The Insolvency and Bankruptcy Code, 2016 (hereinafter to be referred as the "Code") is a beneficial legislation which has been enacted with the aim of having a well structured and a time bound process for the initiation of the Corporate Insolvency Resolution Process, and in the event of the failure of the CIRP, for liquidation. Part II of the Code contains the detailed procedure for initiation of CIRP against the Corporate Debtor, and in the situation, the Adjudicating Authority (hereinafter referred to as NCLT) admits an insolvency resolution application under Section 7,9 or 10 of the Code, it declares a moratorium under Section 14 which continues until the approval/rejection of the resolution plan. During the moratorium period, "the initiation of suits or the continuation or pending suits and proceedings including the execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or any authority is prohibited."

Moratorium has been defined in the Black's Law dictionary as, "Delay in performing an obligation or taking an action legally authorized or simply agreed to be temporary". The intent and the rationale behind having a moratorium is to protect the troubled corporate debtor and provide him with a breathing space so that the Corporate Debtor can focus all his attention towards the revival of his core business instead of worrying about the various proceedings and suits instituted against him. The Hon'ble Supreme Court in the case of Innoventive Industries Ltd v. ICICI Bank Ltd elucidated this by stating that the intent was, "to provide the debtors a breathing spell in which he is to seek to reorganize his business."

Recently the Hon'ble Supreme Court in its recent judgment passed by a division bench in the case Alchemeist Asset Reconstruction Company Ltd v. M/s. Hotel Gaudavan Pvt. Ltd. & Ors.1 held that a proceeding under Arbitration and Conciliation Act 1996 (hereinafter referred to as "Arbitration Act") instituted after declaring moratorium under "Code") is non-est in law i.e. does not exist at all.

It was reiterated that the mandate under Section 14 is very clear and that it expressly states that the moment, the moratorium comes into effect under section 14(1) (a) it expressly prohibits institution or continuation of pending suits or proceedings against corporate debtor. While setting aside the order of District Judge, Supreme Court expressed its dismay for entertaining the said appeal under section 37 of the Arbitration Act while the moratorium was in force. The Supreme Court held that the arbitration, which had been instituted after the commencement of moratorium under the Code, is non-est in law. This strict interpretation of the Hon'ble Supreme Court in upholding the provision of Section 14 of the Code holds the Code in good stead and provides a conducive environment for the fulfillment of the objectives that the Code aims to fulfill.

Footnote

1 Civil Appeal No.16929 of 2017

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.