The Role of Moratorium in Insolvency & Bankruptcy Code 2016 Proceedings

The Role of Moratorium in Insolvency & Bankruptcy Code 2016 Proceedings

What is Moratorium?

If NCLT find that the corporate debtor is saddled with over debts and failed to meet its debt obligations, it will issue a moratorium order under section 14 of the IBC Code.

The specialty of the moratorium order is that the Insolvency Professional is authorised to initiate judicial proceedings for recovery, enforcement of security interest, sale or transfer of assets, or termination of essential contracts to meet the creditor’s financial obligations.

The tone of Section 14 is unambiguous and the moratorium in favour of the Corporate Debtor is also outright.

M/s Schewitzer Systemtek India Private Ltd. V. Phoenix ARC Pvt. Ltd., T.C.P. No. 1059/ I&BP/NCLT/MB/MAH/2017.

In the above case, NCLT Mumbai observed that moratorium will not be available to the Guarantors and Section 14 is clear that the moratorium will only cover the properties of Corporate Debtor as the Guarantors are not covered in terms of Section 14 of IBC.

NCLAT also upheld the views held by NCLT in the Schewitzer Systemtek India case in the case held by it in Phoenix ARC Pvt. Ltd V. M/s Schewitzer Systemtek India Private Ltd, Company Appeal (AT) (Insolvency) No. 129 of 2017.

NCLT, Chennai’s Different Stand on Guarantors

However, in  Veesons Energy Systems Pvt. Ltd, wherein the NCLT, Chennai has passed an order restraining the Financial Creditor from proceeding against the Guarantor of the Corporate Debtor during the moratorium period. 

Shark Differences between Schewitzer Systemtek case and Veesons Energy Systems case as regards to Guarantor’s Rights

Schewitzer Systemtek	The properties held by the Guarantors of the Corporate Debtor were also being attached pursuant to the admission of an Insolvency Petition against the Corporate Debtor. Therefore, the NCLT, Mumbai concluded that in terms of moratorium, the properties held by the Guarantor of the Corporate Debtor is not liable to be attached
Veesons Energy Systems	NCLT, Chennai in an application filed by the Guarantor of the Corporate Debtor had restrained the Financial Creditor in proceeding against such Guarantor during the moratorium on the reason that it will result in creating a charge on the assets of the Corporate Debtor which shall amount to encumbering the properties of the Corporate Debtor and in violation of Section 14(1) (b) of the IBC.

CORPORATE INSOLVENCY RESOLUTION PLAN (CIRP) UNDER SECTION 31(1) OF IBC 2016

Further, a resolution plan is sanctioned, approved by Committee of Creditors and affirmed by NCLT, then as per Section 31(1) of the IBC, the Resolution Plan is binding on the Corporate Debtor and its Employees, Members, Creditors, Guarantors and other Stakeholders involved in the resolution plan.

The Corporate Insolvency Resolution Process is time bound and the relief of moratorium is available to the Corporate Debtor only during the Corporate Insolvency Resolution Process period i.e. for a period of 180 days which can further be extended to 90 days.

RESCUE OF GUARANTOR’S RIGHTS BY ALLAHABAD HIGH COURT UNDER SECTION 31 OR 33 OF THE IBC 2016 CODE

 Allahabad High Court also in the matter Sanjeev Shriya V. State Bank of India & Ors. stayed the proceedings against the Guarantors till the finalization of Corporate Insolvency Resolution Process or till the NCLT approves the resolution plan under sub section (1) of Section 31 or passes an order for liquidation of Corporate Debtor under Section 33, as the case may be. 

THE TERM MORATORIUM IS TO BE EXPLAINED IN THE IBC 2016 TO REMOVE AMBIGUITY

IBC is silent on the aspect of the definition of moratorium and what proceedings will fall under the ambit of Section 14 of the IBC would still require judicial assessment. Nonetheless, the language of Section 14 of IBC is wide and the intention of the legislature is also to provide complete calm period. 

However, the Appellate Authority has carved out an exception to the moratorium in the matter of Deccan Chronicle case  and has held that the moratorium even in favour of the Corporate Debtor is also not absolute and it will not affect the proceedings before the Hon’ble High Court and Hon’ble Supreme Court under Article 32, 136 and 226/227 of the Constitution of India. 

Courtesy: Mr.  Kunal Godhwani