Demystifying Moratorium under IBC

The Oxford Dictionary defines moratorium as “a temporary prohibition of an activity. “In its report of 2015 The Bankruptcy Law Reforms Committee had recommended that a provision relating to a “calm period” be introduced in the Insolvency and Bankruptcy Code (IBC) so that all efforts are focused on resolution and the Corporate Debtor (CD) is not burdened with additional stress. The report had recommended two phases of resolution, upon commencement of the Corporate Insolvency Resolution Process (CIRP).  

(a) A serious effort be made to evaluate the viability of the debt during a “calm period” where the creditors’ interests are preserved, without affecting the running of the CD’s business. This is possible only when a moratorium is imposed on all recovery actions against the CD, so that an IP can manage and operate the company effectively.

 (b) If the investigations into the viability of the company do not result in a solution that can be implemented, the CD may be considered unviable and the matter may proceed to a liquidation, which is regarded as the last resort. The Committee of Creditors (CoC) and the Resolution Professional (RP) should make every effort to maximize the value of the CD and balance the interest of all stakeholders.

These recommendations have been embodied in the Insolvency and Bankruptcy Code (IBC) through the provisions and mechanism of Section 14, which deals with the moratorium during CIRP, and Section 33, which addresses the initiation of liquidation when resolution fails. The purport of this article is to examine, through various judicial pronouncements, the legal principles regarding the procedural distinctions in the moratorium imposed under Section 14 compared to Section 33 of the IBC.

Section 14: The Comprehensive Moratorium During CIRP

Upon the admission of a corporate debtor into Corporate Insolvency Resolution Process (CIRP), the first consequence that follows is a moratorium in terms of section 14 of the IBC. Section 14 of the IBC provides as follows:

(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 Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 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.

Explanation.–For the purposes of this sub-section, it is hereby clarified that notwithstanding anything contained in any other law for the time being in force, 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 constituted under any other law for the time being in force, shall not be suspended or terminated on the grounds of insolvency, subject to the condition that there is no default in payment of current dues arising for the use or continuation of the license, permit, registration, quota, concession, clearances or a similar grant or right during the moratorium period;

(2) The supply of essential goods or services to the corporate debtor as may be specified shall not be terminated or suspended or interrupted during moratorium period.

(2A) Where the interim resolution professional or resolution professional, as the case may be, considers the supply of goods or services critical to protect and preserve the value of the corporate debtor and manage the operations of such corporate debtor as a going concern, then the supply of such goods or services shall not be terminated, suspended or interrupted during the period of moratorium, except where such corporate debtor has not paid dues arising from such supply during the moratorium period or in such circumstances as may be specified;

(3) The provisions of sub-section (1) shall not apply to–

(a) such transactions, agreements or other arrangements as may be notified by the Central Government in consultation with any financial sector regulator or any other authority;

(b) a surety in a contract of guarantee to a corporate debtor.].

(4) The order of moratorium shall have effect from the date of such order till the completion of the corporate insolvency resolution process:

Provided that where at any time during the corporate insolvency resolution process period, if the Adjudicating Authority approves the resolution plan under sub-section (1) of section 31 or passes an order for liquidation of corporate debtor under section 33, the moratorium shall cease to have effect from the date of such approval or liquidation order, as the case may be.

A mere perusal of the above section shows that the NCLT, whilst admitting a company into CIRP, is mandatorily required to declare a moratorium in terms of section 14 of the IBC, with effect from the insolvency commencement date. The mandatory nature of this provision is signified using the term “shall” in the opening words of section 14 and it is equally mandatory that the moratorium should commence from the insolvency commencement date only. The NCLT has no discretion of either preponing or postponing the date on which the moratorium will kick in and should mandatorily declare its commencement from the ‘insolvency commencement date’, which according to section 5(12) of the IBC is “the date of admission of an application for initiating corporate insolvency resolution process by the Adjudicating Authority under sections 7, 9 or section 10, as the case may be.

The effect of such declaration of a moratorium under section 14 of the IBC is that from the date of such declaration of moratorium:

• No suit or proceeding may be instituted or continued against the corporate debtor;
• No asset, legal right or beneficial interest, which may be held by the corporate debtor, may be transferred or encumbered
• The continuation of any proceedings under the SARFAESI Act, 2002, against any asset of the corporate debtor would be prevented.
• Would prevent the resumption of any property under control of the corporate debtor, under lease with the corporate debtor or otherwise.

