Moratorium under IBC: Interpretation of Section 14 IBC, 2016
INTRODUCTION:
It is a standard procedure for a letter to be written by a Resolution Professional, appointed by an order of the NCLT to the Assessing Officer of the Corporate Debtor and attaching with it the order of The National Company Law Tribunal. It is through this letter that the debtors are informed of the initiation of the insolvency proceedings against the Corporate Debtors under the Insolvency and Bankruptcy Code, wherein it has been specified that ‘in light of’ application of section 14 of the Insolvency and Bankruptcy Code for moratorium, the proceedings against the Corporate Debtors is prohibited.
Dictionary meaning of ‘moratorium’ is a legally authorised period to delay due performance of legal obligation owed. The Apex Court in the case of Swiss Ribbons Pvt Ltd & anr vs. Union of India & Ors. (2019) noted that section 14 of IBC 2016 seeks to protect and preserve the assets of the Corporate Debtor from further dilution during the resolution process which in turn protects the interests of its creditors and workers alike, so as to facilitate speedier recovery. However, 'moratorium' under section 14 of IBC is bound by certain exceptions in its operation and there exists other legislations like the NIA 1881, Income Tax Act 1961 that may run parallel, therefore hampering its execution. Hence, the nuances of the moratorium are all the more relevant to study.
How does ‘Moratorium’ impact the legal rights of the company and of those interested?
Post admission of the application for insolvency filed under sections 7, 9 and 10, NCLT orders: 1) (i) to declare a moratorium, (ii) to cause a public announcement of the initiation of the insolvency process and (iii) to appoint an Interim Resolution Professional in the matter, by FC, OC and CA respectively, moratorium is declared under section 13 by the AA. Section 14(1) of IBC 2016 provides that post the declaration of moratorium by NCLT, followinginstitution of suits/actions are prohibited.,:
Institution of suit, pending suits against CD or seeking enforcement of order/judgement/decree of a court/tribunal/other authority shall be barred.
‘transferring/disposing/selling/alienating’ the assets or any legal right/interest created therein of the corporate debtor by theCD i.e., after the declaration of the moratorium, the corporate debtor cannot change the status of his shares. Also, the debtor cannot create a beneficiary of the assets or even endow anyone with the legal rights to dispose off the assets.
If the corporate debtor has created any ‘security interest’ on any property, even under the SARFAESI Act will not be entitled to move forward with it as the IBC has overriding powers.
If the corporate debtor has occupied any property and is enjoying being in such possession, shall not part with it and will not be permitted to transfer the possession to the owner or lessor.
The moratorium of section 14 subsists till the CIRP period. Post approval under section 31 or liquidation order by the AA under section 33, it ceases to have effect.
However, section 14(3) being an exception to sub-section 1 does protect transactions, agreements or arrangements as may be specified by the Central Govt and the right against surety in a contract of guarantee to CD. For instance, in GAIL (India) Ltd v Rajeev Mannadiar & Ors (Company Appeal(AT)(Insolvency) No. 319 of 2018), NCLAT noted, in consonance with section 14(3), that the “prohibition under Section 14(1)(c) shall not include the enforcement of a Performance Bank Guarantee”.
The moratorium announced under section 13 and then followed under section 14 of IBC has to be read with sections 85, 96 and 101 of the IBC.
Section 85(1) of the Code notes that the moratorium is imposed with respect to all debts that are pending with the corporate debtors and the creditors cannot seek to enforce against the same.
Where on application by CD for fresh start order against any qualifying debt, an interim moratorium is commenced wrt legal action or pending litigation suits for any debt under section 81. On acceptance of such application by the AA, moratorium under Section 85(2) having same effect as section 14 is initiated which mandates stay on not only pending litigation but initiation of new suits with respect to any debt as well. However, sub-section 2 is subject to section 86 of the Code, according to which a creditor can object to an order of AA on the ground of inclusion of a debt as qualifying debt and its correctness thereto.
Interim moratorium under section 96 of the Code is commenced when the CD/FC/OC makes an application for CIRP before AA, which has the same effect as section 81 of the Code. Post submission of report by RP on application filed under sec 94 or sec 95, on admission of the application under section 100 of the Code, 'moratorium' under section 101 is imposed having same effect as section 14 of the Code, in relation to all debts, pending legal actions, initiations of suits, disposing/ transferring/ alienating of assets by the CD, subject to any notification by the Central Government. Such moratorium lasts until 180 days from the date of admission of application unless revoked under section 91 or 96 of the Code or shall cease on the order of repayment made by the AA.
Can pronouncement of moratorium disrupt the business of the corporate debtor?
It is to be noted that ‘prohibition’ under section 14(1) shall not suspend/terminate, permit/ license/quota/clearance, etc granted by the Central, State Government or any other authority constituted by law.
Further, while a company is undergoing CIRP, the main purpose is revival, therefore, Consequently, section 14(2A) notes that when operations of a corporate debtor are run as a 'going concern' then supply of goods and services necessary shall not be disrupted unless CD has not paid dues for such supply during the moratorium period or other specified circumstances. Therefore, the debtor is kept under an umbrella which includes certain restrictions.
Consequently, inherent powers of the Supreme Court under art 142 of the Constitution, which allow it to pass judgements in light of justice, as was done in the case of State Bank of India v. The Consortium of Mr. Murari Lal Jalan and Mr. Florian Fritsch (2024), wherein liquidation of Jet Airways was directed in light deferred resolution plan and hold ups which was deemed abuse of section 14 of IBC 2016.
