Moratorium Under IBC
The Adjudicating Authority declares Moratorium under Section 14 of the Code while admitting application under Section 7, 9 or 10 of the Code. Moratorium provides a calm period during which Corporate Debtor could be revived and rehabilitated. During Moratorium no suit or any other legal proceedings can be initiated or continued to recover any debt. Even a Secured Creditor cannot initiate any action to realise secured interests.
Moratorium is an extra ordinary measure as it suspends contractual rights of creditors to recover debts. If Moratorium continues beyond a reasonable period, it will prove a cure worse than a disease. If recovery rights of creditors remains suspended for long, it will be highly inequitable to creditors and will be a serious invasion over contractual rights of a creditor, which is fundamental basis of business.
Once Moratorium is declared, no suit or any other proceedings can be instituted against the Corporate Debtor. If any suit or other proceedings have already been initiated, the same cannot continue after declaration of Moratorium. If any person is having any judgment, decree, order in its favour from any court of law or authority, the same cannot be enforced during Moratorium.
Corporate Debtor is also prohibited from transferring, encumbering, alienating or disposing of any of its assets, legal rights or beneficial interest.
If the Corporate Debtor has created any security interest, the same cannot be recovered, foreclosed or enforced. Even any security created by the Corporate Debtor in respect of its property cannot be enforced under the provisions of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
During the existence of Moratorium, the owner or lessor of property cannot recover property if such property is in possession of the Corporate Debtor.
There are various cases wherein license, permit, registration, quota, concession, clearances or a similar grant or right are critical for survival of the Corporate Debtor. Vide the Insolvency and Bankruptcy Code (Amendment) Act, 2020 an explanation was introduced whereby it was clarified that notwithstanding anything in any other law, a license, permit, registration, quota, concession, clearances or a similar grant or right given by the Central Government, State Government, Local Authority, Sectoral Regulator or any other authority cannot be suspended during Moratorium subject to the condition that there is no default in payment against those license, permit, registration, quota, concession, clearance etc.
Supply of essential goods or services to the Corporate Debtor cannot be terminated or suspended or interrupted during Moratorium. As per CIRP Regulation 32, essential goods and services means electricity, water, telecommunication services and information technology services to the extent they are not a direct input to the output produced or supplied by the Corporate Debtor.
Besides essential goods or services, if Interim Resolution Professional or Resolution Professional, as the case may be, considers supply of goods and services critical for protection and preservation of the value of the Corporate Debtor and management of the operations of such Corporate Debtor as going concern, supply of such goods and services will not be terminated, suspended or interrupted during the period of Moratorium except when such Corporate Debtor has not paid dues arising from such supply during the Moratorium period or in such circumstances as may be specified.
The provisions of Moratorium do not apply to a surety in contract of guarantee to a Corporate Debtor.
Moratorium remains in force till the Adjudicating Authority approves Resolution Plan under Section 31 (1) or Adjudicating Authority passes an order for liquidation of Corporate Debtor under Section 33.
MORATORIUM AND THIRD-PARTY CONTRACTS
A Corporate Debtor may have various contracts with other orgnisations or individuals in course of business. Whether such contracts can be terminated or not during Moratorium.
Section 14 itself provides some contracts which cannot be terminated. Contracts where a party supplies essential goods and services to the Corporate Debtor cannot be terminated during moratorim. Government licenses, permits, registrations, quotas, concessions, clearances or a similar grant or right given by the Central Government, State Government, Local Authority, Sectoral Regulator or any other authority constituted under any other law for the time being in force cannot be terminated.
The Supreme Court in Gujrat Urja Viksas Nigam1 considered applicability of Moratorium on contracts having ipso facto clauses regarding termination of contracts in cases of defaults. Many contracts have ipso facto clauses that contract will be terminated in cases of initiation of insolvency proceedings. Whether such contracts can be terminated during Moratorium. The Supreme Court found that there is no clarity in the Code regarding this aspect. The Supreme Court requested the legislature to provide concrete guidance on this issue.
