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Inapplicability of moratorium on Debt-Recovery Action Under IBC

Author: Mayank Chandra

National Law School of India University, Bangalore


Power Grid Corporation of India v. Jyoti Structures Ltd case is a petition under Section 34 of Arbitration and Conciliation Act, 1996, where the appellant has appealed to quash the arbitral order passed by the arbitral tribunal in the favour of the respondent, which is in the form of a pure money decree in the respondent’s favour. During the pendency of this proceeding under the Arbitration and Conciliation Act, 1996, a creditor of the respondent filed an insolvency application before the National Company Law Tribunal, Mumbai for corporate insolvency resolution against the respondent for recovery of credit. After accepting the application, the NCLT declared a moratorium in accordance to Section 14(1)(a) of the Insolvency and Bankruptcy Code, 2016.


Section 14 (1)(a) of the IBC, 2016 reads as under:

“14. (1 )Subject to provisions under subsections (2) and (3), on the insolvency commencement date, the adjudicating authority shall by order declare moratorium for prohibiting all 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 any other competent authority;”


In terms of the Insolvency and Bankruptcy Code, 2016, moratorium is a period where no judicial proceedings[1] can be carried out or initiated against the corporate debtor for recovery of credit, enforcement of securities interest, transfer/sale of assets, or termination of essential contracts. The moment a petition has been initiated against the corporate debtor under Insolvency and Bankruptcy Code, all proceedings against the corporate debtor for recovery of loans or any debts come to a standstill. Moratorium remains in force till the completion of Corporate Insolvency Resolution Process, i.e., 330 days including extension. Once the resolution process concludes, either a resolution plan is approved by the adjudicating authority or a liquidation order is passed against the company. “The object behind moratorium is there should be no additional stress on the assets of the corporate debtor [2] , thus allowing the corporate debtor to strengthen its financial stand. Besides exempting the corporate debtor from all claims- existing and future, it also takes away the undue distraction in the form of claims and lawsuits for a limited period of time, thus allowing the debtor to focus on the revival possibilities of the core business of the firm. Survival and continuation of a company is not only in the benefit of the creditors, promoters and employees but is also beneficial for the entire economic system. Additionally, the prohibition on judicial proceedings during the moratorium period ensures that no preferential treatment is meted out to any creditor, and that the assets of the company are distributed equitably among all the creditors in case the company has to undergo liquidation. The meaning, scope and purpose of Section 14(1)(a) can purposefully be ascertained from the other provisions surrounding it [3]. It can be inferred that Section 14 would not apply to the proceedings which are beneficial for the financial interests of the debtor. This matter too falls with the above ambit and is not a debt-recovery action in any aspect. It will not lead to diminishment or dissipation of the assets of the debtor in any manner. Stay on proceedings in this scenario would rather be stalking the debtor’s effort to recover its money. Though Section 14(1)(a) seeks to quash the proceedings once the corporate insolvency process has been initiated, it does not in any manner convey that all types of proceedings should be quashed. Rather “it intends to prohibit debt-recovery action”[4], i.e., which may lead to dissipation or diminishment in the assets of the corporate debtor”. Additionally, Section 14(1)(a) seeks to quash only those suits or proceedings which have been filed/ initiated ‘against the corporate debtor’ and not ‘by the corporate debtor’. The ultimate object of the moratorium is safeguarding the debtor’s assets during the insolvency proceedings to ensure that in the end, the company survives.



Endnotes:

[1] The NCLAT in Canara Bank v. Deccan Chronicle Holdings Ltd has held that “the moratorium provision doesn’t apply to proceedings initiated or pending before the SC under Article 32 of the constitution and before the HCs under Article 226 of the constitution.”

[2] Bankruptcy Law Reforms Committee, The Report of Bankruptcy Law Committee- Volume 1: Rationale and Design (November, 2015), pg. 82.

[3] Section 14(1)

  1. b) Transferring, encumbering, alienating or disposing of y the corporate debtor any of its assets or any of its legal right or beneficial interest therein.

  2. c) Any action to foreclose, recover or recover any security interest created by the corporate debtor in respect of its property, including any action under the SARFAESI Act, 2002.”

[4] Power Grid Corporation of India v. Jyoti Structures Ltd 2017 SCC OnLine Del 12189 (Yogesh Khanna J.)

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