Status as on 31/03/2020

The Insolvency & Bankruptcy Code, 2016 [Hereinafter referred to as the “Code”] indeed has been landmark legislation, wherein apart from providing inter alias a resolution mechanism to the insolvent companies, the Code also encourages entrepreneurship. An insolvent company/corporate debtor, which has many creditors at hands with a hefty number of cases itself before various competent courts of law, struggles to compete itself in the market. 

However, after the enforcement of the Code, once a corporate debtor goes into Corporate Insolvency Resolution Process [hereinafter referred to as “CIRP”], after the admission of the petition filed against the company, a moratorium is declared whereby which all the pending cases against the insolvent company before any court of law are stayed. But what exactly is this MORATORIUM? 

MEANING:

The term Moratorium is nowhere defined in the Code, however, the term in basic parlance means, ”a stopping of activity for an agreed amount of time”. Under the Code, Moratorium is actually described as a period wherein no judicial proceedings for recovery, enforcement of security interest, sale or transfer of assets, or termination of essential contracts can be instituted or continued against the Corporate Debtor. The Adjudicating Authority [National Company Law Tribunal], whilst admitting a petition against the Corporate Debtor is required to declare the moratorium period as described under Section 14 of the Code.

RELEVANCE:

The main purpose of declaring the moratorium period is to keep the Corporate Debtor’s assets intact during the CIRP, which otherwise may be attached by any competent court of law during the pendency of proceedings against the Corporate Debtor. In other words, the moratorium ensures that the time-bound completion of the CIRP and also that the corporate debtor may continue as a going concern. Apart from staying the pending proceedings, the moratorium also casts a bar upon the directors of the company, who cannot use or take the amount available on the date of declaration of the moratorium in the company. If the moratorium period is not declared, the insolvency process will be frustrated which in turn will fail the objective of the Code.

Punishment for Violation of Moratorium:

Under Section 74 of the IBC, officials of the corporate debtor who violate provisions of moratorium can be imprisoned for a minimum of three years, which may be extended up to five years. Such officials will also be fined a minimum of Rs 100,000 but not more than Rs 300,000. Officials of creditors who knowingly and willfully authorize or permit such contravention can be jailed for a minimum of one year, with a maximum tenure of five years. Such officials will also be fined a minimum of Rs 100,000, with the maximum penalty of up to Rs 10 million. Further, the Hon’bleNational Company Law Appellate Tribunal, vide its recent judgment has also held that in case any Director withdraws money from the account of the company during the moratorium period, he will be held liable for the criminal offences of misappropriation and breach of trust. 

EXCLUSIONS:

• CASH DEPOSITS MADE IN HIGH COURT

Once cash is deposited before any court of law, for any matter whatsoever, no party can automatically claim any right to the same without an adjudication by a court, even if the Company has gone into CIRP and moratorium is declared. It was clarified that an application filed for the withdrawal of the money (which was deposited before the initiation of CIRP), cannot be conceivably be considered a suit, proceeding or execution within the meaning of Section 14(1)(a).

Refer- Nahar Builders Ltd. Vs. Housing Development and Infrastructure Ltd., Hon’ble High Court of Bombay.

• DUES UNDER GST FOR PRE-CIRP PERIOD

In accordance with the provisions of the IBC and various legal pronouncements, no coercive action can be taken against the corporate debtor with respect to the dues for the period prior to the insolvency commencement date. The dues of the period prior to the commencement of CIRP will be treated as operation debt and claims may be filed by the proper officer before NCLT in accordance with the provisions of the Code. 

• Notification No. 11/2020 – Central Tax dated 21.03.2020 Circular No.134/04/2020-GST dated 23.03.2020.

 

• CRIMINAL PROCEEDINGS OR ANY PENAL ACTION TAKEN PURSUANT TO THE CRIMINAL PROCEEDINGS OR ANY ACT HAVING ESSENCE OF CRIME OR CRIME PROCEEDS

The clause (a) of Section 14 (1) that word ‘proceedings’ used therein and even the words ‘order’ and ‘in Court of law’ will have to be interpreted as a proceeding arising in the nature of a suit and orders passed in such proceedings and suits. Apart from the fact that the Legislature has not conspicuously used the words ‘criminal’ as an adjective to the word ‘proceedings’ and as an adjective to the noun Court of law, it must be assumed that the Legislature in its wisdom has consciously omitted to use such adjectives since it must have intended to prohibit only the suits and execution of the judgments and decrees or a proceeding of the like nature. Therefore, applying the principle of interpretation, one cannot put any other interpretation on this provision contained in Section 14 of the Code except that it only prohibits a suit or a proceeding of a like nature and does not include any criminal proceeding.

