Moratorium – Meaning and Objective in Insolvency & Bankruptcy Law

Table of Contents

1. Legislative History

2. Overview

3. Meaning and objective of moratorium

4. 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

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1. Legislative History

Section 14 has been enforced with effect from 1st December, 2016 vide Notification No. S.O. 3594(E), dated 30th November, 2016. Section 14 has been amended twice. The first amendment to Section 14 was made vide the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 dated 17-08-2018, with effect from 06-06-2018. By virtue of this amendment, Section 14(3) was amended, which earlier read as:

“(3) The provisions of sub-section (1) shall not apply to such transactions as may be notified by the Central Government in consultation with any financial sector regulator.”

After the aforesaid amendment, sub-section (3) of Section 14 reads as under:

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

(a) such transactions 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.

Thereafter, Section 14 was amended vide the Insolvency and Bankruptcy Code (Amendment) Act, 2020 dated 13-03-2020 with effect from 28-12-2019. By virtue of this amendment:

(i) the following Explanation has been inserted after sub-section (1) which provides:

“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;”

(ii) After sub-section (2), the following sub-section (2A) has been inserted, which provides:

“(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.”

(iii) clause (a) of sub-section (3) of section 14 has been amended and reads as under:

“(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;”.

2. Overview

• • Section 14 of the Code provides for a moratorium commencing from the insolvency commencement date i.e. 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.
  • Sub-section (1) of section 14 inter alia lists out the various actions which are prohibited on account of the moratorium:

(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; and

(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.

• • Licences, permits, clearances etc. –Vide the Insolvency and Bankruptcy Code (Amendment) Act, 2020, an explanation has been inserted to sub-section (1) whereby it has been 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. This is however 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.
  • Supply of essential goods or services: Sub-section (2) of section 14 provides that 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. Sub-section (2A) was inserted vide the Insolvency and Bankruptcy Code (Amendment) Act, 2020 which provides that where the interim resolution professional or resolution professional, as the case may be, considers that 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. The only exception being where such corporate debtor has not paid the dues arising from such supply during the moratorium period or in such circumstances as may be specified.
  • Non-applicability of moratorium: Sub-section (3) of section 14 provides that the moratorium does not apply to 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 and a surety in a contract of guarantee to a corporate debtor.
  • Duration of order of moratorium: The order of moratorium shall have effect from the date of such order till the completion of the corporate insolvency resolution process. 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.

3. Meaning and objective of moratorium

The term “moratorium” is not defined under the Code. In Words and Phrases, Permanent Edition, Volume 27A, page 210, the word “moratorium” has been defined as a term designating suspension of all or of certain legal remedies against debtors, sometimes authorised by law during financial distress. The Supreme Court in Shiv Kumar Tulsian and another v. Union of India (1990) 68 Comp. Cas. 720, has observed that,

“…moratorium implies postponement of obligations of the debtor to pay his creditor…”.

An effective insolvency law strives to protect the value of the insolvency estate against diminution by the actions of the various parties to insolvency proceedings and facilitating administration of those proceedings in a fair and orderly manner. The parties from whom the estate needs the greatest protection are the debtor and its creditors.

With regard to creditors, one of the fundamental principles of insolvency law is that insolvency proceedings are collective proceedings, which require the interests of all creditors to be protected against individual action by one of them. Many insolvency laws include a mechanism to protect the value of the insolvency estate that not only prevents creditors from commencing actions to enforce their rights through legal remedies during some or all of the period of the liquidation or reorganization proceedings, but also suspends actions already under way against the debtor. Such a mechanism is variously termed a “moratorium”, “suspension” or “stay”, depending on the effect of the mechanism.

The immediate benefits that accrue to the debtor by having a broad stay quickly imposed to limit the actions of creditors would however need to be balanced against the longer-term benefits that are derived from limiting the degree to which the stay interferes with contractual relations between debtors and creditors, especially secured creditors.

In reorganization proceedings, the application of a stay facilitates the continued operation of the business and allows the debtor a breathing space to organize its affairs, time for preparation and approval of a reorganization plan and for other steps such as shedding unprofitable activities and onerous contracts, where appropriate. Given the goals of reorganization, the impact of the stay is greater and therefore more crucial than in liquidation and can provide an important incentive to encourage debtors to initiate reorganization proceedings. At the same time, the commencement of proceedings and the imposition of the stay give notice to all those who do business with the debtor that the future of the business is uncertain. This can cause a crisis of confidence and uncertainty as to how the insolvency proceedings will affect suppliers, customers and employees of the debtor’s business.

Under the Code, this protection is accorded by way of a moratorium period which is a calm period intended to protect and preserve the value of assets during the corporate insolvency resolution period. The provisions of moratorium provided for under the Code have been provided for by the legislature in its wisdom to afford an opportunity to a distressed company to focus all its energies towards resolution of its insolvency – Lanco Infratech Limited through its interim Resolution Professional  v. Isolloyd Engineering Technologies Limited 2017 SCC OnLine NCLT 12502. Section 14 is a prohibitive section effecting the rights and interests of the parties which are otherwise entitled to take action against corporate debtor who has failed to pay for the supplies made and to stop supplies to the Corporate Debtor in breach of terms and conditions as per law in force. As such this legislation cannot be read as beneficial legislation in favour of the Corporate Debtor because when any provision speaks of prohibitive action curtailing the rights and interest of somebody else, the effect of such provision shall be limited to the extent mentioned in the section, not beyond the section.

