Moratorium under Insolvency and Bankruptcy Code 2016

Key aspects of Section 14 of the Insolvency and Bankruptcy Code (IBC) related to the moratorium:

Introduction and Purpose of Moratorium

• A moratorium is a period during which legal proceedings against a corporate debtor are prohibited or suspended. This includes recovery actions, enforcement of security interests, and termination of essential contracts.
• The primary objectives of a moratorium are to preserve the corporate debtor's assets during the insolvency resolution process, facilitate orderly completion of the resolution process, and ensure the company can continue as a going concern.
• The imposition of a moratorium provides a "stand-still period" that prevents creditors from taking individual enforcement actions that could undermine the Corporate Insolvency Resolution Process (CIRP).
• The moratorium is intended to give the corporate debtor a "breathing space" to reorganize its affairs, allowing for a new management to take over and rehabilitate the company.

Declaration of Moratorium

• Upon the admission of a CIRP application under Section 7, 9, or 10 of the IBC, the Adjudicating Authority is required to declare a moratorium.
• Section 13 of the IBC mandates the Adjudicating Authority to issue an order to declare a moratorium for the purposes outlined in Section 14.
• The Adjudicating Authority must also make a public announcement of the initiation of the CIRP, calling for the submission of claims, and appoint an interim resolution professional.

Ingredients of Section 14(1)

Section 14(1) of the IBC specifies the prohibitions during the moratorium period. It prohibits:
• Institution or continuation of suits or proceedings: This includes the execution of any judgment, decree, or order in any court of law, tribunal, arbitration panel, or other authority.
• Transferring, encumbering, alienating, or disposing of assets: The corporate debtor is prohibited from transferring, encumbering, alienating, or disposing of any of its assets or any legal right or beneficial interest therein.
• Action to foreclose, recover, or enforce security interest: Any action to foreclose, recover, or enforce any security interest created by the corporate debtor in respect of its property, including actions under the SARFAESI Act, 2002, is prohibited.
• Recovery of property: The recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor is prohibited.

Exceptions to Moratorium

Certain transactions and actions are exempt from the moratorium:
• Essential goods and services: The supply of essential goods and services to the corporate debtor cannot be terminated, suspended, or interrupted during the moratorium period.
• Critical supplies: The supply of goods or services critical to protecting the value of the corporate debtor and managing its operations as a going concern cannot be terminated, suspended, or interrupted, except under specific circumstances.
• Transactions notified by the Central Government: The provisions of sub-section (1) do not apply to transactions, agreements, or other arrangements notified by the Central Government in consultation with any financial sector regulator or other authority.
• Surety in a contract of guarantee: The moratorium does not apply to a surety in a contract of guarantee to a corporate debtor.

Commencement, Duration, and Cessation

• The moratorium takes effect from the insolvency commencement date.
• It remains in effect until the completion of the CIRP.
• The moratorium ceases to have effect if a resolution plan is approved under Section 31 or an order for liquidation is passed under Section 33 of the IBC, whichever is earlier.

Interpretation of Key Terms

• Proceedings: The term "proceedings" in Section 14(1)(a) has been interpreted to primarily refer to debt recovery actions against the assets of the corporate debtor, but it does not mean all proceedings.
• The Supreme Court has clarified that "proceedings" under Section 14(1)(a) include quasi-criminal proceedings under Section 138 of the Negotiable Instruments Act, 1881.
• Including: The term "including" is clarificatory of the scope and ambit of the term "proceedings".
• Against the corporate debtor: The phrase "against the corporate debtor" in Section 14(1)(a) indicates a restrictive meaning and applicability, as opposed to the wider phrase "by or against" used in Section 33(5) of the Code.

Judicial Pronouncements and Key Principles

• The Supreme Court has affirmed that the moratorium is in the interest of the corporate debtor, preserving its assets during the resolution process.
• The moratorium protects the corporate debtor's assets from dilution and ensures the resolution process is completed efficiently.
• All proceedings pending before any court against the Corporate Debtor automatically come to a halt, and the Resolution Professional is not required to take any further step in those proceedings.
• The initiation of CIRP against a subsidiary of a Corporate Debtor (under CIRP) is not barred by Section 14(1)(a).
• Any amount received during the CIRP when the moratorium is in force is considered an asset of the Corporate Debtor, and the Resolution Professional must deal with it as per the IBC's provisions.
• Section 14 of the Code does not apply to proceedings that benefit the corporate debtor or suits filed by the corporate debtor.
• Once CIRP commences and a moratorium order is passed, the High Court should not proceed with the auction of the corporate debtor's property.

Impact on Specific Proceedings and Actions

• Arbitration Proceedings:
o Arbitration proceedings cannot be initiated or continued against the corporate debtor after the moratorium comes into effect.
o Arbitral orders passed after the admission of CIRP against the Corporate Debtor violate the Code and contravene the moratorium under Section 14.
o However, arbitration proceedings may continue if a resolution plan is approved.
• Negotiable Instruments Act, 1881:
o Proceedings under Section 138/141 of the Negotiable Instruments Act are considered "proceedings" under Section 14(1)(a) of the IBC, and the moratorium applies to such proceedings.
• Criminal Proceedings and Prevention of Money Laundering Act, 2002:
o Section 14 does not apply to criminal proceedings, penal actions, or acts related to crime or crime proceeds.
o The moratorium under Section 14 does not extend to proceedings under the Prevention of Money Laundering Act, 2002.

Impact on Contracts

• The statutory right of a financial institution to proceed under the SARFAESI Act, 2002, is suspended for a limited period, but existing contracts between the surety, principal debtor, and creditor remain unaffected.
• The adjudication of a counter-claim may not be stayed under Section 14 if it does not adversely impact the assets of the corporate debtor.
• The NCLT cannot use its residuary jurisdiction to intervene in contractual disputes unrelated to the corporate debtor's insolvency.

Explanation to Section 14(1) and Section 14(2A)

• The inclusion of the Explanation to Section 14(1) and Section 14(2A) indicates that Parliament has been amending the IBC to ensure that the status of a corporate debtor as a going concern is not hindered.
• The moratorium period is critical for running the corporate debtor as a going concern.
• Licenses, permits, registrations, quotas, concessions, clearances, or similar rights granted by the government cannot be suspended or terminated due to insolvency, with certain conditions.
• If the Interim Resolution Professional (IRP) or Resolution Professional (RP) considers the supply of goods or services critical to preserving the corporate debtor's value and operations, the supply of those goods or services shall not be terminated, suspended, or interrupted, except under specific circumstances.

Impact on Specific Assets and Transaction

• Bank Accounts: After a moratorium order, a bank cannot debit any amount from the corporate debtor’s account. However, the bank can incorporate the debited amount in a separate ledger as per RBI guidelines.
• Personal Assets of Directors: The moratorium applies only to the assets of the corporate debtor, not the personal assets of its directors.
• Margin Money: Margin money with the bank as security against a bank guarantee is not an asset of the corporate debtor once the bank guarantee is invoked.