Explaining the mandatory and automatic nature of the moratorium under section 14 of the IBC, the Madras High Court in Falcon Tyres Ltd v Geodis Overseas Pvt Ltd (India), observed as follows:

The language of Section 14 leaves no room for doubt that the proceedings contemplated under Clauses (a) to (d) of Sub-section (1) of Section 14 would include any proceeding for recovery against the corporate debtor. Even proceedings initiated by a secured creditor under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest, Act 2002, have been included under Sub Cause (c) of Sub-Section (1) of Section 14. Therefore, I am unable to accept the submission of the learned Senior Counsel Mr. A.P.S. Ahluwalia, that the present proceedings cannot be termed as proceedings within the meaning of Sub Clauses a, b, c and d of Sub-Section (1) of Section 14. Mr. A.P.S. Ahluwalia, learned Senior Counsel would also contend that by virtue of the lien created under the Order dated 21.04.2011, the property becomes answerable to the claims of the 1st respondent. Therefore the 1st respondent would be in the position of the secured creditor and hence these proceedings cannot be prohibited by the order of NCLT. A lien created over the property would not divest the ownership of the corporate debtor over the said property. Even claims of secured creditors are barred under Sub Clause (c) of Sub-Section (1) of Section 14. Clause (d) of Sub-Section (1) of Section 14 includes even proceedings of recovery of any property in possession of a corporate debtor by its owner or lessor. Apart from the wide language of Section 14, Section 238 of the Code gives an overriding effect to the provisions of the Act for any statute or any instrument having the force of the statute.

 The Hon’ble Supreme Court has in M/s. Innoventive Industries Ltd. v. ICICI Bank & Anr., cited supra, pointed out that the scope of moratorium created by Section 14 of the Code. Therefore, I do not think, I have any other option but to stay all further proceedings pursuant to the earlier orders in the suit and adjourn the suit till 16th April 2018.

In Haravtar Singh Arora v Punjab National Bank, the NCLAT whilst interpreting section 14 of the IBC, held that upon declaration of a moratorium, all the proceedings pending before any court against the corporate debtor automatically comes to halt and cannot be decided any further. Thus, it is clear that the moratorium under section 14 of the IBC is automatic and no proceedings instituted prior to such a declaration can continue upon declaration of the moratorium.

The “Partial Moratorium” During Liquidation

The entire procedure of bringing a lawful end to the life of a company can be divided into the liquidation process followed by the dissolution of the CD. Liquidation is defined as a process by which the life of a company is brought to an end in legal terms, after which it will be properly administered by a liquidator for the benefit of its creditors, members, and other stakeholders. For a corporate entity to cease to exist as a separate legal entity, it must be formally dissolved, at which time it will be struck from the register and will become incapable of owning property in its own name, litigating under contracts, and being sued. The legal status of the corporate entity continues to exist during the period of liquidation, until it is finally and formally dissolved in this manner

As per the proviso to section 14(4) of the IBC, the moratorium ordered in terms of section 14(1) of the IBC comes to an end when an order of liquidation is passed in terms of section 33 of the IBC and such, order declaring moratorium ceases to have effect from the date of the liquidation order. The text of Section 33 of the IBC is provided below:

(1) Where the Adjudicating Authority, —

(a) before the expiry of the insolvency resolution process period or the maximum period permitted for completion of the corporate insolvency resolution process under section 12 or the fast-track corporate insolvency resolution process under section 56, as the case may be, does not receive a resolution plan under sub-section (6) of section 30; or

(b) rejects the resolution plan under section 31 for the non-compliance of the requirements specified therein, it shall-

(i) pass an order requiring the corporate debtor to be liquidated in the manner as laid down in this Chapter;

(ii) issue a public announcement stating that the corporate debtor is in liquidation; and

(iii) require such order to be sent to the authority with which the corporate debtor is registered.

(2) Where the resolution professional, at any time during the corporate insolvency resolution process but before confirmation of resolution plan, intimates the Adjudicating Authority of the decision of the committee of creditors ¹[approved by not less than sixty-six per cent. of the voting share] to liquidate the corporate debtor, the Adjudicating Authority shall pass a liquidation order as referred to in sub-clauses (i), (ii) and (iii) of clause (b) of sub-section (1).

Explanation. – For the purposes of this sub-section, it is hereby declared that the committee of creditors may take the decision to liquidate the corporate debtor, any time after its constitution under sub-section (1) of section 21 and before the confirmation of the resolution plan, including at any time before the preparation of the information memorandum.