At the same time, while the moratorium against CD is subsisting, certain mandates are to be followed under section 85(3), to allow for a fair and smooth resolution, which includes: that the CD shall not act as director of any company or take part in its promotion, formation, management. The CD cannot alienate his assets, is to inform his partners about the 'fresh start process' and before entering into any other financial transactions, among others.
Can moratorium be issued against the promoters of a company?
Section 101(3) provides that in case the insolvency application is filed against a firm and is accepted under section 96 then the moratorium shall be applicable against all the partners of the firm, unless otherwise notified by the Central Government. At the same time, the Apex Court in the case of Anjali Rathi v. Today Homes & Infrastructure Pvt. Ltd. (SLP (C) No. 12150 of 2019.), presided over by a three judge bench, observed that moratorium propounded under section 14 of the IBC, 2016 shall not be applicable to the ‘promoters or directors or KMPs or Officers of the Corporate Debtor, who form a part of the management of the Corporate Debtor’, therefore, proceedings can be initiated against the promoters and directors of the company undergoing CIRP. Such a decision by the Supreme Court was reiterated in Ansal Crown Heights Flat Buyers Association vs. M/S. Ansal Crown Infrabuild Pvt. Ltd. & Ors (2024), in order to protect interests of homebuyers and facilitate recovery of debt from promoters and directors of the company
Similarly, in case of moratorium to be applicable under the Negotiable Instruments Act, the Apex Court noted in the case of P. Mohanraj v. Shah Bros. Ispat (P) Ltd. (AIR 2021 SC 1308),:
"102. Thus, for the period of moratorium, since no proceedings can continue or be initiated against the corporate debtor because of a statutory bar, such proceedings can be initiated against the persons mentioned in Section 141(1) and (2) of the Negotiable Instruments Act. This being the case, it is clear that the moratorium provision contained in Section 14 IBC would apply only to the corporate debtor, the natural persons mentioned in Section 141 continue to be statutorily liable under Chapter XVII of the Negotiable Instruments Act."
Does moratorium proclaimed under IBC have an overriding effect over other legislations?
As is aforementioned in the case of P. Mohanraj v. Shah Bros. Ispat (P) Ltd (ibid), the primacy of IBC over NIA was established with respect to the moratorium on suits against the corporate debtors under section 14 of the Code.
Additionally, section 238 of IBC, 2016 read with section 178 of the Income Tax Act, it can be said that the IBC, 2016 has an overriding effect over the Income Tax Act. Section 238 of IBC reads, “The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law”. Consequently, section 178 of the Income Tax Act which provided the overriding effect of the Income Tax Act was amended to avoid inconsistencies with IBC. The Delhi High Court in the matter of Pr. Commissioner of Income Tax-6, New Delhi Vs. Monnet Ispat & Energy Ltd. (Company Appeal(AT)(Insolvency) No. 543 of 2017), observed that “the moratorium period under section 14 of the Code announce by NCLT would be applicable to the order ITAT in respect of tax liabilities.”
Finally, it was laid to rest by the Supreme Court in the case of Innovative Industries v. ICICI Bank (CIVIL APPEAL NOs. 8337-8338 OF 2017), wherein it was decided that the IBC is to prevail over all the other statutes inconsistent with it. The case was filed as appeal before the Supreme Court which affirmed the decision of the Delhi High Court and noted that, “Given Section 238 of the Insolvency and Bankruptcy Code, 2016, it is obvious that the Code will override anything inconsistent contained in any other enactment, including the Income-Tax Act. We may also refer in this Connection to Dena Bank vs. Bhikhabhai Prabhudas Parekh and Co. & Ors. (2000) 5 SCC 694 and its progeny, making it clear that income-tax dues, being in the nature of Crown debts, do not take precedence even over secured creditors, who are private persons. We are of the view that the High Court of Delhi, is, therefore, correct in law”.
Therefore, it is well settled that an assessment proceeding is not barred from being undertaken by the tax authorities where a refund is to be made to the corporate debtor, forgoing to do so will amount to grave injustice. However, where there is demand upon the debtor, no recovery proceeding can be initiated.
CONCLUSION:
The Viswanathan Committee in its report of the Bankruptcy Law Reforms Committee propounded that doctrine of ‘calm period’ in order to enable smooth resolution process for insolvent debtors or firms. The premise behind the prevalence of moratorium is to ensure that the ‘value of corporate debtor’ is preserved by allowing it to work ‘as a going concern’. The report in its Clause 5.3.1 noted that “the motivation behind the moratorium is that it is value maximising for the entity to continue operations even as viability is being assessed during the IRP.” Similarly, the Insolvency Law Committee in 2018 report analysed the now repealed ‘Sick Industries Companies (Special Provisions) Act, 1986 (SICA)’ and examined the notes of clauses under section 14 of the Code to bring forth the original intent behind the provision. The scope of moratorium as mentioned under Clause 5.1 of the report laud down that the “the moratorium in the repealed SICA in two ways – First, under SICA, the actions barred could be instituted or continued with the consent of the BIFR, and second, the language used in Section 22 of SICA clarified that proceedings which affected the assets of the company or for recovery of money etc. were barred.”
Therefore, it can be concluded that the scope of section 14 under IBC is wider as it provides that cases cannot be instituted with the permission of NCLT and that the bar against the debtor for instituting cases is not linked to the assets of the debtor. Additionally, section 14 has clearly defined the classes under which litigation cannot be filed against the debtor.