India: Moratorium Under Insolvency And Bankruptcy Code, 2016 - Impact On Pending Proceeding

Last Updated: 8 November 2017
Article by Kunal Godhwani

Moratorium as per the Oxford dictionary means "A Legal authorization to debtors to postpone payment".

The moratorium in terms of 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.  This raises an interesting question on the issue of the applicability of the Moratorium to the proceedings under Section 138 of the Negotiable Instruments Act, 1891 (NI Act).

The IBC which received the presidential assent on 28.05.2016 is enacted by the parliament with an objective to consolidate and amend the laws relating to reorganization and insolvency resolution of Corporate Persons, Partnership Firms and Individuals. 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.

The language of Section 14 is clear and the moratorium in favor of the Corporate Debtor is also absolute. The issue whether the moratorium will suspend or stay all the proceedings against the Corporate Debtor has already reached court doors. However, before coming to the interpretation adopted by the tribunals, it is necessary to understand 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 Creditors.

SCOPE AND AMBIT OF THE MORATORIUM AS INTERPRETED BY THE NCLT AND NCLAT

The interpretation, scope and extent of moratorium are debatable issues. However, the tribunals have had the occasion to deal with such issue and one such occasion arose in the matter of Schweitzer Systemetek1, wherein NCLT, Mumbai has held that moratorium will not be applicable to the Guarantors and Section 14 is clear that the moratorium will only cover the properties of Corporate Debtor as the Guarantors are not covered in terms of Section 14 of IBC and the aforesaid view of the NCLT has also been upheld by the Appellate Tribunal2. The similar issue again traversed recently in the matter of Veesons Energy Systems Pvt. Ltd.3, wherein the NCLT, Chennai has passed an order restraining the Financial Creditor from proceeding against the Guarantor of the Corporate Debtor during the moratorium period. One might argue that the judgments passed in both the matters are conflicting. However, if we examine the facts, both the judgments operate in different spheres. In the matter of Schweitzer Systemetek, the properties held by the Guarantors of the Corporate Debtor were also being attached pursuant to the admission of an Insolvency Petition against the Corporate Debtor. Therefore, the NCLT, Mumbai concluded that in terms of moratorium, the properties held by the Guarantor of the Corporate Debtor is not liable to be attached, whereas, in the matter of Veesons Energy Systems, the Tribunal in an application filed by the Guarantor of the Corporate Debtor had restrained the Financial Creditor in proceeding against such Guarantor during the moratorium on the reason that it will result in creating a charge on the assets of the Corporate Debtor which shall amount to encumbering the properties of the Corporate Debtor and in violation of Section 14(1) (b) of the IBC. The reasoning adopted by the Tribunal in the matter of Veesons Energy systems may be questioned because in case a Creditor recovers money from the Guarantor, then Guarantor only to that extent steps into the shoes of the Creditor and has all the rights which Creditor already had against the Corporate Debtor. Therefore, the same does not results in creation of further charge. On the contrary, it results only in transfer of rights vis-à-vis Creditor and Guarantor. If the Creditors will proceed against the Guarantors then it will result in thwarting the discussion or decision on revival of the Corporate Debtor and shifting the primary liability from Corporate Debtor to the Guarantor.

In addition, once a resolution plan is sanctioned, approved by Committee of Creditors and affirmed by NCLT, then as per Section 31(1) of the IBC, the Resolution Plan is binding on the Corporate Debtor and its Employees, Members, Creditors, Guarantors and other Stakeholders involved in the resolution plan. It is significant to state that the terms and conditions of the Resolution Plan are also very important as the same will decide the future course of action, if a Creditor consents for a waiver of a part of the debt in the resolution plan then automatically, the liability of the Guarantor will also be considered as waived or if, a Creditor schedules a repayment plan with the principal borrower then until and unless, the default as per the repayment plan is not triggered, the liability qua Guarantors cannot be not invoked. For the same reasons, to avoid any prolixity or overlapping, the Allahabad High Court also in the matter Sanjeev Shriya V. State Bank of India & Ors.4 stayed the proceedings against the Guarantors till the finalization of Corporate Insolvency Resolution Process or till the NCLT approves the resolution plan under sub section (1) of Section 31 or passes an order for liquidation of Corporate Debtor under Section 33, as the case may be. Therefore, the moratorium should be absolute and apply to all cases where the primary liability is that of the Corporate Debtor.