Recommendations of the BLRC

The motivation behind introducing the provisions of the moratorium under the Code has been discussed in the report of the Bankruptcy Law Reforms Committee which was set up for drafting the Code. The report in paragraph 5.3.1 provides as under:

“The motivation behind the moratorium is that it is value maximising for the entity to continue operation even as viability is being assessed during the IRP. There should be no additional stress on the business after the public announcement of the IRP. The order for the moratorium during the IRP imposes a stay not just on debt recovery actions, but also any claims or expected claims from, old lawsuits or on new lawsuits, for any manner of recovery from the entity.”

Thus, it is essential for a meaningful and quick resolution process that the provision for the moratorium is strictly enforced.

4. 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

Section 14(1)(a) provides that on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting 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. Therefore, once moratorium comes into effect, section 14(1)(a) expressly stops institution or continuation of pending proceedings against corporate debtors – Alchemist Asset Reconstruction Co. Ltd. v. Hotel Gaudavan (P.) Ltd. [2017] 88 taxmann.com 202/[2018] 145 SCL 428 (SC).

4.1 Continuation of the suit proceedings as per Section 14 of the Code includes taking procedural steps such as filing of written state-ment

In Golden Jubilee Hotels Limited v. EIH Ltd. 2018 SCC OnLine Hyd 315, the trial Court had opined that mere filing of written statements would not violate the order of the Adjudicating Authority and observed that though the Civil Court could not pass any adverse order fastening any liability, the mere making of an appearance by the defendants and putting forth their case would not be violative of the moratorium. The trial Court had further opined that it had discretion to receive the written statements and pass any procedural orders which would not be in conflict with the order of the Appellate Authority. Another justification that was given by the trial court was that the written statements of the defendants would assist the interim resolution professional to resolve the dispute for which the defendants were using delaying tactics. Negating the observations and decision of the trial Court, the High Court of Andhra Pradesh inter alia held that requiring filing of a written statement would be a step in continuation of the suit proceedings and the same would be violative of Section 14 of the Code. Continuation of the suit proceedings would encompass every step therein, which would include not only adjudicatory steps but also procedural ones. Upon the moratorium order being passed, the pending suit proceedings necessarily had to come to a complete halt. It was further observed that the interim resolution professional is not required to play an adjudicatory role in terms of testing the claims of the creditors against the corporate debtor and the question of the written statements filed by the defendants assisting him in resolving the dispute does not arise.

4.2 Counter Claim

In SSMP Industries Ltd.  v. Perkan Food Processors (P.)  Ltd. [2019] 110 taxmann.com 212 (Delhi), the Plaintiff company (Corporate Debtor) had gone into insolvency and a resolution professional was appointed. The question arose as to whether the adjudication of the counter claim would be liable to be stayed in view of section 14 of the Code. The High Court of Delhi held that a counter claim would be in the nature of a suit against the Plaintiff which is the corporate debtor. Under section 14(1)(a) of the Code, strictly speaking, a counter claim would be covered by the moratorium which bars “the institution of suits or continuation of pending suits or proceedings against the corporate debtor”. A counter claim would be a proceeding against the corporate debtor. However, the counter claim raised in the aforesaid case against the corporate debtor was integral to the recovery sought by the corporate debtor and was related to the same transaction. Section 14 created a piquant situation i.e., that the corporate debtor undergoing insolvency proceedings can continue to pursue its claims but the counter claim would be barred under section 14(1)(a). When such situations arise, the Court has to see whether the purpose and intent behind the imposition of moratorium is being satisfied or defeated. A blinkered approach cannot be followed and the Court cannot blindly stay the counter claim and refer the defendant to the Adjudicating Authority or the Resolution Professional for filing its claims. The nature of a counter claim is such that it requires proper pleadings to be filed, defences and stands of both parties to be considered, evidence to be recorded and then issues have to be adjudicated. The proceedings before the Adjudicating Authority are summary in nature and the resolution professional does not conduct a trial. The resolution professional merely determines what payment can be made towards the claims raised, subject to availability of funds. The Adjudicating Authority/resolution professional cannot be burdened with the task of entertaining claims of the Defendant which are completely uncertain, undetermined and unknown. Moreover, the question as to whether the Defendant is in fact entitled to any amounts, if determined by the Adjudicating Authority, prior to the adjudication of the plaintiff’s claim for recovery, would result in the possibility of conflicting views in respect of the same transaction. Under these circumstances, the High Court of Delhi held that the plaintiff’s and the defendant’s claim ought to be adjudicated comprehensively by the same forum. At this point, till the defence is adjudicated, there is no threat to the assets of the corporate debtor and the continuation of the counter claim would not adversely impact the assets of the corporate debtor. Once the counter claims 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.

