Effect of Moratorium on proceedings initiated by the Corporate Debtor

Section 14 of the Insolvency and Bankruptcy Code, 2016 [“the Code”] proscribes institution of suits or proceedings against the corporate debtor once the adjudicating authority i.e. the National Company Law Tribunal [“NCLT”] admits an application filed under Section 7,9 or 10 of the Code. The objective behind bringing the suit proceedings against the corporate debtor to a grinding halt upon admission of insolvency proceedings is to prevent the asset value of the Corporate Debtor from diminishing by being a subject of legal proceedings. For the purpose of reviving the corporate debtor, the Interim Resolution Professional [“IRP”] appointed under Section 16 by the NCLT and the Resolution Professional, appointed under Section 22 by the Committee of Creditors, have been conferred with wide and expansive powers to take various actions for keeping the corporate debtor as a ‘going concern’ so long the resolution process is under way.

Section 14 does not bar proceedings initiated by the Corporate Debtor

The Code is a beneficial legislation which endeavours to revive the Corporate Debtor and ensures that the Corporate Debtor continues as a ‘going concern’ during the insolvency process. The moratorium imposed in terms of Section 14 of the Code, does not, in any express terms, apply to proceedings which are in the benefit of the Corporate Debtor. The entire object, purpose and import of Section 14 is to protect and preserve the assets of the Corporate Debtor during the resolution process by halting the proceedings initiated “against” the corporate debtor which may result in depreciation or alienation of the assets of the Corporate Debtor. Section 14, does not, in any express terms, impinges upon, or halts proceedings initiated by the Corporate Debtor which result in appreciation of its assets or its enrichment. The aforesaid scheme of the Act is discernible from various provisions of the Code as discussed hereinbelow.

Section 14 of the Code prohibits proceedings against the Corporate Debtor as follows-

“Section 14(1)…the Authority shall by order declare moratorium for prohibiting all of the following namely-

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”

Section 14 of the Code only emphasises upon the proceedings “against” the corporate debtor and does not take within its sweep the proceedings initiated by the Corporate Debtor for its benefit or for protecting its interests. For this purpose, Section 20 of the Code equips the IRP with expansive powers to protect and preserve the value of the property of the corporate debtor and manage the operations of the corporate debtor as a going concern. In this regard, the IRP/RP is authorised to-

Appoint accountants, legal or other professional as may be necessary
Enter into contracts on behalf of the corporate debtor
Raise interim finance
Issue instructions to personnel of the corporate debtor as may be necessary for keeping the corporate debtor as a going concern
Take all such actions as are necessary to keep the corporate debtor as a going concern.

Furthermore, Section 25(2)(b) of the Code categorically confers power upon the Resolution Professional to represent the corporate debtor and exercise rights for the benefit of the corporate debtor in judicial proceedings as follows-

“25. Duties of Resolution Professional

…..

(2)(b) represent and act on behalf of the corporate debtor with third parties, exercise rights for the benefit of the corporate debtor in judicial, quais-judicial or arbitration proceedings.“

A conjoint reading of the above provisions irrefutably shows that there is no embargo upon the proceedings initiated by the Corporate Debtor, in fact, Section 25 of the Code categorically authorises the Resolution Professional to exercise rights for the benefit of the corporate debtor in judicial, quasi-judicial or arbitration proceedings.

Position of Law

The jurisprudence upon the issue emanates from a judgment rendered by the Delhi High Court in the matter of Power Grid Corporation of India Ltd. vs Jyoti Structures¹. An Arbitral Award was passed in favour of the Corporate Debtor in the nature of a pure money decree which was challenged by the aggrieved party under Section 34 of the Arbitration and Conciliation Act, 1996. The Delhi High Court observed that staying the operation of the Arbitral Award awarded in favour of the Corporate Debtor would further exacerbate the financial condition of the corporate debtor and the same would be detrimental to the interests of the corporate debtor. The Delhi High Court read down the import of the Section 14 of the Code and categorically held that Section 14 would not apply to proceedings which are in the in the benefit of the corporate debtor like the one before the court inasmuch as the proceedings would not endanger, diminish, dissipate or impact the assets of the corporate debtor. The court also observed that Section 34 proceedings are a step prior to Section 36 proceedings i.e. execution of arbitral award. If Section 34 proceedings are stayed, then the corporate debtor would be disentitled from seeking execution of the arbitral award under Section 36.

However, a three-judge bench of the Supreme Court in the matter of P.Mohan Raj vs M/s Shah Brothers Ispat Pvt. Ltd², overruled Power Grid (supra) by observing that the said judgment does not state the law correctly as a Section 34 proceeding is a proceeding against a 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. It is pertinent to note that the Delhi High Court in Power Grid (supra) had addressed the aforesaid situation by observing that in case the Section 34 challenge succeeds, in that event moratorium under Section 14 of the code would automatically come into effect. However, staying the proceedings completely would disentitle the corporate debtor from executing the arbitral award under Section 36. Therefore, the Supreme Court adopted a technical approach while overruling Power Grid (supra). It is also pertinent to note that the Supreme Court in P.Mohan (supra) did not disturb the ratio of Power Grid (supra) inasmuch as the Delhi High Court in the said judgment had observed that the proceedings in the benefit of the corporate debtor are not hit by moratorium.