In Tata Consultancy Service Ltd2, the facilities agreement obligated the Corporate Debtor to provide premises with certain specification and facilities to the appellant for conducting examinations for educational institutions. The other party has terminated the contract due to breach of contract on the part of the Corporate Debtor. The Supreme Court held that Moratorium is not applicable to such contracts.
MORATORIUM AND DISHONOUR OF CEHQUES
If a Corporate Debtor has issued a cheque to a creditor and such cheque has been dishonoured due to insufficiency of funds, whether proceeding initiated by a creditor under Negotiable Instruments Act, 1881 will be covered under the Moratorium imposed under Section 14 of the Code.
The Supreme Court has opportunity to consider this aspect in P. Mohan Raj & Ors3. One of the issues before the Supreme Court was whether “proceedings” mentioned in Section 14 is strictu sensu civil proceedings. The Supreme Court analysed various judgments and held that “proceedings’ has been used in wide sense and principles of ejusdem generis and noscitur a sociis cannot used to nullify the plain words used in a statute. The Supreme Court analysed the nature of cheque dishonour cases and held that cheque dishonor cases are quasi criminal cases and such proceeding is mainly concerned with recovery of money though a summary proceeding. Such proceedings will be covered under Section 14 of the Code.
The Supreme Court held that although cheque dishonour proceedings cannot be initiated against the Corporate Debtor during Moratorium, the proceedings can continue against individual natural persons.
MORATORIUM AND WRIT JURISDICTION
NCLAT in Deccan Chronicle Holding Ltd4. has held that Moratorium does not apply to writ jurisdiction of High Court under Article 226 and Supreme Court under Article 32.
MORATORIM AND ARBITRATION PROCEEDINGS
Arbitration proceedings are covered by Moratorium provisions. Arbitration proceedings cannot be initiated or continued after imposition of Moratorium by the Adjudicating Authority. Hon’ble Supreme Court in Hotel Gaudavan Pvt. Ltd5 has held arbitration proceedings could not initiated after initiation of Insolvency Proceedings.
In Power Grid Corporation of India Ltd6 the Delhi High Court has held that arbitration proceedings which are for benefit of the Corporate Debtor is not barred under the Code.
MORATORIUM AND CRIMINAL PROCEEDINGS
The Hon’ble NCLAT in Varsana Ispat Ltd7 has held the Moratorium is not applicable to criminal proceedings.
MORATORIUM AND SURETY TO GURANTOR OF CORPORATE DEBTOR
According to Section 14(3) (b) Moratorium is not applicable on surety in a contract of guarantee to a Corporate Debtor. Moratorium on any actions of recovery against the Corporate Debtor will not extend to the guarantor to a Corporate Debtor. In V Ramakrishnan8 the Supreme Court was seized with the issue whether Moratorium will apply to Personal Guarantor of a Corporate Debtor. The Supreme Court held that moratorium will not apply to personal guarantor.
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1.Gujarat Urja Vikas Nigam Ltd. Vs. Vikas Gupta; Civil Appeal 9241/2019
2.Tata Consultancy Services Ltd Vs. Vishal Ghisulal Jain, Resolution Professional; Civil Appeal 3045/2020
3.P. Mohanraj & Ors Vs. M/s Shah Brothers Ispat Pvt Ltd.; Civil Appeal 10355/2018
4.Canara Bank vs Deccan Chronicle Holding Ltd.; CA (AT) No. 147/2017
5.Power Grid Corporation of India Ltd. Vs. Jyoti Structures Ltd.; OMP (COMM) 397/2016
6.Varrsana Ispat Ltd. Vs. Deputy Director, Directorate of Enforcement; CA (AT) (Insolvency) 3045/2020
7.State Bank of India Vs. V. Ramakrishnan & Anr; Civil Appeal 3595/2018
Mukesh Kumar Suman is an advocate and legal author based at Delhi. He regularly appears before various Judicial Forums including NCLT, NCLAT, High Courts and the Supreme Court. He can be approached at mukesh_suman@outlook.com or +91 9717864570.