4.3 Continuation of proceedings against the Director of the Corporate Debtor not permissible where the cause of action against the Corporate Debtor and the Director are inextricably linked

Another issue in Golden Jubilee Hotels Limited v. EIH Ltd. 2018 SCC OnLine Hyd. 315, was with regard to the continuation of suit against the director of the company. In this case, the company was impleaded as the first defendant and the second defendant in the suit was the Director and CEO of the defendant company. The Trial Court, in its order had observed that as he is an individual, and the moratorium order would not apply to him. The High Court however noted that the plaint averments clearly demonstrated that the suit claim was directed against the first defendant company and it is only in the capacity of being its CEO that the second defendant was impleaded. It was also noted that the cheques on the strength of which the summary suit was filed were issued by the first defendant company. Accordingly, the High Court held that section 14 of the Code, as it presently reads after its amendment, vide the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, with retrospective effect from 06-06-2018, only excludes the surety in a contract of guarantee to a corporate debtor from the ambit of a moratorium order. There is no mention of individual Directors of the corporate debtor being immune from the moratorium order. The Court noted that it is the normal practice to implead in a suit or proceeding not only the corporate entity but also its Managing Director or Chief Executive Officer. This would not mean that the cause of action against such Managing Director or Chief Executive Officer is independent of and separate from the claim against the corporate entity itself. The claim of the plaintiff company is essentially directed against the first defendant company and the acts imputed to the second defendant, its Director & CEO, are inextricably linked therewith. It was accordingly held that the question of allowing the suit proceedings to go on independently against the second defendant, while giving effect to the moratorium order dated 27-02-2018 against the first defendant company alone, would not arise.

4.4 Arbitration Proceedings

An arbitration that has been instituted after the moratorium is non est in law- Alchemist Asset Reconstruction Co. Ltd. v. Hotel Gaudavan (P.) Ltd. [2017] 88 taxmann.com 202/[2018] 145 SCL 428 (SC). An arbitral proceeding pending between corporate debtor and financial creditor could not be initiated during moratorium period – K. S. Oils Ltd. v. State Trade Corporation of India Ltd. [2018] 91 taxmann.com 423/146 SCL 588 (NCL-AT).

In Power Grid Corporation of India Ltd. v. Jyoti Structures Ltd. [2017] 88 taxmann.com 124/[2018] 145 SCL 449 (Delhi), the question posed before the Court was whether the proceedings under section 34 of the Arbitration and Conciliation Act, need to be stayed, as per section 14(1)(a) of the Code. The High Court of Delhi inter alia observed that the proceeding under section 34 would not be hit by the embargo of section 14(1)(a) viz.,

(a) ‘proceedings’ do not mean ‘all proceedings’;
(b) moratorium under section 14(1)(a) of the code is intended to prohibit debt recovery actions against the assets of corporate debtor;
(c) continuation of proceedings under section 34 of the Arbitration Act which do not result in endangering, diminishing, dissipating or adversely impacting the assets of corporate debtor are not prohibited under section 14(1)(a) of the Code;
(d) term ‘including’ is clarificatory of the scope and ambit of the term ‘proceedings’;
(e) the term ‘proceeding’ would be restricted to the nature of action that follows it i.e. debt recovery action against assets of the corporate debtor;
(f) the use of narrower term “against the corporate debtor” in section 14(1)(a) as opposed to the wider phase “by or against the corporate debtor” used in section 33(5) of the code further makes it evident that section 14(1)(a) is intended to have restrictive meaning and applicability;
(g) the Arbitration Act draws a distinction between proceedings under section 34 (i.e. objections to the award) and under section 36 (i.e. the enforceability and execution of the award).

The proceedings under section 34 are a step prior to the execution of an award. Only after determination of objections under section 34, the party may move a step forward to execute such award and in case the objections are settled against the corporate debtor, its enforceability against the corporate debtor then certainly shall be covered by moratorium of section 14(1)(a). Hence, it has been held that the continuation of proceedings under section 34 shall cause no harm to either party’s rights to seek determination of issues under section 34 of the Act and object of the code shall be preserved rather than defeated.

The Supreme Court has however in P. Mohanraj v. Shah Brothers Ispat (P.) Ltd. [2021] 125 taxmann.com 39/167 SCL 327 (SC), observed that the decision in Power Grid (Supra) does not state the law correctly as it is clear that a Section 34 proceeding is certainly a proceeding against the corporate debtor which may result in an arbitral award against the corporate debtor being upheld, as a result of which, monies would then be payable by the corporate debtor. A Section 34 proceeding is a proceeding against the corporate debtor in a court of law pertaining to a challenge to an arbitral award and would be covered just as an appellate proceeding in a decree from a suit would be covered. It was thus held that the judgment in Power Grid (Supra) does not state the law correctly.

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Where corporate debtor against which moratorium had been passed was directed by the Arbitral Tribunal to produce certificates in relation to completion of project, mere handing over or showing any document to any party would not amount to violation of order of ‘Moratorium’ – V. Nagarajan Resolution Professional v. Meenakshi Energy Ltd. [2018] 90 taxmann.com 372/146 SCL 224 (NCL-AT).