of IBC, 2016 has already been issued and even in the said proceeding the parties have put their appearance before the insolvency professionals, then the impugned proceeding against the guarantors of principal debtor is per se bad.) In-State Bank of India v. V. Ramakrishnan and Veeson Energy System8, the NCLAT took a broad interpretation of section 14 and held that it would bar proceedings or actions against sureties. It held that proceedings against guarantors would affect the CIRP and may thus be barred by the moratorium. Such a

6-(1998) 8 SCC 1 7-Sanjeev Shriya v. State Bank of India (1998) 8 SCC 1, 8- NCLAT, New Delhi, Company Appeal (AT) (Insolvency) No. 213/2017, Date of decision – 28 February, 2018.

broad interpretation of the moratorium may curtail significant rights of the creditor which are intrinsic to a contract of guarantee.9 In the Northway Spaces & Anr. v. Sicom Spaces and Anr.10 Held that the moratorium order passed under Section 14(1) of the Code applies only to the security interest created by the Corporate Debtor in respect of its properties but not to the properties of the guarantors. In the case of Schweitzer Systemtek India Pvt. Ltd. Vs. Phoenix ARC Pvt. Ltd. & Ors. 11 the court had an in-depth examination of Section 14(1)(c) of the code and concluded that, ‘its’ denotes the property owned by the corporate debtor. The property not owned by the Corporate Debtor does not fall within the ambit of the Moratorium. The outcome of this discussion is that the Moratorium shall prohibit the action against the properties reflects in the Balance Sheet of the Corporate Debtor. The Moratorium has no application on the properties beyond the ownership of the Corporate Debtor. Conclusion The Code as it is relatively new in the corporate sector needs further consideration to render a purposive and concrete interpretation of the debated provisions, including relating to Section 14 of the Code. The language of Section 14 of IBC is wide and the intention of the legislature is also to provide a complete ‘calm period’. There has been a difference of legal opinion by the authorities on the issue of personal guarantor but if the property of the guarantor is excluded from the scope of moratorium, then it could potentially affect the financial position of the corporate debtor once the creditor satisfies its debts out of the property of the guarantor, contrary as pointed out by the NCLAT tribunal ‘moratorium indeed is an effective tool, sometimes being used by the Corporate Debtor to thwart or frustrate the Recovery Proceedings’12. In order to avoid this uncertainty, a golden mean is still need to be established, preferably by the apex court.

9 -Report of the insolvency law committee, [March 2018]. Para 5.8 10- C.P (I.B) No. 28/14 & 20/NCLT/AHM/20 11-Schweitzer Systemtek India Pvt. Ltd. Vs. Phoenix ARC Pvt. Ltd. & Ors. NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI Company Appeal (AT) (Insolvency) No. 129 of 2017 12- https://www.livelaw.in/promoters-cannot-escape-liquidation-personal-assets-given-security-filing-bankruptcy-code-nclt-read-order/

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