(3) Where the resolution plan approved by the Adjudicating Authority under section 31 or under sub-section (1) of section 54 is contravened by the concerned corporate debtor, any person other than the corporate debtor, whose interests are prejudicially affected by such contravention, may make an application to the Adjudicating Authority for a liquidation order as referred to in sub-clauses (i), (ii) and (iii) of clause (b) of sub-section (1).

(4) On receipt of an application under sub-section (3), if the Adjudicating Authority determines that the corporate debtor has contravened the provisions of the resolution plan, it shall pass a liquidation order as referred to in sub-clauses (i), (ii) and (iii) of clause (b) of sub-section (1).

 (5) Subject to section 52, when a liquidation order has been passed, no suit or other legal proceeding shall be instituted by or against the corporate debtor:

Provided that a suit or other legal proceeding may be instituted by the liquidator, on behalf of the corporate debtor, with the prior approval of the Adjudicating Authority.

(6) The provisions of sub-section (5) shall not apply to legal proceedings in relation to such transactions as may be notified by the Central Government in consultation with any financial sector regulator.

(7) The order for liquidation under this section shall be deemed to be a notice of discharge to the officers, employees and workmen of the corporate debtor, except when the business of the corporate debtor is continued during the liquidation process by the liquidator.

Explaining the purport of proviso to section 14(4) and noting the fact that the moratorium ceases to have effect by operation of law, the NCLAT in Jet Aircraft Maintenance Engineers Welfare Association v Ashish Chhawchharia, RP of Jet Airways (India) Ltd, observed as follows:

The Moratorium which comes into operation by order of the Adjudicating Authority on the insolvency commencement date is limited to the date when Adjudicating Authority approves the Resolution Plan under sub-section (1) of Section 31 or passes an order of liquidation under Section 33. The Moratorium is to cease to have an effect from either of the above dates. Thus, the life of Moratorium is not indefinite and is limited. Normally, period of completion of CIRP is 180 days and an ultimate time limit taking into consideration including all extension is 330 days as required by Section 12, sub-section (3). The object of the Code is clearly that there should be no depletion of Corporate Debtor’s assets during the CIRP. The assets of the Corporate Debtor have to be preserved, protected and guarded for a successful insolvency resolution, which is the object of engrafting Section 14 in the statute.

A cursory reading of section 33(5) of the IBC indicates that the “partial moratorium” granted under the said provision only bars the institution of any “fresh suit” or “other proceeding”. Therefore, an interesting question arises in the context of pending legal proceedings, which stood in suspended animation on account of the moratorium under section 14(1) of the IBC. In this regard, it is relevant to note that section 33(5) does not apply to pending legal proceedings and these proceedings can continue to their logical end, without any interference from the NCLT. Setting out this position in law, the Madras High Court in Chennai Metro Rail Ltd, Represented by The Chief General Manager v Lanco Infratech Ltd, Represented by the Liquidator Lanco House, compared section 446 of the Companies Act, 1956, and section 279 of Companies Act, 2013, with section 33(5) of the IBC and observed as follows:

17. To appreciate the difference in the language of Sections 14 and 33(5) of the IBC it may be useful to refer to the scheme of the IBC in the context of the aforesaid Sections. Section 14 and Section 33 are part of two separate Chapters of IBC. Section 14 is part of Chapter II which deals with Corporate Insolvency Resolution Process’, whereas Section 33 is a part of Chapter III which deals with Liquidation Process’. Chapter II of the IBC deals with the Resolution Process in respect of a ‘corporate debtor’, where the objective is to revive the corporate debtor by coming out with a resolution plan, which is to be approved by the committee of creditors and thereafter, by the Adjudicating Authority. Chapter III of the IBC deals with the liquidation process which comes into effect upon the failure to come out with a resolution plan within the prescribed time period or a resolution plan not being approved. The moratorium under Section 14 of the IBC comes into effect upon the Adjudicating Authority passing an order declaring a moratorium and continues till the completion of Corporate Insolvency Resolution Process. Upon the approval of the resolution plan by the Adjudicating Authority or upon passing of a liquidation order under Section 33 of the IBC, the moratorium shall cease to have effect. After the Adjudicating Authority (NCLT) passes a liquidation order under section 33(4) of the IBC, a fresh moratorium in terms of Section 33(5) of the IBC comes into place.
18. The objective of the liquidation process is to derive the maximum value from the assets of the corporate debtor for the benefit of various creditors and other stakeholders in the company under liquidation. The objective is not the revival of the company. It is perhaps for this reason that unlike Chapter II, no time limits have been provided in Chapter III of the IBC. Therefore, legislature in its wisdom has decided not to include ‘pending suits or legal proceedings’ within the scope of moratorium under Section 33(5) of the IBC. To be noted that even the proviso to Section 33(5) of the IBC only uses the word ‘instituted’, but does not use the word ‘pending’. Further, in terms of the said proviso, even a fresh suit or legal proceedings may be instituted by the Liquidator with the prior approval of the Adjudicating Authority. So, unlike Section 14 of the IBC, under Section 33(5) of the IBC there is no absolute bar in a suit or legal proceedings continuing along with the liquidation proceedings.