Refer: Tayal Cotton Pvt. Ltd. vs. State of Maharashtra & Ors., Hon’ble High Court of Bombay.

• The prevention of Money Laundering Act, 2002 relates to proceeds of crime and the offence relates to money-laundering resulting confiscation of property derived from or involved in, money laundering and for matters connected therewith or incidental thereto. Thus, like the Prevention of Money Laundering Act, 2002 or provisions therein relates to proceeds of crime, Section 14 of the Code is not applicable to such proceeding.

Refer: VarrsanaIspat Limited vs. Deputy Directorate of Enforcement, Hon’bleNational Company Law Appellate Tribunal

• Section 138 the Negotiable Instrument Act, 1881 is a penal provision, which empowers the court of competent jurisdiction to pass the order of imprisonment or fine, which cannot be held to be proceeding or any judgment or decree of money claim. The imposition of fine cannot be held to be a money claim or recovery against the Corporate Debtor nor order of imprisonment, if passed by the court of competent jurisdiction on the Directors, they cannot come within the purview of Section 14. In fact, no criminal proceeding is covered under Section 14 of Code.

Refer: Shah Brothers Ispat Limited vs. P. Mohanraj & Ors., Hon’ble National Company Law Appellate Tribunal

• ARBITRATION PROCEEDINGS

After moratorium under Sec. 14 come into effect, arbitration proceedings cannot start or continue against the Corporate Debtor.

Refer: Alchemist Asset Reconstruction Company vs. Hotel Gaudavan Pvt. Ltd. & Ors, Hon’ble Supreme Court of India

• COUNTERCLAIM

Once the counterclaims are adjudicated and the amount to be paid/recovered is determined, at that stage, or in execution proceedings, depending upon the situation prevalent, Section 14 could be triggered. At this stage, due to the reasons set out above, the counterclaim does not deserve to stay under Section 14 of the Code,

Refer: SPM Industries Ltd. vs, Perkan Foods Processors Pvt. Ltd., Hon’ble High Court of Delhi

• PERSONAL AND INDIVIDUAL ASSETS OF DIRECTOR(S)

The personal and individual assets of a Director are not the subject matter of the corporate insolvency resolution process and the moratorium only extends to the assets of the Corporate Debtor.

Refer: Suresh Chand Garg vs. Aditya Birla Finance Ltd., Hon’ble National Company Law Appellate Tribunal

• SUIT OR CASE UNDER ARTICLE 32 BEFORE SUPREME COURT OR AN ORDER PASSED UNDER ARTICLE 136 BY SUPREME COURT OR PROCEEDING UNDER ARTICLE 226 BEFORE A HIGH COURT

The Hon’ble Supreme Court has the power under Article 32 of the Constitution of India and Hon’ble High Court under Article 226 of the Constitution of India which power cannot be curtailed by the provision of an act or as a court. In view of the aforesaid provision of law, we make it clear that moratorium will not affect any suit or case pending before the Hon’ble Supreme Court under Article 32 of the Constitution of India or where an order is passed under Article 136 of Constitution of India. The moratorium will also not affect the power of the High Court under Article 226 of the Constitution of India. 

Refer: Canara Bank vs. Deccan Chronical Holdings Ltd., Hon’ble National Company Law Appellate Tribunal

• SEBI OR STOCK EXCHANGE CANNOT RECOVER ANY AMOUNT OR SELL ANY ASSET OF CORPORATE DEBTOR DURING MORATORIUM 

Section 14 of the Code will prevail over Section 28A of the SEBI Act, 1992 and SEBI cannot recover any amount including the penalty from the Corporate Debtor.

Refer: Ms. AnjuAgarwal vs. Bombay Stock Exchange & Ors., Hon’ble National Company Law Appellate Tribunal

 

Disclaimer – The above article is based on the personal interpretation of related laws and relevant pronouncements. The readers are expected to take expert advice before putting reliance on it. For any clarification, please connect to the reader at support@centrik.in