In Jharkhand Bijli Viltran Nigam Ltd. vs IVRCL and Anr.³, the NCLT Hyderbad Bench, inter alia observed that a Statement of Claim filed by the Claimant /corporate debtor, in arbitration proceedings is not hit by moratorium under Section 14 of the Code, however, a counter claim raised against the corporate debtor in the arbitration proceedings, is covered by moratorium. This order was subsequently challenged before the NCLAT⁴ in which the NCLAT inter alia observed that the Claim of the corporate debtor can be determined only after determination of the counter claim made by the Appellant in the same very arbitration proceeding, therefore, the Arbitral Tribunal can adjudicate both the claims, however, after determination, if it is found that the corporate debtor is liable to pay certain amount then moratorium in terms of Section 14 would immediately come into effect, barring such recovery of money from the corporate debtor. The Delhi High Court in SSMP Industries Ltd. vs Perkan Food Processors Pvt. Ltd.⁵ in similar facts and circumstances observed that counterclaim raised in the suit proceedings is integral to the recovery sought by the Plaintiff/corporate debtor and adjudication of the same would not pose as a threat to the assets of the corporate debtor. However, in the event, the court finds that the corporate debtor is liable to pay certain money, then moratorium would immediately come into effect.

The NCLAT Principal Bench, New Delhi in the matter of Directorate of Enforcement vs Manoj Kumar Agarwal and Ors.⁶, also observed “…while Section 14 protects Corporate Debtor from actions, the Resolution Professional can pursue claims for the benefit of the Corporate Debtor”

In Hafeez ur Rahman & Ors. vs S.A. Rawther Spices Ltd.⁷, the Plaintiff filed a suit for recovery under Order 37 of the CPC. The Trial Court allowed the Defendant to defend the suit subject to depositing 50% of the suit claim. The Defendant failed to comply with the said order in view of which the Plaintiff filed memo requesting the court to decree the suit under Order 37 Rule 3(6)(b) of CPC. In the meanwhile a moratorium came into effect against the Defendant company due to which the Trial Court dismissed the memo filed by the Plaintiff. The said order of Trial Court was challenged by the Plaintiff before the High Court of Karnataka. The High Court relied upon Power Grid (supra) and similarly observed that Section 14 of the Code does not apply to proceedings in the benefit of the Corporate Debtor. Court held that the Trial Court can continue proceedings against the Corporate Debtor and the moratorium would only come into effect if the Suit is decreed in favour of the Plaintiff and the Defendant/Corporate Debtor is called on to satisfy the claim. The said order was challenged before the Supreme Court⁸, however, by this time the Suit had been decreed by the Trial Court in favour of the Plaintiff resulting in the Appeal becoming infructuous.

In New Delhi Municipal Council vs Minosha India Ltd.⁹, the Corporate Debtor filed an Application under Section 11 of the Arbitration and Conciliation Act, 1996 for appointment of an arbitrator. This application was preceded by imposition of moratorium upon the corporate debtor/Respondent, submission of resolution plan and approval thereof by the NCLT. The High Court allowed the application and appointed an arbitrator. The said order was challenged before the Supreme Court on the premise that the application under Section 11 was time barred and the Corporate Debtor cannot seek the benefit of Section 60(6) of the code for excluding the period of moratorium. The Supreme Court, after analyzing the import of Section 14 of the Code, categorically observed that Section 14 does not bar proceedings initiated by the corporate debtor-

“24. Under the IBC, by virtue of the order admitting the application, be it Under Sections 7, 9 or 10, and imposing moratorium, proceedings as are contemplated in Section 14 would be tabooed. This undoubtedly does not include an application Under Section 11(6) of the 1996 Act by the corporate debtor or for that matter, any other proceeding by the corporate debtor against another party. At least there is no express exclusion of the jurisdiction of the Court or authorities to entertain any such proceeding at the hands of the corporate debtor.

25… These provisions do not in any manner appear to stand in the way of the corporate debtor instituting or proceeding with a suit or a proceeding against others.”

Conclusion

The scheme of the Code does not in any express terms, bar proceedings initiated by the corporate debtor. Rather the Code has abundantly equipped the IRP/RP to represent the corporate debtor in judicial or arbitration proceedings, for the benefit of the corporate debtor. The aforementioned judgments also subscribe to this view. Although the Supreme Court in P. Mohan (supra) has overruled Power Grid (supra), however, in the said judgment the Supreme Court has not disturbed the ratio of Power Grid (supra) inasmuch as, Section 14 does not bar proceedings initiated by corporate debtor. Subsequently, the Supreme Court in Minosha India Ltd. (supra) has affirmed this view.

By Daksh Pandit