 A reading of Section 63 of the IBC would reveal that the bar on the Civil Court is only to ‘entertain any suit or proceeding in respect of any matter on which NCLT has the jurisdiction under this Code’. This would not apply to suits, which were already pending before the commencement of liquidation proceedings. Section 231 of the IBC, inter alia states that no injunction shall be granted by a Court in respect of action taken in pursuance to any order passed by the Adjudicating Authority. The intent is clear that the bar is only in respect of civil suits filed after an order has been passed by the Adjudicating Authority. In my view, the aforesaid bar under Sections 63 and 231 of the IBC would only be in respect of fresh suits. Sections 63 and 231 of the IBC cannot be read in manner so as to defeat the provisions of Section 33(5) of the IBC. If Sections 63 and 231 of the IBC are interpreted in the manner canvassed by the counsel for the Liquidator, the provision of Section 33(5) of the IBC would be rendered otiose and the moratorium under Section 33(5) of the IBC, which was to apply only in respect of fresh suits would also apply to pending suits. This cannot be the intention of the legislature. Therefore, I do not find any merit in the submission of the Liquidator that the present suit cannot proceed in view of Sections 63 or 231 of the IBC.

In the paragraphs of the Report of the Insolvency Law Committee extracted above, it has been noted that the omission of pending suits and legal proceedings of the corporate debtor from the scope of moratorium provided under Section 33(5) of the IBC seems to be an error. Further, the Committee recommended that suitable amendments should be made to Section 33(5) of the IBC so that leave of the Adjudicating Authority is also required for continuing any pending suit or legal proceeding by or against the corporate debtor undergoing liquidation. The said report is of 20th February, 2020 and the IBC has been amended many times thereafter. However, the legislature in its wisdom has not made any amendments in respect of Section 33(5) of the IBC. Therefore, the reliance placed on the Report of the Insolvency Law Committee is misplaced. It cannot even be stated that the legislature was not aware of the omission in view of the fact that the words ‘pending suit or legal proceedings’ have been specifically used in Section 14 of the IBC.

Notably, a similar view has been taken by the Kerala High Court in The Liquidator of The corporate debtor, Viz., Orieon Kuries And Loans Pvt Ltd v The State of Kerala. In the said case, it was specifically observed that unlike section 14(1)(a) of the IBC, under section 33(5) of the IBC, there is no prohibition for continuance of already instituted suits and proceedings. The moment the liquidation proceedings commence, there would be a bar only in respect of fresh suits or proceedings, in terms of section 33(5) of the IBC. However, the pending suits and proceedings shall continue. In view thereof, the Kerala High Court upheld the order passed by the Controlling Authority under the Minimum Wages Act, 1948, even though the same was passed during the liquidation process. Similarly, the Delhi High Court in Elecon engineering company limited v. Energo engineering projects limited (2022)   concluded that the bar/moratorium under Sections 33(5), 63, and 231 of the IBC will not apply to the present suit, and therefore, the proceedings in the suit shall continue. Consequently, the Liquidator was directed not to adjudicate the corresponding claim filed by the plaintiff, as the claim must be adjudicated in the present continuing court proceedings.

The analysis confirms that the IBC employs a bifurcated approach to moratoriums, architecting a broad, protective shield during the revival-focused CIRP, which is then deliberately dismantled in favour of a narrower, procedural stay once the objective shifts to the finality of liquidation. In succinct Section 14 of the Insolvency and Bankruptcy Code imposes a comprehensive bar on both the institution and continuation of legal proceedings against the corporate debtor, regardless of whether such proceedings are newly filed or already pending. In contrast, Section 33 of the IBC, which governs the liquidation process, restricts only the institution of new legal proceedings against the corporate debtor, thereby permitting the continuation of proceedings that were already pending prior to the commencement of liquidation.

References

1. https://ibbi.gov.in//en/legal-framework/act
2. https://www.lawfinderlive.com/search.aspx