MORATORIUM AND ITS IMPACT ON THE PROCEEDINGS PENDING UNDER SECTION 138 OF NI ACT, 1891 AGAINST THE CORPORATE DEBTOR AND ITS DIRECTORS

The Corporate Insolvency Resolution Process is time bound and the relief of moratorium is available to the Corporate Debtor only during the Corporate Insolvency Resolution Process period i.e. for a period of 180 days which can further be extended to 90 days but not thereafter and even the period of 180 days is also not absolute because the Committee of Creditors anytime within such period may conclude to liquidate the Corporate Debtor and the moratorium will cease to have its effect.

From the provisions of the IBC and on the basis of the Bankruptcy Law Report, it transpires that the window for revival of the Corporate Debtor is very limited and during that period there should be a strict calm period and absolute moratorium in all cases where the primary liability is that of the Corporate Debtor. Thus, even the proceedings against the Guarantors or the Directors of the Corporate Debtor should also be stayed till such verdict on revival of Corporate Debtor is delivered by the Committee of Creditors.

There has been no judicial pronouncement on the issue whether the moratorium will also cover the proceedings pending against the Corporate Debtor under Section 138 of NI Act. It is evident that the moratorium will apply to all the proceedings where the primary liability is that of the Corporate Debtor. Likewise, in a case of cheque bouncing, the primary liability is of the Corporate Debtor as the director signs cheque only on behalf of the Corporate Debtor. Of course, the personal liability of director is also attracted but what remains untouched is that the primary liability is only of the Corporate Debtor and not of the Director of the Corporate Debtor.

Now the second issue which will arise is whether the moratorium will also cover the proceedings against the directors of the Corporate Debtor under Section 138 of the NI Act. Based on the reason that the primary liability is that of the Corporate Debtor and if, there is a stay of proceedings against the Corporate Debtor then it will automatically result in shifting the primary liability to the director of the Corporate Debtor and ultimately result in opening of flood gates during such calm period wherein, the Creditors will chase the directors and then the intent to provide the calm period and draw the focus of the Creditors on the revival of the Corporate Debtor will all result in a futile exercise.

Further, in a cheque bouncing case, the remedy to compound is always available to the directors5. However, if there is a partial moratorium only in favor of the Corporate Debtor then there will be an embargo on such right to compound during the moratorium period because all such decisions cannot find a way without the approval or assent of the Interim Resolution Professional/Resolution Professional. One may also draw an analogy from Section 22(1) of the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA Act, 1985) wherein proceedings under Section 138 of NI Act were not covered within the ambit of Section 22(1) of the SICA Act, 19856 but in SICA Act, 1985 the period for rehabilitation or revival of the Corporate Debtor was neither time bound  nor there was a shift in the management of the operations of the Corporate Debtor as envisaged under the IBC. 

CONCLUSION

In conclusion, it can be stated that IBC is silent on the aspect of the definition of moratorium and what proceedings will fall under the ambit of Section 14 of the IBC would still require judicial assessment. Nonetheless, the language of Section 14 of IBC is wide and the intention of the legislature is also to provide complete calm period. However, the Appellate Authority has carved out an exception to the moratorium in the matter of Deccan Chronicle7 and has held that the moratorium even in favor of the Corporate Debtor is also not absolute and it will not affect the proceedings before the Hon'ble High Court and Hon'ble Supreme Court under Article 32, 136 and 226/227 of the Constitution of India. Therefore, the issue whether the proceedings under Section 138 of NI Act will also be covered under the umbrella of moratorium and to what extent would still necessitate judicial examination and only time will set the issue at rest.

Footnotes

[1] M/s Schewitzer Systemtek India Private Ltd. V. Phoenix ARC Pvt. Ltd., T.C.P. No. 1059/ I&BP/NCLT/MB/MAH/2017.

[2] Phoenix ARC Pvt. Ltd V. M/s Schewitzer Systemtek India Private Ltd, Company Appeal (AT) (Insolvency) No. 129 of 2017.

[3] Mr. V. Ramakrishnan Vs. M/s Veesons Energy Systems Pvt. Ltd. & State Bank of India IA 05/2017 in CP/510/IB/CB/2017.

[4] Sanjeev Shriya V. State Bank of India, Writ - C No. - 30285 of 2017.

[5] Section 147 of the Negotiable Instruments Act, 1891.

[6] BSI Ltd. & Anr. V. Gift Holdings Pvt. Ltd. & Anr., AIR 2000 SC 926.

[7] Canara Bank V. Deccan Chronicle Holdings Limited, Company Appeal (AT) (Insolvency) No. 147 of 2017.

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